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6345.0 - Wage Cost Index, Australia, Jun 2003  
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APPENDIX 2


SEASONALLY ADJUSTING THE WAGE COST INDEX, Experimental Estimates


INTRODUCTION

1 The ABS released experimental seasonally adjusted estimates of the WCI in the April 2002 issue of Australian Economic Indicators (cat. no.1350.0). The article concluded that the WCI does exhibit seasonality but the pattern is affected by some instability in the series. However, the seasonal adjustment was based on a time series of only 17 quarters. As the time series available becomes longer, it should be easier to identify the underlying seasonal pattern. Despite the uncertainties associated with the seasonally adjusted estimates at this time, the ABS will be updating the seasonal adjustment each quarter and will release the experimental seasonally adjusted estimates in this annex to the WCI publication.


TIME SERIES DECOMPOSITION

2 Three distinctly different notional influences underlie any observation in a time series such as the WCI:

    • Trend movements-measures of the underlying behaviour of the series
    • Seasonal influences-systematic calendar related effects, such as pay reviews occurring at the end of the financial or calendar year
    • Residual irregulars-unpredictable short-term fluctuations in a series, not systematic or calendar related, involving one-off events such as delayed payments of safety net adjustments.

3 To understand the underlying behaviour of the original series over time and to assist in decision making, the ABS estimates and publishes seasonally adjusted and trend series for a wide range of time series. When a series is seasonally adjusted, estimates of the seasonal influences (i.e. systematic calendar related effects) are removed from the original data. The WCI seasonally adjusted estimates thus reflect the interaction of the underlying trend and all the irregular effects.

4 The ABS will not normally recommend a seasonally adjusted series for publication unless there are at least five, though preferably seven, years of quarterly data. This is the length of time required before the moving averages used in the seasonal adjustment process yield reliable results. Also, there must be significant peaks and/or troughs evident in the data on a regular basis for seasonality to exist. If the series is not stable the seasonal patterns are difficult to determine and in such cases the ABS may wait for more data or publish only a trend series. A trend series is one in which the irregular influences have been removed from the seasonally adjusted series; in other words, where both the systematic calendar related influences and the irregular influences have been removed from the original estimates.


WCI SEASONALITY

5 The most recent seasonal analysis of the WCI shows that evidence of seasonality exists. A slight peak exists in the first quarter, but not as significant as the peak in the third quarter. A definite trough exists in the second quarter, again suggesting seasonality exists. No obvious seasonality has been identified for the fourth quarter. Anecdotal and historical evidence from WCI data indicate increased activity regarding pay rises at the end of the financial year for employees on individual agreements and awards. With methods of setting pay in Australia estimated at 20.5 per cent for awards, 38.2 per cent for collective agreements and 41.3 per cent for individual agreements (Source: Survey of Employee Earnings and Hours, May 2002 (cat. no. 6306.0)), the seasonal high in the third quarter is not surprising.

6 When the WCI series is broken down to the sector level interesting differences occur. For the private sector, it is apparent that the second quarter is seasonally low and the third quarter is seasonally high. This pattern is consistent with the WCI at the total Australia level, but the size of the seasonal factors is larger for the private sector. While there is inconclusive evidence of seasonality in the first quarter, the fourth quarter indicates the possibility of a slight peak. Anecdotal and historical evidence from WCI data indicates that pay movements are mainly reported for employees on individual agreements and awards in the third quarter. This is consistent with data from EEH, May 2002, which reports 50.4 per cent of employees on individual agreements and 24.6 per cent on awards in the private sector.

7 The public sector exhibits a slightly different pattern of seasonality from the total Australia and private sector series. This may be due to the predominance of collective agreements as the pay setting mechanism in the public sector (89.8 per cent of employees (EEH, May 2002)). When looking at public sector data only, there is evidence of a higher seasonal pattern in the first quarter than in the third quarter and evidence of low seasonality in the second and fourth quarters. However, there is some instability evident in the public sector data which means the reliability of the estimated seasonal factors could be strengthened with a longer time series.

8 The graph below compares the WCI, Australia, original and seasonally adjusted quarterly changes. The graph demonstrates how the peaks and troughs in the original data are smoothed by the seasonal adjustment process. The percentage movements in the original series are between 0.4 per cent and 1.3 per cent per quarter. The movements for the seasonally adjusted series are between 0.6 per cent and 0.9 per cent per quarter.

Graph - WCI Quarterly changes, original v seasonally adjusted



REFERENCE BASE

9 The reference base of an index series is most commonly a year but can also be a different length of time, ranging from two or three years down to a single quarter. It often coincides with the weighting base for the series, but this is not essential. The September quarter 1997 used as the base period for the original (i.e., non-seasonally adjusted) WCI series was chosen arbitrarily—it was the first quarter for which WCI data were available.

10 Seasonal adjustment is a mathematical process that is principally designed to help analysts identify the underlying movements in the series involved. However, the relationship between the original and seasonally adjusted series is also useful in terms of indicating which quarters are ‘seasonally high' and those which are ‘seasonally low'. Therefore, it has been decided to show the seasonally adjusted series exactly as they have been derived from the original series and not to re-reference the seasonally adjusted data to 100.0 in September quarter 1997.


SEASONAL ADJUSTMENT

11 The WCI series uses a concurrent seasonal adjustment methodology to derive adjustment factors. This method uses the whole series available at each reference quarter to estimate seasonal factors. Concurrent adjustment can result in revisions each quarter to estimates for earlier periods, although the most significant change is likely to occur in the last quarter of the series previously published.


AVAILABILITY OF DATA

12 Seasonally adjusted series are calculated for total Australia, private sector and public sector only. It is not possible at this stage to derive useful seasonally adjusted series for other index sets.


CONCLUSION

13 The ABS intends to publish the experimental seasonally adjusted WCI estimates each quarter. The estimates will be monitored with the aim of removing the 'experimental' status once the seasonal pattern can be reliably estimated.

EXPERIMENTAL ESTIMATES, TOTAL HOURLY RATES OF PAY EXCLUDING BONUSES, Seasonally Adjusted

Period
Private
Public
Private and
public

INDEX NUMBERS (a)
2000
June
108.4
109.3
108.6
September
109.3
110.2
109.6
December
110.4
111.3
110.6
2001
March
111.4
112.3
111.6
June
112.4
113.5
112.6
September
113.2
114.4
113.5
December
114.1
115.3
114.4
2002
March
114.9
116.1
115.2
June
115.9
117.1
116.2
September
116.9
118.1
117.2
December
118.0
119.3
118.3
2003
March
118.9
120.9
119.4
June
119.8
121.9
120.3

PERCENTAGE CHANGE (from corresponding quarter of previous year)
2001
June
3.7
3.8
3.7
September
3.6
3.8
3.6
December
3.4
3.6
3.4
2002
March
3.1
3.4
3.2
June
3.1
3.2
3.2
September
3.3
3.2
3.3
December
3.4
3.5
3.4
2003
March
3.5
4.1
3.6
June
3.4
4.1
3.5

PERCENTAGE CHANGE (from previous quarter)
2001
June
0.9
1.1
0.9
September
0.7
0.8
0.8
December
0.8
0.8
0.8
2002
March
0.7
0.7
0.7
June
0.9
0.9
0.9
September
0.9
0.9
0.9
December
0.9
1.0
0.9
2003
March
0.8
1.3
0.9
June
0.8
0.8
0.8
(a) Reference base of each index: September quarter 1997 (in non-seasonally adjusted terms) = 100.0.
See paragraphs 9 and 10 of this Appendix.



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