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A comparison between the adjusted and unadjusted labour cost index

Introduction

The labour cost index (LCI) (salary and wage rates) measures movements in base salary and ordinary time wage rates, and overtime wage rates for a fixed quantity and quality of labour input. This means that changes in pay rates due to the performance of employees and promotions, among other things, are not shown in the index. An unadjusted LCI was developed to complement the official LCI in providing a more comprehensive picture of wage changes. In contrast to the official LCI, the unadjusted series reflects quality change within occupations. Prior to the March 2008 quarter, the unadjusted index was an experimental series. However, it has now had its status changed to an analytical series, with information about the index being released in the Hot Off The Press.

This article explains the differences between the official LCI salary and wage rates series and the analytical unadjusted LCI series.

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The LCI: salary and wage rates series

The LCI is a price index that measures changes in pay rates for a fixed quality and quantity of labour input. This means that all movements in salaries or wages due to quality or quantity reasons are not shown in the index, while price-related changes are. Some common reasons which are deemed to be price-related and those that are quality or quantity related are shown below.

Price-related reasons (shown in the index) include:

  • cost of living
  • matching market rates
  • retaining staff
  • attracting staff
  • collective employment agreements
  • minimum wage changes.

Quality/quantity reasons (not shown in the index) include:

  • performance of the employee
  • promotion
  • change in qualification
  • change in the duties or type of work
  • change in responsibilities
  • change in the number of hours worked
  • change in level of experience or length of service.

Salary and ordinary time and overtime wage rates for a fixed set of job descriptions are collected by a quarterly postal survey of employers. When a change in a pay rate is reported by the respondent, they are asked to provide a reason for the movement. This ensures only price-related changes in pay rates are shown in the index. Commonly, more than one reason is provided to explain a change in the pay rate. In this case, the respondent is asked to indicate how much of the movement is due to a particular reason. This enables the level of movement due to price-related reasons to be included in the index, while changes due to quality or quantity reasons will be excluded.

Job descriptions are specified in a high level of detail, which also helps when identifying changes in pay rates that need to be excluded from the index. The index will not show pay rate changes if there is a change in employee unless the respondent can confirm there has been no change in labour input between the old and new employee, and that any change in pay rate is price-related. The greater the level of detail in the job description recorded on the survey, the easier it is to pick up changes in the pay rate associated with a change in the person doing the job, and remove these changes from the index.

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The analytical unadjusted LCI series

The analytical unadjusted LCI was developed to supplement the official published LCI and enhance the picture on wage growth. It is not affected by relative employment shifts between industries and between occupations, but reflects quality change within occupations in addition to price change.

The unadjusted LCI excludes overtime pay rates and measures only changes in ordinary time salary and wage rates.

The unadjusted series is based on a matched sample of reported rates for the previous and current quarters prior to quality control. It includes changes due to price-related reasons, as well as reflecting quality change within occupations. Movements in pay rates due to factors such as a change in the performance of the individual employee, change in qualifications, responsibility or experience of employees filling surveyed positions, and the effect of different employees replacing incumbent employees in surveyed positions at lower or higher rates are all regarded as a quality change within the occupation being tracked. If there is a change in the pay rate because the reported pay period changed (eg from providing an hourly pay rate to an annual pay rate), or if a rate has changed wholly or partly due to a change in the number of hours worked, these will be excluded from the unadjusted index.

There are some risks with the analytical unadjusted LCI series. The first is that the LCI is designed to measure the change in pay rates for a fixed quality and quantity of labour input. Therefore the LCI sample is not entirely suitable for calculating a measure of wage movements including those resulting from quality changes. Some positions in the sample follow individual employees, while some specify specific points on a pay scale. Those which follow individual employees will pick up movements due to both quality and price changes, while those which follow pay scales will only reflect price changes. Therefore not all quality change movements will be picked up.

The second risk is that the unadjusted series reflects quality change within an occupation. The extent to which the index reflects this depends partly on how well the sample represents entrances and exits of employees, and on whether the sample replacement practice is unbiased. Additionally, the unadjusted series tends to reflect the effect of turnover in, and the cessation of, existing positions, but not the price and/or quality effect associated with employees being hired to fill new positions. If an unadjusted index reflecting quality change was designed from scratch it might be built in a way to reflect changes of all employees filling positions in each surveyed occupation.

