Chapter 2 - Purposes and uses of the Wage Price Index
Introduction
2.1 This chapter discusses the purposes and uses of the Wage Price Index (WPI).
What the Wage Price Index measures
2.2 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 paragraph 7.44 of the System of National Accounts [see Australian National Accounts: Concepts, Sources and Methods, Edition 1 2012 (cat. no. 5216.0)].
2.3 The WPI is a Laspeyres-type index covering wage and salary costs. It measures the change in the price between the current period and the price at a given base period with the quantity and quality of labour services being held constant.
2.4 To ensure that the quantity and quality of labour services are held constant, changes in the composition of the labour force, hours worked, or changes in characteristics of employees (e.g. work performance) are all excluded from the index.
2.5 Four sets of indexes are compiled. These are:
- ordinary time hourly rates of pay excluding bonuses
- ordinary time hourly rates of pay including bonuses
- total hourly rates of pay excluding bonuses
- total hourly rates of pay including bonuses.
Uses of the Wage Price Index
2.6 The primary use of the WPI is as a deflator in the preparation of the National Accounts. This use is described in more detail in Chapter 13.
2.7 The WPI informs wages policy in Australia and is considered by Fair Work Australia when determining award wages.
2.8 The WPI is also used to monitor inflationary pressure in the economy and determine macro economic performance. For example, the WPI is one of the sources used by the Reserve Bank of Australia when reviewing monetary policy.
2.9 The WPI may also be used in indexation arrangements in business contracts, where the WPI may account for inflation of the wage component of costs. For more information on using price indexes in contracts, refer to Use of Price Indexes in Contracts which is available on the ABS website.