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Feature Article - Forthcoming changes in the estimation of compensation of employees
Within the Australian national accounts this measure is currently derived by summing the following components:
The Survey of Employment and Earnings is an employer based survey which provides data on the number of jobs held and earnings (including severance, termination and redundancy payments) derived from jobs held from a sample of both private and public sector units, excluding private sector units in agriculture, forestry and fishing, employees in private households, employees of foreign embassies and consulates in Australia, Australian citizen employees based outside Australia and defence force personnel. The earnings data are collected on a cash basis and therefore both public and private sector earnings are adjusted for the varying number of pay days in a quarter prior to their use in the national accounts. SEE earnings accounted for 84.5% of compensation of employees in December quarter 2001, with private sector earnings accounting for 64.8% and public sector earnings accounting for 19.7%.
Unrecorded wages adjustment
When employment estimates from the Labour Force Survey (LFS) are transformed to a 'number of jobs' basis comparable with employment data from SEE it is generally the case that the LFS estimates exceed those of SEE. Investigations by the ABS suggest that a major cause is that some SEE respondents fail to report all their payrolls, typically omitting payrolls for executive staff and casual workers. To overcome the SEE underestimate of employment and hence of earnings, unrecorded wages are estimated by calculating the difference between employment data from SEE with those from the LFS. To ensure comparability between the collections the LFS estimate of the number of wage and salary earners is adjusted for multiple job holders, employees on strike, employees on workers compensation paid through payroll, employees on unpaid absences and employees overseas. Unrecorded employment is then calculated as the number of labour force jobs filled by wage and salary earners minus the number of SEE jobs filled by wage and salary earners. It is assumed that all unrecorded employment occurs in the private sector. The unrecorded wages adjustment is derived by multiplying unrecorded employment by average private sector earnings from SEE, i.e. SEE private sector earnings divided by SEE private sector employment. Unrecorded wages accounted for 1.8% of compensation of employees in December quarter 2001.
Employer social contributions
Employer social contributions include superannuation expense and workers' compensation premiums. Estimates for the private sector are obtained for each state and territory by distributing annual benchmark estimates from the annual Economic Activity Survey according to the quarterly distribution of private sector wages. Beyond the benchmark years, the quarterly estimates of employers' social contributions are calculated by using the proportion of social contributions to civilian wages and salaries in the previous year. The quarterly allocation of employer social contributions has been adjusted in some recent years to allow for the impact of the introduction of the superannuation guarantee levy legislation and of periodic changes in the levy. Public sector employer social contributions are derived using data from the Survey of Major Labour Costs for all components and extrapolated using government civilian wages, except for general government superannuation for which quarterly data are obtained from the Department of Finance and Administration ledger. Employer social contributions accounted for 9.6% of compensation of employees in December quarter 2001.
Defence force wages
Defence force wages and allowances are derived from annual information supplied by the Department of Defence and allocated to quarters using data for defence wages paid from the Department of Finance and Administration ledger. Defence force wages accounted for 1.1% of compensation of employees in December quarter 2001.
Annual estimates of farm wages and salaries are provided by the Australian Bureau of Agricultural & Resource Economics (ABARE) and are estimated on a quarterly basis using linear interpolation and extrapolation. Farm wages accounted for 1.0% of compensation of employees in December quarter 2001.
Payments in kind
The value of wages paid in kind is estimated using annual data relating to the value of fringe benefits supplied by the Australian Taxation Office and allocated to quarters using linear interpolation and extrapolation. Payments in kind accounted for 1.4% of compensation of employees in December quarter 2001.
Net labour income from overseas
The estimate of wages paid to Australian resident employees of foreign embassies and consulates in Australia and employees based outside Australia are obtained from balance of payments statistics. Net labour income from overseas accounted for 0.6% of compensation of employees in December quarter 2001.
