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Average Weekly Earnings as a Wage Indicator
Tony Kryger
Statistics Group
Background
Average earnings figures, as published by the Australian Bureau of Statistics
(ABS), 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 obvious distortion is inflation and for this reason earnings are
often expressed in real (ie constant price) terms. Another 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. To minimise these distortions,
analysts tend to focus on narrower measures such as average weekly ordinary
time (ie excluding overtime) 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. This Research Note
shows how real earnings have changed after controlling for changes in
the skill distribution of Australian workers.
The ABS regularly publishes earnings data for non-managerial employees
by occupation, but because of changes in the classification system of
occupations it is only possible to get a consistent series back to 1986.
One method of controlling for occupational change is to assume that the
percentage distribution of employees by occupation in 1986 is a constant,
ie did not change in any of the subsequent years. An average earnings
figure calculated on this basis could thus be said to exclude any component
due to a change in the average skill level of workers since 1986.
Results
In real terms (ie expressing all earnings figures in 1995 dollars),
the average weekly ordinary time earnings (AWOTE) of a full-time adult
non-managerial male employee rose by 2.5 per cent from $614 in 1986
to $629 in 1995. Holding skill levels constant at average 1986 levels
however, the increase ($614 to $620) was somewhat less at 1.0 per cent.
(See table 1.)
The movement between 1986 and 1995 in real AWOTE of a full-time adult
non-managerial male employee varies significantly by occupation. Worst
affected were labourers and related workers who, in real terms, were earning
$22 a week less in 1995 than they were in 1986. They were followed by
clerks ($14 less) and tradespersons ($4 less). All other occupational
groups experienced an increase in their real earnings over the period
with increases of $47 a week for sales and personal service workers, $32
for professionals, $22 for plant and machine operators and $21 for para-professionals.
(See Table 2.)
Concluding Remarks
Although real earnings increased by 2.5 per cent between 1986 and 1995,
real wages rose by just 1.0 per cent. The gap of 1.5 per cent is attributable
to compositional effects.
Movement in the ABS average weekly earnings series therefore reflects
a combination of wage effects and compositional effects. The latter results
from the ever changing mix of employees on which the average weekly earnings
series is based. To be effective as a wage indicator, average weekly earnings
should be based on the earnings of a fixed basket of employees in just
the same way as the consumer price index, as a price indicator, is based
on the prices charged for a fixed basket of goods
a. Adjusted by the CPI.
b. Skill levels held constant at the minor occupation group (or 2 digit
ASCO) level.
c. Average earnings by occupation was derived by taking a weighted average
of earnings at the minor occupation group level. Earnings data were obtained
from the Distribution and Composition of Employee Earnings and Hours
(ABS 6306.0) while the weights (number of full-time male employees)
were obtained from the ABS Labour Force Survey.
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