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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 1. Overview of the LPI

INTRODUCTION

1.1 The LPI was developed to provide a measure of changes in the price of labour. It replaced the award rates of pay index (ARPI), which had become less relevant in that it related to a rapidly decreasing proportion of employees. This chapter provides information about what the LPI is, why it was developed, and the history of pay setting arrangements in Australia.



ABS INFORMATION ABOUT PAY RATES

1.2 From the early 1950s to June 1997 the ABS produced the award rates of pay indexes (ARPI) series, published in cat. no. 6312.0. By the early 1990s this series no longer provided a reliable measure of movements in wages and salaries, due to the changing industrial relations environment which saw a move away from pay setting based on awards.


1.3 As awards became less dominant in setting wages and salaries, the arpi series applied to a diminishing proportion of the labour market. The ARPI series was discontinued with the June quarter 1997 release. In its place the ABS commenced the quarterly wage price index series (originally known as the wage cost index) to measure changes in wage and salary costs for employee jobs. The index follows pay movements in jobs, regardless of whether remuneration is set by award or through some form of non-award agreement. In 2004, the ABS published non-wage price indexes and labour price indexes for the first time.



OVERVIEW OF THE LPI

1.4 The LPI is one of the key quarterly economic indicators produced by the ABS. It measures change in the price of labour services resulting from market pressures, and is unaffected by changes in the quality and quantity of work performed. Wages and salaries account for the majority of expenditure on labour costs. These costs are outlined in the System of National Accounts (SNA93) concept Compensation of Employees. The Compensation of Employees is defined as 'the total remuneration, in cash or kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period' (source SNA93, paragraph 7.21).


1.5 The ABS conducts a number of sample surveys of businesses which provide measures of changes in wages and salaries over time, e.g. the average weekly earnings series which is designed to provide estimates of the level of average weekly earnings and the quarterly change in the average. However, these types of surveys can be affected by a number of factors including compositional shifts in the labour market and changes to the hours worked by employees, as well as changes in the survey sample selected each quarter from the ABS Business Register.


1.6 The LPI was developed to provide a measure of changes over time in the price to an employer of employing labour services but which would not be affected by changes in the quality or quantity or work performed. i.e. it is unaffected by changes in the composition of the labour force, hours worked, or changes in characteristics of employees (e.g. work performance).


1.7 The LPI is a Laspeyres-type index covering wage and salary and selected non-wage 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.


1.8 The methodology used to construct the LPI is similar to that used for other price indexes such as the Consumer Price Index. In the LPI, index numbers are compiled for a range of wage and non-wage costs relevant to a representative sample of employee jobs within a sample of employing organisations.


1.9 Information about the wage price indexes has been released for each quarter since September 1997 in the Labour Price Index publication, initially with the title, Wage Cost Index, Australia (cat. no. 6345.0).


1.10 The wage price indexes measure changes over time in wage and salary rates of pay for employee jobs. Four sets of indexes are compiled:

  • 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.

1.11 The non-wage price indexes measure changes over time in various non-wage costs. These are compiled on a financial year basis, and were first compiled for the 2001-02 financial year. The four non-wage price indexes available are for:
  • annual and public holiday leave
  • employer funded superannuation
  • payroll tax
  • workers' compensation.

1.12 From the individual wage and non-wage components a labour price index can be constructed. Two versions of the labour price index are produced (one excluding bonuses and one including them) and, like the non-wage price indexes, they are financial year indexes (first compiled for 2001-02).


1.13 The LPI was developed by the ABS in response to the changing labour market conditions which are described below.



AUSTRALIAN INDUSTRIAL RELATIONS AND PAY SETTING ENVIRONMENT

1.14 Governments have regulated the Australian labour market since colonial times. An awards system was originally introduced in the late 1800s to prevent and settle disputes arising between employers and employees who could not reach agreement on terms of employment. Under the awards system, the interests of employees could only be represented by trade unions. Awards are collective agreements i.e. they relate to groups of employees and may be specific to an industry, occupation or enterprise, or may have a common law effect.


1.15 During the Constitutional Conventions in the 1890s, it was agreed to establish a body with powers of conciliation and arbitration for the prevention and settlement of industrial disputes that extended beyond the limits of any one State. For most of the twentieth century, highly centralised Commonwealth and State tribunal-based systems of conciliation and arbitration shaped labour-employer relationships. The Conciliation and Arbitration Act 1904, established the Commonwealth Court of Conciliation and Arbitration, the forerunner of the Australian Industrial Relations Commission.


1.16 The Excise Tariff Act 1906, under which employers were granted tariff protection, provided that a fair and reasonable wage was paid to their workers, was supported by both unions and employers. The first attempt to define a fair and reasonable wage was made in the Harvester case (1907). This case established the concept of a 'basic wage'. It also established the principle that a fair and reasonable wage should be based on 'the normal needs of the average employee, regarded as a human being living in a civilised community'. The Harvester standard was used in making other awards, and the basic wage, with margins for skill, became the foundation wage rate.


1.17 The Federal system, with jurisdiction over matters extending beyond State borders, gradually became dominant over the individual State systems. By 1976 nearly 90% of the workforce had come under awards, of which 40% were under Federal jurisdiction. By the mid 1980s there were over 9,000 separate awards with over 250,000 individual award classifications.


1.18 The nexus between tariff protection and the fair wage was weakened in 1973 when the Commonwealth government oversaw a reduction in overall tariff protection, in an attempt to open up the Australian economy to international competition.


1.19 Opening up the Australian economy to international competition has continued since then. This in turn has resulted in greater emphasis being placed upon increases in productivity, improvements in work performance, the abolition of rules of demarcation, and workplace restructuring.


1.20 Coinciding with these developments was an increased emphasis on agreement making and decentralised bargaining. Decentralisation related to movements away from centralised arbitration and conciliation arrangements, such as awards. These changes occurred in both the Commonwealth and State jurisdictions, although the timing and nature of industrial reforms have varied.


1.21 From the 1980s onwards, the Australian industrial relations system has become characterised by more decentralised arrangements for labour-employer bargaining.


1.22 In 1991 the Australian Industrial Relations Commission introduced a series of bargaining principles (the Restructuring and Efficiency Principle, the Structural Efficiency Principle, and the Enterprise Bargaining Principle) which provided a framework for decentralised bargaining and workplace reform.


1.23 Two key pieces of Federal legislation were introduced in the 1990s. The Industrial Relations Reform Act 1993 encompassed provisions to better allow enterprise bargaining in non-unionised workplaces. The opening up of collective bargaining to workers not represented by unions meant that wages and employment conditions could be changed without unions being directly involved in negotiations. Further labour market reforms were undertaken through the Workplace Relations Act 1996 which allowed the development of individual worker agreements (Australian Workplace Agreements) as well as continuing collective worker agreements (Certified Agreements) and prohibited unions intervening in non-union agreements. The legislation also facilitated the simplification of awards. At the same time, industrial reform took place at the State level aimed at encouraging decentralised bargaining and workplace reform.


1.24 In the 1990s, the method of wage determination moved away from industry-based awards whereby all employees in a particular industry were covered by the same wages and employment conditions. In place of these awards, more diverse agreements have been set up to cover the pay and conditions under which employees work.


1.25 By May 2002, 20.5% of employees had their pay set at exactly the applicable award rate of pay, 38.2% had their pay set in a collective agreement, and 41.3% had their pay set in an unregistered individual agreement (Employee Earnings and Hours, 2002 (cat. no. 6306.0)).

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