Chapter 7 - Weights and their sources

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Wage Price Index: Concepts, Sources and Methods
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7.1 Weighting practices vary at different levels of the WPI. WPI expenditure weights are a measure of the relative importance of each elementary aggregate (EA), based on employers' expenditure on wages and salaries. Below the EA level, sample weights applied to each job on the WPI survey questionnaire indicate the number of jobs in the Australian labour market a particular sampled job represents. This chapter describes the procedures that are typically followed in updating the WPI expenditure weights. For more information on WPI sample weights refer to Chapter 6.

Expenditure weight theory and sources

7.2 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. This process is referred to as reweighting. Expenditure weights for the WPI are reweighted every two years following the release of data from the Survey of Employee Earnings and Hours (EEH). This update occurs in the December quarter.

7.3 EEH is designed to provide detailed statistics on the composition and distribution of earnings and hours paid for by employers. Information is collected about the characteristics of employers, such as state/territory, industry and sector, and their employees. The WPI expenditure weights for each EA are derived using this information. EAs are the finest aggregations of jobs for which expenditure shares (referred to in the WPI as expenditure weights) are available. EAs represent groups of jobs within the same state/territory, sector and industry. Each selected job in the sample is assigned to a specific EA based on characteristics of the employing organisation (state/territory, sector and industry). The structure of the elementary aggregates used in the WPI is shown in Diagram 7.1 below.

7.1 Wage Price Index EA structure

Wage Price Index elementary aggregate structure diagram

7.1 Wage Price Index EA structure

This hierarchy diagram outlines how each job in WPI is assigned to a specific elementary aggregate (EA) based on the characteristics of the employing organisations. EA's are the building blocks of the WPI and represent a group of jobs with the same characteristics. Outlined in the diagram below: 1. At the top level jobs are divided by state 2. At the second tier jobs are divided into sector - either private or public 3. At the third tier jobs within each sector are further split into specific industry The expenditure weights for each EA are derived using this information.

7.4 The 2010 EEH has been used for the December quarter 2011 update. Appendix 1 shows the current distribution of employers' expenditure on wages and salaries.

7.5 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 Chapter 11). Following the introduction of the new weights, price movements (based on a comparison between the current and previous quarter prices) are applied to the expenditure weights to construct Value Aggregates (VAs). More detail on this process can be found in Chapter 10.

7.6 Ideally, the WPI expenditure weights should be as up to date as possible and be broadly representative of employers' expenditure pattern on wages and salaries that might be expected over the life of the index series. However, new estimates from EEH are not available each year so updated expenditure 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.

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