Labour Cost Index (Quarterly)

PDF Data Dictionary

Series Description

Title

Labour Cost Index (Quarterly)

Alternate Title

LCI

Rights

Statistics New Zealand

Unspecified
LCIQ.
Abstract

The Labour Cost Index sits alongside the Producers Price Inputs Index (which measures changes in businesses’ current costs of production, excluding labour and capital costs, as defined by the New Zealand System of National Accounts' concept of intermediate consumption) and the Capital Goods Price Index (which measures changes in businesses’ capital costs).

Purpose

The labour cost index measures changes in salary and wage rates for a fixed quantity and quality of labour input. Service increments, merit promotions, and increases (or decreases) relating to performance of the individual employee are not shown in the index.

Frequency

3 Quarterly

Main users of the data

• The business community, in contract escalation clauses.

• Government departments, such as the Reserve Bank, the Treasury, the State Services Commission, the Department of Labour and the Ministry of Commerce.

• Employee organisations such as the PSA and the CTU.

• Business groups, such as the Employers’ Federation and the Manufacturers’ Federation.

• Economic forecasters such as NZIER and BERL.

• International organisations, such as the OECD and the ILO.

• Statistics New Zealand (as an input into other outputs, such as the National Accounts and the Producers Price Index)

Usage and limitations of the data

The Labour Cost Index provides employers, employer organisations, employees and employee organisations with an economy-wide measure of changes in pay rates costs.

The index measures changes in labour costs at a sector, sector by industry, sector by occupation, and industry by occupation level, providing users with a level of detail to meet most requirements. The salary and wage rates index is a quality-controlled measure, which provides a “pure” indicator of changes in pay rates not affected by compositional changes such as industry employment shifts.

The index quantifies the impact on employers’ labour costs of changes in the labour market such as the emergence of skill shortages, the trading off of overtime rates, and the impact of economic growth, consumer inflation. The index provides information on the distribution of changes in pay rates (such as what proportion remain unchanged on an annual basis, what proportion increase by up to 2 percent, etc.

The index is used in wage negotiations.

The index is used in contract escalation clauses (also referred to as cost fluctuation adjustment clauses). In these, the salary and wage rates index for the appropriate industry (or occupation) group is used together with the corresponding Producers Price Inputs Index (which measures movements in the price of non-labour production costs), to determine an appropriate cost fluctuation adjustment. This allows both parties to a contract to have an agreed procedure for adjusting the originally tendered price, therefore compensating the party providing the goods and services for ongoing changes in labour and non-labour input costs.

The index is used by economic forecasters and policy makers to monitor and forecast wage movements. The Reserve Bank uses the Labour Cost Index, in conjunction with the Quarterly Employment Survey, to monitor and forecast changes in unit labour costs and nominal wage inflation, which feed into monetary policy settings. The index is used within Statistics New Zealand, such as in the National Accounts, in the Producers Price Index and in calculating the now discontinued Real Wage Rate Index (which adjusted changes in pay rates for changes in tax rates and consumer prices).

The index excludes irregular salary and wage payments such as irregular bonuses, commissions and one-off payments in lieu of wage increases. The index excludes performance-based increases in salaries and wages, promotions and service increments.

There are no gender breakdowns.

There is no information available on the average dollar value of wages. This is because the sample is not randomly selected, is relatively small and is designed to measure changes not levels.

Related Documentation

Labour Cost Index (Salary and Wage Rates) – information releases

Studies

Coverage

Subjects
Macroeconomic statistics, Economic accounts, Prices, Labour
Keywords
Wage rates, Inflation, Labour, Wage growth
Date
December1992 -

LCI March 2017 quarter

Name
LCI March 2017 quarter
Label
LCI March 2017 quarter
Description

Response rates

Target: 94 percent

Achieved: 95.0 percent

Data Collection Date
1992 -
Data Collection Frequency
1992 -
Intended Frequency
Quarterly

Methodology

Methodology

Measures

  • Adjusted LCI measures the rates employers pay to have the same job completed to the same standard.
  • Controls for changes in sector, industry, and occupation by assigning fixed weights. Weights reflect relative importance of job descriptions for different combinations of sectors of ownership, occupation, and industry.
  • Unadjusted LCI measures the rates employers pay to have the same job completed to a differing standard (allowing the quality of labour within occupations to improve).

