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6351.0.55.001 - Labour Price Index: Concepts, Sources and Methods, 2004  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 17/11/2004   
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Contents >> Chapter 4. Wage Price Indexes

WAGE PRICE INDEXES

4.1 Wages and salaries account for the majority of expenditure on labour costs. They are estimated to represent 86.6% of total labour costs according to the survey results available in Labour Costs, Australia (cat. no. 6348.0.55.001).


4.2 The wage price indexes encompass cash payments to employees and include ordinary time earnings, overtime earnings, and bonus, commission and incentive payments, together with the value of any salary sacrificed.


4.3 Price indexes are compiled for the following four wage series:

  • 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.

4.4 The "headline measure" of the wage price indexes is the index of total hourly rates of pay excluding bonuses.


4.5 The methodology to derive prices for input into the construction of each of the four wage price indexes is outlined in this chapter. The process of constructing the indexes is outlined in chapter 6.



INDEX OF ORDINARY TIME HOURLY RATES OF PAY EXCLUDING BONUSES

4.6 Ordinary time hourly rates of pay data are collected quarterly in the Labour Price Index survey. Ordinary time payments are collected for each sampled job and include the following:

  • Award, agreed or overaward payments
  • Casual loadings
  • Value of any salary sacrificed
  • Retainers
  • Piecework payments
  • Higher duties allowances which relate to the selected jobs.

4.7 The following are specifically excluded from ordinary time payments:
  • Shift allowances and shift penalty payments
  • Taxable allowances
  • Reimbursement and non-taxable allowances
  • Leave loading
  • Severance, termination and redundancy payments
  • Employer contributions to superannuation funds (included in the superannuation index)
  • Value of payments in kind that cannot be salary sacrificed.

4.8 Employers providing data for the LPI 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.


4.9 When a job is paid by piece rates, i.e. paid a set amount per unit produced, an hourly rate is determined after consultation with the business contact based on the rate per piece and the average number of pieces per hour. The average hourly rate is calculated when the job is first selected and it becomes part of the pricing specifications for the job and is priced from quarter to quarter. In subsequent quarters, any changes to the piece rate are collected, so that the percentage change is calculated and applied to the previous quarter's hourly rate.


Price of ordinary time hourly rates of pay excluding bonuses

4.10 The price of ordinary time hourly rates of pay for each job is simply the base hourly rate.


4.11 The price for a job is combined with the prices for other jobs to determine the ordinary time hourly rate of pay for each elementary aggregate (EA). EAs are the basic building block of the LPI (see paragraph 3.15). They represent a group of jobs with the same state, sector, industry and occupation characteristics. An EA ordinary time hourly rate of pay is calculated by taking a weighted average of prices for the jobs in the EA. These are referred to as the weighted average prices. The weights used take account of both the sampling weight (the population represented by the job) and weekly standard hours for each job.


(4.1)


Equation: Weighted average price equation


where:

      WtdAvPa is the weighted average price for EA a
      HBsei is the base hourly rate for job i
      StdHrsi is the weekly standard ordinary time hours for job i
      Sampwti is the sample weight for job i.

4.12 Consider an example EA, which is made up of the following jobs.

HBseP
StdHrs
Sampwt

Job 1
$18
40
200
Job 2
$15
20
300
Job 3
$25
38
150


4.13 Substituting the values into the above equation:


(4.2)


Equation: Weighted average price example equation


Price movements

4.14 Movements in the price of ordinary time hourly rates included in the index are those due to inflation, cost of living, enterprise or agency agreements, award rises, safety net rises, individual contracts (both formal and informal) and salary reviews, etc..


4.15 Elements of the average hourly rate that are excluded from changes in the price are those that relate to changes in the quality or quantity of work performed. A range of procedures has been developed to quality adjust the data collected to ensure only pure price changes are reflected in the indexes.


4.16 Only those jobs that exist in both the current and the previous quarter (ie matched jobs) contribute to the index calculations. Jobs are matched by collecting detailed job specifications and by including new (or replacement) jobs in the LPI only after the average hourly rates for each job can be calculated for two successive quarters.


Salary sacrifice

4.17 A feature of the labour market which is becoming more common is the use of salary sacrificing. Salary sacrifice arrangements are voluntary agreements in which the employee agrees to forego part of their salary or wages in return for benefits of a similar cost to the employer. The amount sacrificed can vary at the employee's discretion within guidelines set by the employer. The arrangement is generally intended to be cost neutral to the employer and advantageous to the employee. Salary sacrifice arrangements can change and the cash component of the salary for a job may fluctuate between adjacent quarters even when there has been no change in the cost to the employer.


4.18 In deriving the price of ordinary time hourly rates both the cash and non-cash elements of flexible salary packages are included. The price movements in wage and salary rates would be distorted if just the cash component was included and if the relationship between the cash and non-cash components changed.