THE NEW DATA SOURCE
The Quarterly Economic Activity Survey (QEAS) was fully implemented in March quarter 2001 and collects data from the private sector on a range of items including income from sales of goods and services, wages and salaries, workers' compensation costs, superannuation, interest and dividends, other income and expense items, profits and inventories. However, it does not collect employment estimates. QEAS replaces three collections: the Survey of Inventories, Sales and Services, the Survey of Company Profits and the private sector component of SEE. The aim of QEAS is to provide the best estimates of quarterly movements with which to carry forward annual benchmarks in the compilation of the quarterly national accounts. QEAS estimates are published in Business Indicators (Cat. no. 5676.0). For background on the introduction of this survey refer to Information Paper - Improvements to Australian Bureau of Statistics Quarterly Business Indicators (Cat. no. 5677.0)
THE NEW METHOD
The introduction of the new QEAS data source will only affect the calculation of that part of the private sector earnings component of compensation of employees estimated using SEE and the unrecorded wages adjustment. The methods used for estimating other components of compensation of employees as described above will not change.
The method to be used to derive private sector earnings is quite straightforward. Private sector earnings (other than farm wages and payments in kind) will be calculated by extrapolating the December quarter 2001 private sector earnings levels estimates (including the unrecorded wages adjustment) using the movements in wages and salaries collected in QEAS with the extrapolation being done at the state level.
Of importance in this new method is that since QEAS does not collect employment data, the unrecorded wages adjustment will no longer be able to be calculated. However, given the nature of QEAS the potential for respondents to not report all payrolls is greatly reduced. In the short term, since the existing level of the series will be maintained, there is no concern for possible understatement of the level of compensation of employees. In the future, the QEAS estimates will be benchmarked to data collected via the annual Economic Activity Survey. These annual data are supplemented by income data from the Australian Taxation Office thus providing a very large sample of employing businesses.
Another methodological development being considered is to extrapolate private sector employer social contributions (workers' compensation and superannuation) at the Australia level using data collected in QEAS specifically for this purpose.
It is known that QEAS and SEE estimates will differ for genuine sampling, conceptual and methodological reasons. Investigations will continue over the next three months to better understand the extent of these differences and to validate the QEAS series. These investigations may lead to some small variations in the method just described. Any differences will be reported in the March quarter 2002 release of 5206.0.
KEY ANALYTICAL ISSUES
There are three key issues which arise in the change over of data sources for compensation of employees which will affect analysis of the results. These issues are:
Coherence with other national accounts series
Until recently, quarterly national accounts estimates were compiled from a range of independent quarterly surveys on wages and salaries, profits, sales of goods and services and inventories, capital expenditure and other items. The development of QEAS seeks to improve the coherence between the various national accounts components by sourcing the quarterly information from the same source to as large an extent as possible. Over the past 12 months the data from QEAS have been progressively introduced into the national accounts and now many elements of the accounts are estimated from a common source. These include estimates of industry value added for a number of industries in the calculation of GDP(P), estimates of gross operating surplus for private non-financial corporations within GDP(I), and estimates of changes in inventories within GDP(E). The use of QEAS data for estimating compensation of employees is another step in the process. Since the data are coming from a common source, the data feeding into much
of GDP(P) and GDP(I), in particular, should be able to be reconciled at an individual business level and this should carry through to the aggregates shown in the accounts.
Quality of seasonal adjustment
QEAS has been collecting wages data since March quarter 2001, thus providing a four quarter overlap of QEAS and private sector SEE data. This overlap will be used to make an initial estimate of the difference in seasonal pattern between the QEAS and SEE wages data. It is likely that as more QEAS data become available revisions will be made to the seasonally adjusted estimates.
Measures of average earnings
The old approach to estimating compensation of employees ensured a close link between the estimates of LFS employment and the overall measure of compensation of employees. Consequently, national accounts measures of average earnings - derived by dividing total compensation of employees by the number of LFS wage and salary earners - had a degree of internal coherence. Since the new approach will not directly link LFS data and quarterly estimates of compensation of employees, national accounts measures of average earnings derived using LFS data may be of lower quality.
The introduction of QEAS data will simplify the method for estimating compensation of employees. The use of QEAS data should improve the coherence between estimates of compensation of employees and estimates of gross operating surplus, changes in inventories and value added in other parts of the accounts. This is a significant advantage. Further developments and the results of current investigations will be reported in the March quarter 2002 issue of this publication. For further information on the issues presented in this feature article please contact Carl Obst on 02 6252 6713 or Henry Foira on 02 6252 7488.
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