6351.0.55.001 - Labour Price Index: Concepts, Sources and Methods, 2004
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 17/11/2004
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Contents >> Chapter 3. The Labour Price Index

INTRODUCTION

3.1 This chapter provides an overview of the LPI, largely in the context of the theoretical and methodological issues outlined in chapter 2. More detailed information on practical matters is provided in subsequent chapters.

MAIN FEATURES OF THE LPI

3.2 The LPI is a Laspeyres type price index which measures changes in the price of labour in the Australian labour market, unaffected by changes in quality or quantity of work performed. As outlined in chapter 2, a Laspeyres price index measures the change in price between a given base period and the current period.

3.3 In compiling the indexes of the LPI, price movements for different segments of the labour market (defined by state, sector, industry and occupation) are combined using weights which represent each segment's proportion of the total expenditure on labour by employers in Australia in the weighting base period. These weights, referred to as expenditure weights, are kept constant between successive weighting base periods.

3.4 To enable the LPI to measure price changes over time, data are collected for a sample of individual jobs common between consecutive quarters. Only those jobs that have a price derived in both the current and previous quarters (i.e. matched jobs) contribute to index calculations. In addition, any price changes reflected are 'pure' price changes. That is, no change is shown as a result of shifts in the quality or quantity of work performed.

3.5 A specification pricing methodology is employed to measure the price underlying each job in the sample. It involves identifying all the price influencing characteristics of each sampled job and incorporating them in fully defined and fixed pricing specifications.

3.6 Payroll tax and workers' compensation are levied at the employer level, so these indexes are calculated using a matched sample of employers rather than jobs. Specific details about these indexes are outlined in Chapter 5.

3.7 In the LPI, the wages data are based on actual wage and salary payments made to job occupants in the survey reference period rather than nominal or list rates (e.g. awards or book rates) for the job concerned.

3.8 The LPI is an input price (or purchaser price) index designed to measure changes over time in the cost to businesses of purchasing a fixed quantity and quality of labour input, irrespective of the output produced. Consequently, when considering price movements for jobs, no adjustment is made for productivity changes within the production process that arise from factors such as capital investment, technological change, more efficient organisational arrangements, and entrepreneurial activities.

CONSTANT QUALITY PRICING IN THE LPI

3.9 Effective construction of price indexes requires the application of specification pricing, which involves the use of fixed pricing specifications. In the LPI, these pricing specifications include a job identifier as well as characteristics of the job being priced, such as job title, grade or level, location and tasks, so the employer can uniquely identify the selected employee job.

3.10 Most importantly, pricing specifications also outline the price determining characteristics of each selected job. Pricing to constant quality is achieved by considering any changes in relation to these characteristics, and by removing any changes in labour payments which relate to these changes. Essentially, pricing to constant quality in the LPI ensures that price changes from the following are not reflected in the index series:

• changes in the nature of work performed (e.g. different tasks or responsibilities)
• changes in the quantity of work performed (e.g. the number of hours worked)
• changes in the characteristics of the job occupant (e.g. age, apprenticeship year, successful completion of training or a qualification, grade or level, experience, etc.)
• changes in other price determining characteristics which may exist (e.g. the site where the work is performed, the presence of other components of pay or labour costs which have been rolled in, changes in work schedules).

3.11 In the LPI, a range of procedures have been developed to identify and measure quantity and quality changes and to ensure only pure price changes are reflected in the indexes.

3.12 As mentioned earlier, only matched jobs contribute to the index calculation each quarter. If one or more characteristics of a matched job change from one quarter to the next then the impact of the change in quality (see paragraph 3.10) is removed from the price change for the job prior to index calculation. A constant quantity is maintained for each individual job from one quarter to the next by pricing the hourly rate of pay.

3.13 Sometimes, significant changes in job specifications fundamentally alter the nature of the job, to the point where the job priced in the previous quarter essentially no longer exists. In this situation it is not possible to continue pricing the job originally selected, and a new job is selected to take its place in the sample.

COMPILING THE INDEXES OF THE LPI

3.14 The indexes of the LPI are compiled by weighting price movements (or relatives) between the base and current period, by their shares of labour expenditure in the base period. As described in paragraphs 2.11 and 2.12 this is simply an alternative way of calculating a Laspeyres index. In this alternative view, the weights used are expenditure shares rather than actual quantities.

3.15 This weighting of price relatives occurs at the elementary aggregate (EA) level. EAs represent groups of jobs with the same state/territory, sector (private/public), industry and occupation characteristics. EAs are the finest aggregations of jobs for which expenditure shares (referred to in the LPI as expenditure weights) are available. Each selected job in the sample is assigned to a specific EA based on the occupation code of the job and the characteristics of the employing organisation (state/territory, sector and industry).

3.16 Being a Laspeyres-type index the LPI has fixed weights. However, some qualification is required. It is not realistic to hold the weights of groups of jobs (elementary aggregates) permanently fixed. If held constant on a permanent basis, the further the series moved away from the base period, the more likely it would be that the weights are no longer representative of the relative importance of jobs. To overcome this problem the weights are updated annually. The series calculated using the new weights is linked to the series calculated using the previous weights to ensure a continuous series exists over time.