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Comparison of published LCI and unadjusted LCI results

Results for the official adjusted LCI index can be compared with the unadjusted LCI index to get an idea of changes in pay rates due to quality. As the unadjusted index measures changes for salary and ordinary time wage rates (that is, it excludes overtime wage rates), the results need to be compared with the salary and ordinary time wage rates LCI index for an accurate comparison. In general, if the unadjusted percentage change is greater than the published LCI percentage change, then the overall movement in pay rates due to quality change is positive. Differences can also be compared over time. If the difference between the two indexes is greater in one quarter than in the previous quarter, it indicates more quality adjustments were made in the current quarter than in the previous quarter.

This section looks at the results for the March 2008 quarter for both indexes, at the all-sectors and private-sector level.

All sectors combined

In the March 2008 quarter, salary and ordinary time wage rates for all sectors, measured by the LCI, increased 0.8 percent. In comparison, unadjusted salary and ordinary time wage rates for all sectors rose 1.2 percent. Therefore the unadjusted LCI recorded a greater increase which indicates that the overall change in pay rates due to quality change was positive.

Figure 1 shows the quarterly growth rates for both the unadjusted and the adjusted LCI series from the March 2002 quarter to the March 2008 quarter for all sectors combined. In general the two series are similar except the growth rate for the unadjusted series is higher than the adjusted series for this time period. This indicates that the quality changes in pay rates have a positive impact on the index.

Figure 1:

Graph, Quarterly Growth Rates of the Unadjusted and Adjusted Labour Cost Index Series All Sectors.

Figure 2 shows the difference in percentage points between the quarterly growth rates of the unadjusted and adjusted LCI series, from the March 2002 quarter to the March 2008 quarter. As shown in the graph, the difference for both the March 2008 quarter and the December 2008 quarter was 0.4 percentage points. This shows that increases in pay rates due to quality reasons were at the same level for both quarters. In the September 2007 quarter, the difference was at 0.7 percentage points, the largest recorded between the two series since the September 2005 quarter. This indicates that increases in pay rates due to quality change had a greater impact on the index than in the previous seven quarters.

Figure 2:

Graph, Difference Between Quarterly Growth Rates of the Unadjusted and Adjusted Labour Cost Index Series All Sectors.

Private sector

For the private sector, adjusted salary and ordinary time wage rates increased 0.7 percent in the March 2008 quarter, while unadjusted pay rates rose 1.2 percent. The difference between the two series was 0.5 percentage points, a greater difference than recorded for all sectors combined. This means that changes due to quality had a greater impact on pay rates in the private sector than in all sectors combined. This could be influenced by the fact that points on salary scales are more likely to be tracked for the public sector than for the private sector.

Figure 3 shows the difference in quarterly growth rates for the private sector unadjusted and adjusted LCI series, from the March 2002 quarter to the March 2008 quarter. Similar to the difference in growth rates for all sectors combined (shown in figure 1), the two series track reasonably closely, with the unadjusted series above the adjusted series for each quarter. This means that quality differences in pay rates had a positive impact on the index, resulting in an overall increase in pay rates.

Figure 3:

Graph, Quarterly Growth Rates of the Unadjusted and Adjusted Labour Cost Index Series Private Sectors.

Figure 4 shows the difference between the quarterly growth rates for the two series in the private sector, from the March 2002 quarter to the March 2008 quarter. As mentioned earlier the difference for the March 2008 quarter was 0.5 percentage points. This was greater than the difference for the December 2007 quarter (0.2 percentage points) indicating that quality changes had a greater impact on pay rates in the March 2008 quarter. In the graph the largest difference recorded between the two series over the six-year period was 0.9 percentage points (recorded in the September 2002, September 2004 and September 2005 quarters). This indicates that changes in pay rates due to quality had the greatest impact on the index in these three quarters than any other quarter during the six-year period.

Figure 4:

Graph, Difference Between Quarterly Growth Rates of the Unadjusted and Adjusted Labour Cost Index Series Private Sector.

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Conclusion

To summarise, the published index:

  • often tracks employees, but does not show performance-related increases or service increments
  • commonly links in new employees (without showing change).

The analytical unadjusted index:

  • often tracks employees, and shows performance-related increments and service increments
  • shows any change when new employees replace incumbents.

As mentioned previously, the unadjusted LCI had its status changed in the March 2008 quarter from an experimental to an analytical series. As a result, quarterly results will be included in the published tables, as well as the main results being analysed in the Hot Off The Press commentary.

Further information about the LCI, including an example of how a specific position would be treated in the published LCI and in the unadjusted index, can be found in the technical notes of the Hot Off The Press release, or by contacting:

Nicola Argyle
Wellington 04 931 4600
Email: info@stats.govt.nz

Back to Price Index News: July 2008

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