Chapter 3 - Historical background

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Wage Price Index: Concepts, Sources and Methods
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3.1 The history of Australian Bureau of Statistics (ABS) collections that have been used to measure the price of labour are outlined in this chapter.

Award Rates of Pay Indexes

3.2 The Award Rates of Pay Indexes (ARPI) series was produced from the early 1950s to 1997 and was published in Award Rates of Pay Indexes, Australia (cat. no. 6312.0). ARPI was designed to measure changes in award rates of full-time adult wage and salary earners.

3.3 The series was published on a monthly basis and measured minimum award rates of pay for adult employees covered by awards. It did not measure relative levels of award rates of pay between states and industries and excluded the effect of compositional change in awards, occupations and industries over time.

3.4 Changes to the Australian Industrial Relations environment (see paragraphs 3.19 to 3.30) meant that from the 1980s onwards, awards were becoming less dominant in setting the pay of employees. As a consequence, the ARPI series began to apply to a diminishing proportion of the labour market, and was discontinued in 1997.

Wage Cost Index and Labour Price Index

3.5 In response to the diminished relevance of the ARPI series, the Wage Cost Index (WCI) was introduced in 1997. It was produced on a quarterly basis and was published in Wage Cost Index, Australia (cat. no. 6345.0). The WCI produced four main indexes. These were: 

  • 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.

3.6 Whilst all four indexes tracked changes in the price of labour in the Australian labour market, the indexes that included bonuses reflected changes in the quality of work performed. It is for this reason that only the indexes excluding bonuses can be considered "pure price indexes". That is, they measure changes in the price of labour and are unaffected by changes in the quantity and quality of work performed.

3.7 The WCI measured changes in hourly wage and salary rates arising from a range of sources including: award variations; enterprise and workplace agreements; centralised wage fixation; individual contracts; and informal arrangements. The index followed pay movements in jobs, regardless of whether remuneration was set by award or through some form of non-award agreement.

3.8 The WCI was disaggregated by the following classifications:

  • Broad institutional sector - Public / Private, Standard Institutional Sector Classification of Australia (SISCA), 1998 (cat. no. 1218.0)
  • Industry division, Australian and New Zealand Standard Industrial Classification (ANZSIC), 1993 ( 1292.0)
  • State and Territory, Australian Standard Geographical Classification (ASGC), 1996 (cat. no. 1216.0)
  • Occupation, Australian Standard Classification of Occupations (ASCO), 1997 (cat. no. 1220.0).

3.9 The survey focused exclusively on wage and salary rates until the June quarter 2002, when the scope was increased to incorporate the collection of non-wage costs. The information was first published in the September quarter 2004 and resulted in four non-wage indexes being released. These were:

  • Payroll tax
  • Workers' compensation
  • Employer contributions to superannuation
  • Annual leave and Public holidays

3.10 These indexes were combined with the total hourly rates of pay excluding bonuses index and the total hourly rates of pay including bonuses index to produce composite or total labour price indexes. Both the non-wage and total labour price indexes were released on a financial year frequency. For reasons outlined in paragraph 3.6, only the Labour Price Index excluding bonuses could be considered a "pure price index" .

3.11 The increase in scope was reflected by a change in the collection's name from the Wage Cost Index to the Labour Price Index (LPI). The change of name also helped to identify the publication as one of the price indexes produced by the ABS. The catalogue number remained as 6345.0.

Change to classifications

3.12 In the September quarter 2008, the last occupation based indexes were released. After consultation with users and stakeholders it was found that the occupation based indexes were of lower priority than the industry series. Discontinuing these indexes allowed the work program to focus on various projects aimed at optimising the quality of the more heavily used industry series.

3.13 In the September quarter 2009, the collection adopted the revised, ANZSIC 2006 industry classification. To assist users with the change in classification, the complete time series for published data (i.e. from the September quarter 1997) were made available on the ABS website, on an ANZSIC 2006 basis. At the same time, the updated institutional standard from the 2008 Standard Economic Sector Classification of Australia (SESCA) was also applied.

3.14 The Australian Standard Geographical Classification (ASGC) was used by the ABS for the collection and dissemination of geographically classified statistics until July 2011. From 2011 onwards the ABS has adopted a new statistical geography classification called the Australian Statistical Geography Standard (ASGS).