Substitution effects

4.19 With the introduction of enterprise bargaining in Australia it has become common for benefits such as allowances, leave entitlements or fringe benefits, to be traded off to obtain greater pay increases by rolling them into ordinary time or base pay. These trade-offs are generally price neutral to the employer and therefore do not reflect changes in the price of the job in the labour market. Accordingly changes of this nature do not affect the ordinary time hourly rates of pay indexes. For example, an employee may choose to trade-off a non-cash component of their salary package (e.g. annual leave) for an increased cash component. In such a case, there would be no change recorded in the wage price index.


4.20 One exception to this is the shift of payments from overtime to ordinary time. The ordinary time rates of pay index shows the impact of these changes. However, they exclude all other 'roll-ins' which are not related to the value of the job in the labour market.


Performance related pay changes

4.21 Occasionally pay rate changes are partially the result of an individual's work performance i.e. the pay change reflects more than pure price change in the labour market. For a small proportion of such jobs, it may not be possible to completely quantify the effect work performance has had on remuneration.


4.22 When the quality (i.e. performance related) and pure price components of the pay changes cannot be separately identified, the entire increase is allowed to contribute to the wage price indexes. It is expected that over time the job occupant will change, resulting in a subsequent fall in the price of the job due the lower quality (i.e. performance/experience) of the new employee. This decrease in the price of the job will also contribute to the index, counterbalancing the increase shown earlier, and in effect removing the performance component over time. While there may be some upward bias in the price rise during the tenure of a given employee, this treatment should minimise any bias in the long term. Given the small number of jobs where quality cannot be separately identified, this treatment is considered preferable to the alternative of removing all pay movements where there is a quality component which would create a downward bias in the index.


4.23 Jobs where individual work performance is a factor in remuneration generally have unstructured or informal pay setting mechanisms i.e. an unregistered individual agreement. Remuneration is usually the result of negotiation between the employer and the employee with the level of pay generally being reviewed annually.



INDEX OF TOTAL HOURLY RATES OF PAY EXCLUDING BONUSES

4.24 The difference between the price for ordinary time hourly rates of pay excluding bonuses and that for total hourly rates of pay excluding bonuses is overtime.


Overtime

4.25 Overtime relates to payment for hours worked in excess of standard or usual hours. Often, but not always, overtime attracts a higher rate of pay, or penalty rate, than ordinary time. This penalty rate is generally defined as some multiple of the ordinary time hourly rate of pay (e.g. 1.5 times the ordinary time hourly rate).


4.26 Overtime tends not to be worked on a standard or regular basis. Different hours of overtime will be worked in different jobs each week. Not all job occupants will be eligible to work overtime and not all occupants who are eligible will have been paid overtime in any particular period. For those who do, there is a broad range of scenarios and arrangements under which overtime might be paid. These arrangements are usually based on peaks and troughs in the operations of a business. Therefore, overtime is often worked irregularly and may be infrequent.


4.27 Furthermore, different overtime rates may apply depending on the time and the length of overtime worked (e.g. 1.5 times the ordinary rate for the first three hours of overtime worked Monday to Friday, and 2.0 times the ordinary rate for hours in excess of three hours or for overtime worked on weekends). The details of these rates applying to different hours of overtime worked are referred to as overtime provisions.


Price of total hourly rates of pay excluding bonuses

4.28 Ideally, overtime weekly standard hours would be the usual or average overtime standard hours paid for in an average week. However, this information is not readily available from employers, as overtime does not tend to be worked on a standard or regular basis.


4.29 To overcome the problem of irregular or fluctuating overtime hours and to enable overtime to be priced to a constant quantity and quality, standard overtime hours for a job are defined as the number of overtime hours actually paid for in the reference week of the first quarter the job is included in the survey. Therefore not all jobs where the occupant is eligible for overtime will have overtime priced in the total hourly rates of pay indexes. This reflects the fact that overtime is not worked by all job occupants who are eligible to work overtime in a given week.


4.30 In addition to deriving the standard overtime hours for the job, an overtime provision factor is derived from data collected in the first quarter. This factor is used to derive an average penalty rate for overtime hours worked and it represents the relationship between the hourly rates for overtime worked and ordinary time. For jobs where the occupant is not eligible to work overtime or where overtime is not being priced (i.e. overtime was not worked in the first quarter the job was included in the survey), the standard overtime hours and overtime provision factor are both set to zero. The following example illustrates how the overtime provision factor is derived.

      4 hours @ $15 (time and a half) = $60
      4 hours @ $20 (double time) = $80
      Total overtime paid = $60 + $80 = $140
      Total overtime hours = 4 + 4 = 8
      Overtime hourly price = $140/8 = $17.50
      Ordinary time hourly rate of pay = $10
      Overtime provision factor = $17.50 / $10.00 = 1.75

4.31 The total hourly rate of pay is calculated by combining the overtime hourly rate with the ordinary time hourly rate. To do this, the standard weekly ordinary time and overtime hours are used to weight the wages and salary components.


(4.3)


Equation: ordinary time weight and overtime weight equations


where:

      StdHrs is the weekly standard ordinary time hours
      VStdHrs is the weekly standard overtime hours.