Data sources

A quarterly postal survey of employers provides data for a fixed set of job descriptions. Each quarter, we survey salary and wage rates for what employers pay at the 15th of the middle month of the quarter.

Survey samples

We collect salary and ordinary time wage rates for about 6,000 job descriptions each quarter (and nearly 1,000 overtime descriptions).

Approximately 2,000 businesses provide information.

Coverage

Jobs filled by paid employees in all occupations and in all industries except private households employing staff. We extended coverage to include jobs filled by paid employees aged under 15 years when the index was reweighted and re-expressed on a base of the June 2001 quarter (=1000).

Weights

Each job description used in calculating the index is assigned a weight that reflects the relative importance of the job description within its sector of ownership, industry, and occupation group.

Weights were calculated using: 2013 Census of Population and Dwellings information on the relative importance of occupations within each sector by industry group, Business Register (previously known as Business Frame) information on the relative importance of industry groups within each sector, and pay rates surveyed in the June 2014 quarter.

Classifications

Imputation

Imputation is the process of estimating data for surveyed respondents or businesses that do not respond. We carry forward the previous price for the relevant position that did not reply. This is the most likely outcome for salary and wage rates, which tend to change about once a year.

Rounding

Index numbers are rounded to the nearest whole number. We calculate percentage changes on rounded numbers. For this reason, total percentage changes for an index may not appear consistent with the percentage changes for its components.

Index calculation formula and base

We calculate the LCI using the price-relatives form of the base-weighted Laspeyres formula, and express it on a base of the June 2009 quarter (=1000). The index’s calculation base is periodically updated to reflect changes in the sector of ownership of organisations.

Quality control

The LCI is a quality-controlled measure. Only changes in salary and wage rates for the same quality and quantity of work are reflected in the index. We achieve this by asking respondents to provide reasons for movements in salary and wage rates. If a movement is due to more than one reason, we also ask the respondents to indicate how much of the movement is due to each reason.

In theory, these job descriptions should remain fixed between index revisions. In practice, many descriptions change over time, usually as a result of changes to contractual arrangements or because specific employees are being tracked through time. If a newly negotiated contract involves an increase in the number of ordinary time hours worked per week, then we amend the description and an adjustment is made to ensure that the pay rate movement used in the index relates to the same quantity of work as specified in the new contract.

Similarly, rates being paid for job descriptions in the survey may change partly or wholly because employees undertaking these jobs have become more experienced, more (or less) proficient or productive, better qualified, have taken on additional responsibilities, or have been promoted. Components of salary and wage rate movements that are due to changes of this type in the quality of work are not reflected in index movements. The policy of excluding increases due to service increments and merit promotions is consistent with this approach.

We also exclude one-off payments in lieu of pay rises, as they do not result in changes to pay rates, as such.

Regular fixed allowances and regular fixed bonuses are included in surveyed pay rates. Where included, these are specified in job descriptions. However, we exclude payments such as commissions and irregular bonuses, as these payments are usually performance related.

In instances where allowances, penal rates, and other payments (eg commissions), which have not previously been included in surveyed rates, are incorporated into base rates, only the overall effect of such changes is reflected in the index.

Contract indexation

Parties that engage in commercial contracts use a range of price indexes produced by Statistics NZ in their indexation clauses (also known as contract escalation clauses). An indexation clause provides both parties to a contract with an agreed procedure for adjusting an originally contracted price, to reflect changes in costs or prices during the life of the contract.

Contract indexation: A Guide for Businesses (published 2009) provides information on the price indexes we produce and issues relating to their use in indexation clauses. The guide also outlines some points to consider when preparing an indexation clause, and includes an example of the mechanics of a simple indexation formula.

Analytical unadjusted series

An analytical unadjusted index series, based on ordinary time pay rates collected in the LCI sample, is available in the tables of this release (see the 'Downloads' box). The analytical unadjusted series is an additional measure intended to complement the official LCI and QES indicators and provide customers with a fuller picture on the wages front. The analytical unadjusted series is not affected by relative employment shifts between industries and between occupations, but, in addition to price change, it does reflect quality change within occupations.

