This document was added or updated on 26/05/2020.

WAGE PRICE INDEX


INTRODUCTION

The Wage Price Index (WPI) has the dual purpose of monitoring wages and salaries inflation in the economy and supporting the compilation of the Australian System of National Accounts (ASNA). It is a key economic indicator that is used by a wide range of organisations and individuals in developing wages policy, and undertaking economic analysis. WPI is one of the preferred information sources when assessing monetary policy.

The WPI measures changes in the wages and salaries paid by employers for a unit of labour where the quality and quantity of labour are held constant. To achieve this, the WPI uses a Laspeyres index methodology (where the price in a particular period is compared to that in a previous fixed period) designed to produce a measure of pure price change in wages and salaries independent of compositional factors.

Wages and salaries account for the majority of expenditure on labour costs by employers. The 'headline' measure of the wage price index is the total hourly rates of pay excluding bonuses index. Wage price indexes are released for state and territory; sector (private/public) and broad industry groups.

For further information on the WPI, see Wage Price Index, Australia (cat. no. 6345.0).


WHAT THE WAGE PRICE INDEX MEASURES

The WPI measures changes in the price employers pay for labour that arise from market factors. Specifically, the WPI measures changes in the price of wages and salaries.

Wages and salaries reflect payments in cash or kind that are made at regular intervals (e.g. weekly, monthly) and include: piecework payments; enhanced or special allowances for working overtime or unsocial hours (e.g. nights, weekends); regular supplementary allowances (e.g. housing allowances, allowances to cover the cost of travel to and from work); payments for employees away from work for short periods (e.g. holidays) but not including absences for sickness or injury; and bonus and incentive payments. A full definition of wages and salaries is provided in paragraphs 11.7– 11.14 of the Australian System of National Accounts: Concepts, Sources and Methods (cat. no. 5216.0).


CONCEPT OF A PRICE INDEX

An index number on its own has little meaning. The value of a price index stems from the fact that index numbers or any two periods can be used to directly calculate price change between those periods. Price indexes such as the WPI enable prices for a common item or group of items to be compared at different points in time. In order to compare the sets of prices, it is necessary to designate one set the ‘reference’ set and the other the ‘comparison’ set. By convention, the reference price set is used as the base (or first) period for constructing the index, and is given an index value of 100.0.

The most common comparison is between sets of prices at two points in time (temporal indexes). The points in time can be adjacent (this quarter and the previous quarter) or many periods apart (this year and ten years earlier). Typically the method is to nominate one set of prices as the reference period, and to revalue the quantities of items purchased in the base period by prices in the second (or comparison) period. The ratio of the revalued comparison period to the value of the reference period provides a measure of the price change between the two periods.


INDEX FORMULAS

In presenting index number formulas, a simple starting point is to compare two sets of prices. Consider price movements between two time periods, where the first period is denoted as period 0 and the second period as period t (period 0 occurs before period t). In order to calculate the price index, the quantities need to be held fixed at some point in time. The initial question is what period should be used to determine the quantities.

All price indexes in the ABS use the Laspeyres price index formula. The WPI utilises the Laspeyres index methodology since it is not practical to calculate current weights every period, as is required by other methods.

Detailed information on the major index formulas used in the WPI is contained in Chapter 4 – Price Index Theory in the ABS publication Wage Price Index: Concepts, Sources and Methods, 2012 (cat. no. 6351.0.00.001).

A more comprehensive exploration of price index theory can be found in corresponding chapters of Consumer Price Index: Concepts, Sources and Methods, 2011 (cat. no. 6461.0).


SCOPE AND COVERAGE

The target population for the WPI is all employing organisations in Australia (private and public sectors) excluding:

• Enterprises primarily engaged in Agriculture, Forestry or Fishing;
• Private households employing staff; and
• Foreign embassies, consulates, etc.

Enterprises primarily engaged in agriculture, forestry and fishing activities are excluded because a very high proportion of agricultural enterprises have no employees. It would be disproportionately costly to survey a sufficient number of these enterprises to obtain a sample of jobs that is large enough to adequately represent this industry. In addition, the highly seasonal nature of activities in this industry would make it difficult to track jobs over time.

