Wage-setting methods and wage growth in Australia
The Wage Price Index (WPI) measures changes in the price employers pay for labour and provides an indicator of wage growth within the Australian labour market. The WPIs primary function is as a deflator in the preparation of the National Accounts but is also an important tool for informing policy development and macro-economic analysis. The WPI is used by businesses and the general public in setting wages and forming labour contracts.
This article analyses the microdata of the ABS Wage Price Index (WPI) survey to provide insights into the wage-setting dynamics and wage growth in Australia. Section 1 describes the ABS WPI Survey; the three main wage-setting methods in Australia; and allocates each of the WPI surveyed jobs to one of these wage-setting methods. Section 2 examines the contribution of each wage-setting method to wage growth over the period 2006 to 2017, focusing on the changing contribution of wage-setting method to wage growth over time. Section 3 provides some insights and conclusions.
Section 1 – The WPI and wage-setting methods
ABS Wage Price Index Survey
The Wage Price Index measures the change over time in the price of wages and salaries, unaffected by changes in the quality or quantity of work performed, to ensure only pure price changes are reflected in the index.
Information for the WPI is collected each quarter from a sample of private and public sector employers selected from the ABS Business Register, which lists organisations undertaking economic activity in Australia. The survey reference date is the last pay period ending on or before the third Friday of the middle month of the quarter.
In the first quarter that respondents participate in the survey, each employer selects a sample of jobs from their workplace(s) using sampling instructions provided by the ABS, and provides information for these jobs, including detailed pricing specifications. Importantly, the wage-setting method is collected for each job during the selection process. Jobs are tied to employers not employees.
In subsequent quarters survey respondents are asked to provide details of payments made to the current occupants of these same jobs. It is essential that the same jobs are priced in successive quarters to ensure measurement of pure price change, whether the individual job occupants are the same or not. Approximately 18,000 matched jobs are priced each quarter from the selected employers.
An individual job’s influence on the final WPI growth is determined by several factors. A combination of the job’s hourly rate of pay, the number of hours worked and the application of a population weight (to convert the job’s cost into a representative labour cost) are used to construct the building blocks for index creation. The effect of these building blocks on the WPI is then determined by another weighting factor based on the share of total labour expenditure for each building block.
Overall wage growth can be decomposed with the use of several classificatory items, some based on discrete building blocks. This article looks to explore the different wage-setting methods and explain their influence on the WPI over time.
Australian wage-setting methods can be placed into three broad categories. They are: Awards, Enterprise Agreements (EAs) and Individual arrangements.
Award based wages are determined by central bodies which set minimum terms and conditions for employment, including a minimum wage. These are determined according to various economic and social factors. Some state based commissions are still in operation, although these have largely been superseded by the Fair Work Commission (FWC) operating at a national level. The FWC reviews the national minimum wage on an annual basis, with decisions generally taking effect from 1 July each year. These decisions then flow through to the relevant National Awards. For the purposes of this article, all jobs which derive their wage changes from the changes to the award rates of pay will be grouped together.
EAs (also known as collective agreements) set a rate of pay and conditions for a group of employees through a negotiation process and has a set time period of operation. Changes to wages are pre-determined for the life of the agreement (conditions often remain in force after the scheduled expiration whilst a new agreement is negotiated). These agreements are often negotiated on behalf of the employees by a union or elected representatives. The key requirement for EAs is that they must provide for a level of conditions which are at least equivalent to what is set out in the award, referred to as the better off overall test.
Individual arrangements set the wages and conditions for individual employees, sometimes referred to as common law agreements. Timing of the review of these arrangements vary on a case by case basis.
Allocation of WPI jobs to wage-setting method
Each of the 18,000 jobs surveyed by the ABS has been allocated to one of the wage-setting categories.
General findings over the period being analysed show jobs covered under EAs (Enterprise Agreements) make the largest contribution to wage growth, followed by Individual arrangements, with award based jobs making the smallest contribution. At the beginning of the studied period, Individual arrangements made a larger contribution to wage growth than EAs, however this changed post 2008/2009 and the GFC. Awards have recorded the lowest contribution to growth across the studied period.
Table 1 Proportion of Contribution to Wage Growth by Wage-Setting Method1
Section 2 – The contribution of each wage-setting method to wage growth
By decomposing the quarterly movement of the WPI into separate contributions of each wage-setting method it is possible to analyse the effect of compositional changes over the studied period on wage growth.
Original index movements have been used for this analysis over the period of March quarter 2006 until December quarter 2017. Figure 1 presents the contribution to growth by wage-setting method over this period.
The Individual arrangement wage-setting method is the largest contributor to growth from 2006 to 2013, with the exception of the year following the GFC (2009). From 2013, the main contribution to wage growth shifted, with EA related jobs recording the largest contribution to wage growth.
Figure 1 Australian Wage Growth, 2006 - 20172
2. Total Hourly Rates of Pay Excluding Bonuses, (Original figures)
More detailed information on the Wage Price Index can be found in Wage Price Index: Concepts, Sources and Methods, 2012 (cat. no. 6351.0.55.001)