In simple terms, the approaches we take in compiling the published and analytical unadjusted series are summarised as:

Published index:

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

Analytical unadjusted index:

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

The LCI is a price index that measures change in pay rates for a fixed quality and quantity of labour input. We show price-related change in rates reported by respondents, such as those to reflect the cost of living, to match market rates, to retain staff, and to attract staff. We don't show changes in reported rates that are the result of service increments, merit promotions, increases (and decreases) relating to the performance of individual employees, and change in hours worked are not shown in the index, as they are considered to represent quality or quantity change.

The analytical unadjusted index retains fixed weights for occupations within industries, within sectors of ownership, but is based on a matched sample of reported rates for the previous and current quarters before quality control. In addition to price change, it reflects quality change within occupations, such as change in the performance of individual employees, change in the 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.

Rates for which the pay periods reported by respondents (eg per year, week, or hour) differ from those for the previous period, and rates where change is wholly or partly due to change in hours worked, are excluded from the matched sample. Typically, we exclude between 1 and 2 percent of surveyed rates from the unadjusted index each quarter for these reasons.

We calculate the analytical unadjusted index using a matched sample of reported rates for the previous and current quarters. Expenditure weights are used to weight movements in reported rates from the previous quarter to the current quarter. To derive the expenditure weights, we use the price changes (after quality control) of job positions in the sample (from the base period to the previous quarter) to scale base-period expenditure weights (which are then assigned to job positions in the sample).

Note: the LCI is designed to measure change in pay rates for a fixed quality and quantity of labour input. The sample of surveyed pay rates is not particularly suitable for preparing a measure that includes quality change. This is due in part to the fact that some positions in the survey follow individual employees (with corresponding pay rates subject to both quality and price change) and some positions specify particular points on pay scales (which are usually subject only to price change). In general, we track individual employees for positions surveyed in the private sector, and for positions surveyed in the public sector there is a mix of points on pay scales and individual employees being tracked.

The analytical unadjusted index reflects quality change within occupations. How well this is measured partly depends on how well the sample represents entrances and exits of employees, and on whether the sample replacement practice is unbiased in this regard (eg in some cases, replacement employees are incumbent employees filling other positions rather than new employees filling the existing positions – this can happen when there is a delay filling vacancies in surveyed positions). In addition, the analytical unadjusted index 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. An unadjusted measure designed from scratch might use the average pay rate, within each surveyed firm, of all employees filling jobs in each surveyed occupation.

The published LCI is a fixed-weight price index that measures changes in pay rates for a fixed quality and quantity of labour input. The index is not affected by relative shifts in the occupational and industrial composition of the pool of paid employees. It is useful in the context of the extent to which changes in businesses' input labour costs might put pressure on the output prices they charge for goods and services.

The analytical unadjusted LCI series has fixed weights for occupations within industries, within sectors of ownership, so is not affected by relative employment shifts between industries and occupations. However, it does reflect quality shifts within occupations. The index uses weights based on the mix of employment in occupations and industries evident in 2013.

It does not take account of the effect of any subsequent shifts in the mix of employment in occupations and industries. In addition, it will not reflect:

  • the effect of very new or emerging occupations and industries
  • the effect of employers mitigating the effect of skill shortages by substituting away from occupations showing high relative price change to occupations showing lower relative price change (eg from carpenter to builder's labourer, or from registered nurse to nurse aide).

Timing of published data

Labour market statistics are published within six weeks after the end of the quarter's reference period.

Confidentiality

Only people authorised by the Statistics Act 1975 are allowed to see your individual information, and they must use it only for statistical purposes. Your information is combined with similar information from other people, households, or businesses to prepare summary statistics.

More information

Principles and protocols for producers of Tier 1 statistics

Statistics in this release have been produced in accordance with the Official Statistics System principles and protocols for producers of Tier 1 statistics for quality. They conform to the Statistics NZ Methodological Standard for Reporting of Data Quality.

Sampling Procedure

Stratification

The sample of employers in the Labour Cost Survey was selected purposively. A sample of employers was selected in each relevant industry group within each sector of ownership (central government, local government and private). Care was taken to select a range of small, medium and large organisations, in a range of regional locations. Employers were asked, on a best-guess basis, whether they had employees in specific occupations. For occupations where this was the case, respondents selected individual employees to report on.

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