Private households employing staff and foreign embassies, consulates, etc. cannot be included, because they are out of scope of the ABS Business Register from which the WPI sample of businesses is selected.

A change to WPI coverage in the December quarter 2009 resulted in businesses with 5 or less employees (referred to as micro-businesses) being excluded from the collection. An internal ABS review determined that the size and frequency of pay changes in micro-businesses were similar to businesses with five employees or more. Effectively, micro-businesses could be excluded from the survey without adversely affecting measures of price change. These businesses are still considered within scope of the target population, and continue to be represented in WPI outputs via their inclusion in the expenditure weights.

Statistical units

The ABS uses an economic statistics units model, based on the ABS Business Register, to describe the characteristics of businesses and the structural relationships between related businesses. The units model is also used to break groups of related businesses into relatively homogeneous components that can provide data to the ABS. See the section: Methods Used in ABS Business Surveys for more information about the ABS Business Register and the ABS statistical units model.

The units model allocates businesses to one of two sub-populations. The vast majority of businesses are in the Australian Tax Office (ATO) Maintained Population, while the remaining businesses are in the ABS Maintained Population. Together, these two sub-populations make up the ABS Business Register population.

All jobs in the target population of employers are in scope of the WPI, except the following:

• Australian permanent defence force jobs;
• Non-salaried directors;
• Proprietors/partners of unincorporated businesses;
• Persons paid by commission only;
• Working proprietors/owner managers of Pty Ltd companies;
• Employees on workers’ compensation who are not paid through the payroll;
• ‘Non-maintainable’ jobs (i.e. jobs that are expected to be occupied for less than six months of a year); and
• Jobs for which wages and salaries are not determined by the Australian labour market (e.g. most employees of Community Development Programs, or jobs where the remuneration is set in a foreign country).

As such, full-time, part-time, permanent, casual, managerial and non-managerial jobs are in scope of the WPI. Costs incurred by businesses for work undertaken by self-employed persons, such as consultants and subcontractors, are out of scope of the WPI as they do not relate to employee jobs. Workers paid commission without a retainer are also excluded, as a large number of such workers operate in a similar fashion to self-employed persons.

Detailed information on WPI scope and coverage topics, see Chapter 5 - Coverage and classifications in the ABS publication Wage Price Index: Concepts, Sources and Methods, 2012 (cat. no. 6351.0.00.001).


SAMPLING

A two-stage sampling methodology is used to generate a sample of employee jobs for the WPI. The first stage selects a sample of businesses, whilst in the second stage a sample of employee jobs are selected from within these businesses.

In the first stage of sampling, approximately 3,000 private and public sector businesses are selected from the ABS Business Register. These businesses are selected by stratifying the target population of businesses by state/territory, sector (private/public), industry division and business size, and selecting a random sample from each stratum. For a number of complex organisations, further sampling is undertaken to simplify reporting arrangements.

In the second stage of sampling, businesses selected in the first stage are asked to select a sample of jobs from their payrolls using instructions provided by the ABS. The number of selections depends on the total number of jobs in the business, but is limited to a maximum of ten jobs per business. Approximately 18,000 jobs are selected.

The WPI uses probability sampling at both stages. Probability sampling means that each unit (i.e. business or job) has an equal chance of selection.

Sampling weights are calculated for each contributing job. Jobs in the WPI are assigned sample weights according to the number of similar units they represent within a stratum. The procedure for assigning a sample weight to a job takes place at the business and job level. Total sample weight is determined by multiplying business and job weights together.


WEIGHTS

Weighting practices vary at different levels of the WPI. WPI expenditure weights are a measure of the relative importance of each elementary aggregate (EA), based on employers' expenditure on wages and salaries. Below the EA level, sample weights applied to each job on the WPI survey questionnaire indicate the number of jobs in the Australian labour market a particular sampled job represents.