EXPENDITURE WEIGHTS

3.17 LPI expenditure weights are a measure of the relative importance of each elementary aggregate, based on employers' expenditure on labour. These weights are derived from the Survey of Employment and Earnings (SEE), the Major Labour Costs Survey (MLC), the Employee Earnings and Hours (EEH) survey and the Census of Population and Housing. Separate expenditure weights are derived for each of the components of the LPI; wages and salaries (including overtime and bonuses), superannuation, annual and public holiday leave, payroll tax and workers' compensation. The actual expenditure weights used depend on the index being constructed.

3.18 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. Once updated, the weights are fixed again, and a new weighting base is created. In the following quarters, prices will be compared using this new weighting base. This process is referred to as reweighting. The LPI is reweighted annually.

3.19 When the expenditure weights are updated, it does not follow that the published index numbers will recommence at 100.0. Instead, the series based on the old expenditure weights and that based on the new weights are linked to form a continuous series via an arithmetic calculation, which is referred to as chaining (see paragraph 2.16 to 2.18).

3.20 New estimates from the independent data sources used to create the LPI expenditure weights are not available each year. When this is the case, updated weights are calculated by revaluing the previous expenditure weights using current annual price movement data. In effect, this process maintains the quantities underlying the weights from the earlier period.

DATA COLLECTION

3.21 Information for the LPI is collected using quarterly mail questionnaires. Data for the wage price indexes are collected each quarter. Annual leave and superannuation data are collected annually as part of the June quarter LPI survey. Data used to construct the payroll tax and workers' compensation indexes, as well as the public holiday component of the annual and public holiday leave index, are obtained from ABS and non-ABS data sources, rather than being directly collected from employers.

3.22 When a business is first selected in the survey, detailed pricing specifications are collected for each of the randomly selected jobs. These specifications (i.e. job position number, title, tasks, grade, location, etc.) enable the same jobs to be identified in subsequent quarters. Other information relating to the jobs is also collected including details about pay change mechanisms (i.e. awards or agreements), details of overtime provisions, and any additional information about jobs that have unusual pay or working arrangements. This additional information assists survey staff to understand the nature of pay changes as they occur and to ensure that only pure price changes are reflected in the index.

3.23 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). In these situations data are imputed based on similar jobs.

SCOPE AND COVERAGE

3.24 The target population of businesses for the LPI is all employing organisations in Australia (private and public sectors) excluding:

• enterprises primarily engaged in agriculture, forestry or fishing
• private households employing staff
• foreign embassies, consulates, etc.

3.25 The first group above is excluded primarily 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. The other groups cannot be included because they are out of scope of the ABS Business Register from which the LPI sample of businesses is selected.

3.26 For details on the ABS treatment of businesses as statistical units see Appendix 1.

3.27 All employee jobs in the target population of businesses are in scope of the LPI, with the exception of the following:

• Australian permanent defence force jobs
• non-maintainable jobs (i.e. jobs that are expected to be occupied for less than six months of a year)
• jobs for which wages and salaries are not determined by the Australian labour market (e.g. working proprietors of small incorporated enterprises, most employees of Community Development Employment Programs, and jobs where the remuneration is set in a foreign country).

3.28 As such, full-time, part-time, permanent, casual, managerial and non-managerial jobs are in scope of the LPI. Costs incurred by businesses for work undertaken by self-employed persons such as consultants and subcontractors are out of scope of the LPI, 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.

SAMPLE DESIGN AND MAINTENANCE

3.29 A two-stage sampling procedure is used to generate a sample of employee jobs for the LPI: a sample of businesses; and a sample of employee jobs from within those selected businesses. Probability sampling is used in the selection of both businesses and jobs to ensure that the sample of jobs used in the compilation of the indexes is representative of all jobs in the labour market.

3.30 In the first stage of sampling, approximately 4,800 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 group and business size and selecting a random sample from each stratum. For a number of large complex organisations, a subsample of locations is selected to simplify reporting arrangements.

3.31 In the second stage of sampling, businesses selected in the first stage are asked to select a random sample of up to ten employees from their payrolls using instructions provided by the ABS. The number of selections depends on the total number of employees in the business. The provider then identifies the jobs occupied by these employees. Approximately 20,000 jobs are selected.

3.32 For effective and efficient ongoing index construction, it is important that a high proportion of the initial sample of businesses is retained in subsequent quarters, and that the same jobs within those businesses stay in the sample where possible. However, with annual reweighting of the index to ensure its continued relevance, it is also necessary to update or refresh the survey sample annually. Refreshing the sample also allows the ABS to control the length of time that small businesses, in particular, are included in the sample. By controlling the length of time businesses are included in the survey the ABS can ensure that the reporting load placed on businesses is kept to a minimum.

3.33 The sample selection methodology used to refresh the sample of businesses in the survey is referred to as the 'Rotating Panel Methodology'. In this methodology, the survey population is initially broken into five equal population panels. The sample is refreshed from within only one population panel for each annual update. All new businesses commencing operations during the course of a year are included in the next population panel to be refreshed, and therefore have a chance of being selected at the next annual update, ensuring the index reflects changes to the population of businesses.

3.34 Between each annual refresh of the business sample, a small number of employee jobs will be lost from the survey sample because of the closure of some businesses. In addition, some jobs in continuing businesses will be replaced in the sample because of restructuring and other job changes. These small sample losses do not affect the index as the jobs lost from the sample are represented by other similar jobs in the sample through adjustments to the sampling weights.

3.35 Sampling weights are calculated for each contributing matched job. The sampling weight for a job reflects the overall probability of selection as well as the extent and type of non-response.

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