The two most commonly used measures of labour costs in Australia are average total earnings from the national accounts, and average weekly earnings (AWE) based on an Australian Bureau of Statistics (ABS) survey of employers. The first measures employee compensation per non-farm wage and salary earner, and includes irregular bonuses, workers' compensation, superannuation and redundancy payments. The AWE has a similar coverage but excludes such costs as superannuation and redundancy payments. This article looks mainly at AWE but also discusses a new measure of labour costs known as the Wage Cost Index (WCI).
Measures of AWE
Each quarter the ABS collects information from approximately 5,000 employers to determine estimates of average weekly earnings. Employers are asked to provide details of the total gross weekly payments to employees (including weekly overtime payments) split into full-time adults and all other employees. This results in three different measures of AWE which are each available by gender:
- full-time adult ordinary time earnings, or the weekly earnings of full-time adult employees attributable to award, standard or agreed hours of work, calculated before taxation and any other deductions (eg superannuation) have been made;
- full-time adult total earnings, or the weekly ordinary time earnings plus weekly overtime earnings of full-time adult employees; and
- all employees total earnings, or the weekly total earnings of all full-time and part-time adult employees plus full-time and part-time junior employees.
AWE as a wage indicator
Average earnings figures are often used as a basis for interpreting wage trends in Australia. The problem with this approach, however, is that average earnings figures are subject to several distortions that make it difficult to isolate the pure wage component of a change in earnings.
One major distortion is caused by compositional change in the workforce. For example, average weekly total earnings data are subject to compositional changes in overtime hours worked and in the proportion of full-time and part-time employees, males and females, and adults and juniors. Of particular significance has been the growth in the proportion of workers employed part-time. Over the past 20 years part-time workers have increased their representation from 15 to 26 per cent of all employed persons. Since part-time workers typically have lower earnings than full-time workers, an increase in their representation has the effect of reducing both the level and the growth of average earnings per person. To minimise distortions such as these, analysts have tended to focus on narrower measures such as average weekly ordinary time earnings of full-time employed adult males.
Even a narrow measure of earnings such as the above is subject to various forms of compositional change, in particular those resulting from a change in the occupational mix of the workforce. In Australia, average skill levels have been rising (mainly as a result of increases in education and training with a consequent lowering of the proportion of workers in lower paid jobs) creating an upward earnings bias.
It is in response to problems such as these that the ABS has developed a Wage Cost Index (WCI) designed to measure changes in the underlying price of labour.
Wage Cost Index
The WCI is similar in concept to the Consumer Price Index (CPI). Just as the CPI measures movement in the prices charged for a fixed basket of goods, so the WCI measures movement in the wage and salary cost of a fixed basket of jobs over time. The WCI is thus unaffected by changes in the quantity or quality of work performed. By following a basket of jobs over time, and by maintaining a fixed weighting pattern, the WCI is unaffected by such things as shifts in the distribution of employees by occupation and industry, and between full-time and part-time jobs.
Information for the WCI is collected from approximately 3,500 employers. The first quarter they participate in the survey, employers select a small sample of jobs from their workplace (based on instructions from the ABS), and provide information on these jobs. In subsequent quarters they are asked to provide updated information about the same jobs, irrespective of whether the individual employees occupying the designated jobs are the same or not.
Four sets of indexes together comprise the WCI. 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; and
- total hourly rates of pay-including bonuses.
WCI indexes were compliled for the first time in December quarter 1997. The WCI will be incorporated into MESI once a reasonable length time series has been established.
MESI Table 2.1
This table provides two measures of AWE-full-time adult ordinary time earnings of persons and total earnings of all males-plus annual percentage movements in both. Australian Government pension payments are adjusted twice yearly on the basis of movements in either male total AWE or (if greater) the Consumer Price Index.
This feature was prepared by Tony Kryger.