The Laspeyres index methodology requires that prices in each period are compared to those in a given base period. To ensure the index remains relevant, expenditure weights need to be updated to reflect changes in expenditure patterns. This process is referred to as reweighting. Expenditure weights for the WPI are reweighted every two years, following the release of data from the Survey of Employee Earnings and Hours (EEH). This update occurs in the December quarter.

Detailed information on calculating of sampling weights is contained in Chapter 7 – Weights and their Sources and Chapter 10– Wage Price Index Calculation in Practice in the ABS publication Wage Price Index: Concepts, Sources and Methods, 2012 (cat. no. 6351.0.00.001).


DATA COLLECTION PROCESSES

The WPI is compiled quarterly by the ABS. The survey reference date is the last pay period ending on or before the third Friday of the middle month of the March, June, September and December quarters each year. The data are typically released approximately seven weeks after the end of each quarter, in the publication Wage Price Index, Australia (cat. no. 6345.0).

Information for the WPI is collected using quarterly mail-out, mail-back questionnaires.

When a business is first selected in the survey, detailed pricing specifications are collected for each of the randomly selected jobs. These specifications (job position number, title, tasks, grade, location, etc.) enable the same jobs to be identified in subsequent quarters.

Employers providing data for the WPI have the option of reporting either the ordinary time hourly rate of pay or the annual salary for each selected job. Where an annual salary is reported, information about the usual or standard weekly hours for the job is used to convert it into an hourly rate of pay. Other information relating to the jobs is also collected, including:

• details about pay changes during the reference quarter;
• details about pay change mechanisms (e.g. Fair Work Australia or Modern award, collective agreement or salary review);
• details of overtime provisions;
• details of any bonuses, commissions or incentive payments paid during the reference quarter; and
• any additional information about jobs that have unusual pay or working arrangements.

Sometimes it is not possible to collect data for all of the selected jobs. Some jobs may be temporarily vacant, or the required information is simply not provided by the employer (although this is rare). There are a few options available to deal with temporarily missing observations. These include:

• repeating the previous period's price of the item;
• imputing a movement for the item, based on the price movement for all other items in the sample; and
• using the price movement from another price sample.

The procedure most commonly used in the WPI is to impute a movement for the missing job, based on the price movements of the other jobs in the sample.


OUTPUTS

Four sets of wage price indexes are released:

• ordinary time hourly rates of pay excluding bonuses;
• ordinary time hourly rates of pay including bonuses;
• total hourly rates of pay excluding bonuses; and
• total hourly rates of pay including bonuses.

The "headline measure" of the wage price index is the index for total hourly rates of pay excluding bonuses. Separate indexes are released for each of the above series for various combinations of state/territory, sector (private/public) and industry divisions. Estimates are published quarterly, and more detailed data may be available on request. Seasonally adjusted and trend data are produced for the index of total hourly rates of pay excluding bonuses for Australia, for the private and public sectors.


AVERAGE WEEKLY EARNINGS AND WAGE PRICE INDEX

The six monthly Average Weekly Earnings (AWE) and quarterly WPI collections both measure the wages and salaries of employees.

The AWE and WPI collections aim to measure different, albeit related, concepts. AWE is designed to measure earnings, which consist of payments-in-cash and payments-in-kind such as fringe benefits. The WPI is designed to measure inflationary pressures associated with the compensation of employees. Theoretically, WPI would include all elements of compensation of employees, but for practical reasons it focuses on wages and salaries payments in cash, as well as salary sacrifice payments.

The WPI measures changes in the wages and salaries paid by employers for a unit (i.e. hour) of labour where the quality and quantity of labour are held constant. It has the dual purpose of monitoring wages and salaries inflation in the economy and supporting the compilation of the Australian System of National Accounts.

In contrast, the AWE is designed to provide an accurate estimate of the current average value of wages and salaries paid to employees by an employer over a specified period. The emphasis placed on producing a contemporary measure of average wages and salaries mean that the AWE reflects structural changes that occur over time (such as changes in hours paid for and employment). For more information, see the feature article 'Average Weekly Earnings and Wage Price Index - What do they measure?' in Average Weekly Earnings, Australia, May 2014 (cat. no. 6302.0).


BACK TO TOP