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Labour cost index
Nature and purpose

The labour cost index (LCI) measures changes in labour costs. These costs consist of base salary and ordinary-time wage rates, overtime wage rates, and non-wage labour-related costs. The index essentially covers all employees aged 15 years and over, in all occupations, and in all industries except domestic services.

Statistics NZ publishes the following types of labour cost indexes:

  • labour cost index (salary and wage rates)
  • labour cost index (non-wage labour costs)
  • labour cost index (all labour costs).

The salary and wage rates component of the LCI measures movements in base salary rates, ordinary time wage rates, and overtime wage rates. The non-wage component measures changes in the costs of annual leave and statutory holidays, superannuation, Accident Compensation Corporation (ACC) employer premiums, medical insurance, motor vehicles available for private use, and low interest loans. The all labour costs component measures changes in both pay rates and non-wage labour costs.

The salary and wage rates index is released quarterly; the non-wage labour costs and all labour costs indexes are published only for the June quarter of each year. Up until the June 1999 quarter, the all labour costs indexes were released quarterly.

Classifications used

The LCI is made up of about 280 published indexes for quarterly salary and wage rates and about 90 annually published indexes for all labour costs as defined by the following classifications (including combinations):

  • by sector of ownership (based on the New Zealand Standard Institutional Sector Classification – NZISC96)  
  • by industry (Australian and New Zealand Standard Industrial Classification – ANZSIC96) 
  • by occupation (New Zealand Standard Classification of Occupations 1999 – NZSCO99)
  • by labour cost type.
Data sources – wage and non-wage information

Wage information for a fixed set of job descriptions is obtained by a quarterly postal survey of employers (Quarterly Labour Cost Survey for Wage and Salary Rates). As at the September 2009 quarter, about 2,200 employers provided information on pay rates for this survey. There are some 6,300 job descriptions for which salary and ordinary-time wage rates are collected for the pay period (the pay period is the period that includes the 15th day of the middle month of the surveyed quarter). There are also nearly 850 overtime descriptions, designed to track changes in overtime wage rates, attached to ordinary-time wage descriptions in the survey.

The non-wage information for the all labour costs index is collected annually by a set of postal surveys of employers for the June quarter. Information on superannuation costs, annual leave entitlements, and ACC employer premiums is collected in mid-May of each year. Information on medical insurance costs, motor vehicles available for private use, and low-interest loans is collected in July for the June quarter of each year.

Data sources - weights

Each job description used in calculating the salary and wage rates, and non-wage indexes is assigned a weight that reflects the relative importance of the job description within its sector of ownership, industry, and occupation group. For both indexes, weights were calculated using 2006 Census of Population and Dwellings information on the relative importance of occupations within each sector by industry group and Business Frame (BF) information on the relative importance of industry groups within each sector. In addition, the salary and wage rates index also used pay rates surveyed in the June 2008 quarter (see ‘Reweighting the labour cost index (salary and wage rates)’ in the January 2009 issue of Price Index News for further details). The non-wage index also used non-wage information surveyed in the June 2008 quarter.

Timing

The LCI (salary and wage rates) is published each quarter approximately five weeks after the end of the quarter; the LCI (all labour costs) is published annually for the June quarter, approximately 16 weeks after the end of the quarter.

Considerations for indexation clauses

Contract parties need to carefully consider which index to use, particularly the choice between the index measuring salary and ordinary-time wage rates, or the index measuring all salary and wage rates (including overtime as well as ordinary-time wage rates). The latter index provides an overall measure of changes in pay rates and may be considered the most appropriate one to use, even if there is no provision in the contract for working overtime. The all salary and wage rates index may be considered more appropriate because it reflects the overall impact of trade-offs in ordinary-time and overtime rates. Whereas, the salary and ordinary-time wage rates index reflects the increase in ordinary-time rates, but not a related fall in overtime rates. Overtime hours are held constant and the index is not affected by the varying number of overtime hours worked from quarter to quarter. Whichever series is chosen, the index selected needs to be carefully specified given the number of indexes relating to any particular area.

Another option is to use the LCI (all labour costs). However, it is only published annually for the June quarter.

The LCI is subject to revision, and any revisions are indicated by an 'R' beside the revised number in published tables. The need to minimise revisions for use in indexation clauses is balanced against the requirements for other key uses, such as economic analysis and in the country's national accounts.

The LCI is also subject to changes in industry and occupation classifications, and index reference period. In practice, this occurs at approximately five-yearly intervals.

The LCI relates to labour costs only and may need to be used in conjunction with an index measuring current costs of production, such as the PPI inputs index, and an index measuring capital expenditure, such as the capital goods price index.  

 

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