Wage Price Index

3.15 In 2012, due to work program reductions, the ABS discontinued non-wage and labour price indexes. The last data in these series can be found in the September quarter 2011 edition of Labour Price Index, Australia (cat. no. 6345.0).

3.16 To represent the reduced scope of the collection, the name of the series was changed to the Wage Price Index (WPI) from the September quarter 2012. This publication continues to be produced on a quarterly basis and retains the original catalogue number.

3.17 The WPI produces four main indexes. These are:

  • 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.

3.18 The WPI is disaggregated by the following classifications:

  • Broad institutional sector (Public / Private), SESCA, 2008 (cat. no. 1218.0)
  • Industry division, ANZSIC, 2006 ( 1292.0)
  • State and Territory, ASGS, 2011 (cat. no. 1270.0.55.001).

Australian industrial relations and pay setting environment

3.19 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.

3.20 Prior to the 1980s, the Australian industrial relations environment was a highly centralised system. From the 1980s onwards, the Australian industrial relations system had become characterised by more decentralised arrangements for labour-employer bargaining. As a consequence of decentralisation, the magnitude and timing of pay changes became less homogenous across the labour market, and lead to collections, such as ARPI, becoming less relevant. In recognition of the changing industrial relations environment, the WPI was developed. The WPI utilises sampling methodology which provides a representative selection of jobs across the Australian economy. This ensures that the WPI is sensitive to pay changes that occur across the various segments of the labour market.

3.21 From 1991 the Australian Industrial Relations Commission (AIRC) 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.

3.22 Two key pieces of Federal legislation were introduced in the 1990s. The Industrial Relations Reform Act 1993 encompassed provisions to facilitate 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.

3.23 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 were set up to cover the pay and conditions under which employees worked.

3.24 By May 2002, 20% of employees had their pay set at exactly the applicable award rate of pay, 38% had their pay set in a collective agreement, 39% had their pay set in an unregistered individual agreement and 2% had their pay set by a registered individual agreement (Employee Earnings and Hours, 2002 (cat. no. 6306.0)).

3.25 Work Choices legislation came into effect in March 2006. The Work Choices legislation made use of the corporations power of the Commonwealth to establish a national industrial relations system covering approximately 80% of workers. As well as significantly increasing the scope of the national industrial relations system, and setting minimum conditions, Work Choices streamlined Certified Agreements and Australian Workplace Agreements (AWAs).

3.26 The Australian Fair Pay Commission was established as part of Work Choices to set the Federal Minimum Wage. This replaced the National Wage Cases at the AIRC that previously set the minimum wage.

3.27 By May 2006, the proportion of employees with their pay set by a registered individual agreement had risen to 3% due to the effect of AWAs, those with their pay set exactly at the award rate of pay had dropped to 19%, those with pay set by collective agreement had risen to 41% and those with pay set by unregistered individual agreement had dropped to 32% (Employee Earnings and Hours, 2006 (cat. no. 6306.0)).

3.28 With a change in government in 2007, the first changes made to industrial relations in 2008 related to the Workplace Relations Amendment (Transition to Forward with Fairness) Act 2008. These amendments banned the creation of new AWAs, established a temporary employment instrument known as Individual Transitional Employment Agreements (ITEAs), introduced a no-disadvantage test, and began a round of award modernisation. These transitional arrangements were in place until 2010 and the process of award modernisation led to a decrease in the number of awards from over 1,500 to 122.

3.29 In 2009, the federal government introduced the Fair Work Act 2009. Fair Work Australia (FWA) is the national workplace relations tribunal created under the new legislation. It replaced the AIRC and also performs functions previously performed by Workplace Australia and the Australian Fair Pay Commission. FWA also sets the minimum wage and employment conditions.

3.30 By May 2010 only 15% of employees had their pay set exactly at the award rate, collective agreements accounted for 43% of pay setting of employees and the number of employees with pay set by an individual agreement had risen to 37% (Employee Earnings and Hours, 2010 (cat. no. 6306.0)).

Historical WPI

3.31 Graph 3.1 shows wage inflation since the September quarter 1998 when the first through-the-year percentage changes were published. It compares the quarterly percentage changes in the total hourly rates of pay excluding bonuses in original terms to the through-the-year trend movement.

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