4.32 The total hourly rate of pay excluding bonuses (THRPEB) is calculated as:


(4.4)


Equation: THRPEB equation


where:

      HBse is the Base(ordinary time) hourly rate of pay
      HVBase is the Overtime hourly rate of pay.

4.33 Using the example above and assuming a weekly ordinary time standard hours of 38 and a weekly overtime standard hours of 2, the total hourly rate of pay would be:


Equation: THRPEB example equation


4.34 An EA price is calculated by taking a weighted average of all the job prices in the EA. Note that for total hourly rates of pay, the weight relating to standard hours includes both the ordinary time and overtime standard hours.


(4.5)


Equation: Weighted average of all job prices equation


where:

      WtdAvPa is the weighted average price for EA a
      THRPEBi is the total hourly rate of pay excluding bonuses for job i.

Price movements

4.35 Generally, the overtime provision factor is only derived in the first quarter a job is included in the survey. In subsequent quarters, if there has been no change in the eligibility of the occupant to work overtime and there has been no change to the overtime provisions, then neither the standard overtime hours nor the overtime provision factor will be changed.


4.36 Hence any change in the overtime hourly price would be due to a change in the ordinary time hourly price, as the overtime hourly price is derived from the ordinary time hourly price and the overtime provision factor, as illustrated in the example below.


EXAMPLE

Quarter 1
Quarter 2
% increase

Overtime hourly price
$10.00
$10.50
5.0
Overtime provision factor
1.75
1.75
. .
Overtime hourly price
$10.00 x 1.75 = $17.50
$10.50 x 1.75 = $18.38
5.0

. . not applicable


4.37 Overtime provisions or eligibility may change when pay is reviewed for a job, for example when new individual contracts or collective agreements are struck. In such cases, the overtime provision factor and the overtime weekly standard hours are updated to reflect this change, which flows into the calculation of total hourly rates of pay.


Substitution effects

4.38 The treatment of substitute price changes in the LPI was outlined in 4.19 and 4.20. When there are substitutions in remuneration between overtime and ordinary time payments, the total hourly rates of pay index only shows any net changes resulting from this substitution.



INDEXES OF HOURLY RATES OF PAY INCLUDING BONUSES

Bonuses

4.39 Bonuses, commissions and incentive payments may be paid to employees in addition to regular wage or salary payments. They may relate to the performance of the employee or the organisation, and may be paid on a regular basis e.g. weekly, quarterly or annually, or on an ad hoc basis (e.g. staff suggestion bonuses). For ease of reference in this section the term 'bonuses' encompasses bonuses, commissions and incentive payments.


4.40 Bonuses fluctuate from quarter to quarter, as they generally relate to the productivity of either the individual in the job or the organisation as a whole. The hourly price for bonuses is derived from the total of such payments, without separating quality changes from pure price changes. Therefore, the indexes which include bonuses comprise a combination of a pure price index and a form of unit value (i.e. total value divided by quantity). Changes in quality or quantity affect the bonus component and hence the indexes that include bonuses.


4.41 Bonuses exclude the cost of retainers and piece work payments which are included in the calculation of the ordinary time hourly rate (see paragraph 4.6).


4.42 Data on bonuses are collected on the following basis:

  • where the bonuses are paid with a weekly, fortnightly, monthly, or quarterly frequency - the most recent payment to the employee is collected
  • where the bonuses are paid biannually, annually or with other frequency - the full amount paid in the quarter is collected (ie the total paid since the previous quarter's survey reference date).

Price of hourly rates of pay including bonuses

4.43 Hourly prices for bonuses are derived from the bonus payment, the frequency of the bonus payment and standard ordinary time hours (unless the frequency of the bonus is the same as the wage and salary payments in which case ordinary time hours for the period are used). For bonuses paid less frequently than quarterly, e.g. annual bonuses, the hourly price is carried forward to subsequent quarters until the next such payment is due.


4.44 Two wage price indexes are produced which include bonuses: ordinary time hourly rates of pay including bonuses, and total hourly rates of pay including bonuses. These are the two indexes discussed above but with the inclusion of bonuses.


4.45 To calculate a price inclusive of bonuses, the derived hourly price of bonuses is added to the ordinary time hourly rate of pay.


ORDINARY TIME HOURLY RATE OF PAY INCLUDING BONUSES (OTHRPIB)


(4.6)


Equation: OTHRPIB equation


where HBon is the hourly price of bonuses.


TOTAL HOURLY RATES OF PAY INCLUDING BONUSES (THRPIB)


(4.7)


Equation: THRPIB equation


4.46 Again, a weighted average price for each EA is then calculated. The weighted average will either exclude or include the overtime standard hours depending on whether it is the ordinary time or total time price being calculated.


Price movements

4.47 With the exception of commissions no attempt is made to remove quality from the price of bonuses, hence indexes which include bonuses are not pure price indexes. An attempt is made to quality adjust commissions by removing changes in the price reported of commissions.


4.48 The ABS is investigating the treatment of bonuses and reviewing the methodology for deriving the price change for bonuses. The aim of these investigations will be to develop a more refined measure of bonuses with respect to pricing to constant quality.


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