What the index measures
The salary and wage rates component of the Labour Cost Index (LCI) measures movements in base salary and ordinary time wage rates, and overtime wage rates. The non-wage component measures changes in the following costs:
Annual leave and statutory holidays
- Accident Compensation Corporation (ACC) employer premiums
- Medical insurance
- Motor vehicles available for private use
- Low interest loans.
The LCI 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). This is shown diagrammatically in figure 1 below. These three indexes provide measures of the extent to which changes in businesses’ input costs put pressure on the output prices they charge for goods and services. Information from the 2004 Annual Enterprise Survey indicates that labour costs account for about 17 percent of employers’ total expenditure (including depreciation).
Index calculation and base
The index is calculated using the price-relatives form of the base-weighted Laspeyres formula, and is expressed on a base of the June 2001 quarter (=1000). The index’s calculation base is periodically updated to reflect changes in the sector of ownership of organisations.
The index covers jobs filled by paid employees in all occupations and in all industries except private households employing staff. Coverage was extended to include jobs filled by paid employees under 15 years of age when the index was reweighted and re-expressed on a base of the June 2001 quarter (=1000).
Each job description used in calculating the index was assigned a weight that reflected the relative importance of the job description within its sector of ownership, industry and occupation group. Weights were calculated using 2001 Census of Population and Dwellings information on the relative importance of occupations within each sector by industry group, Business Frame (BF) information on the relative importance of industry groups within each sector, non-wage information surveyed in the June 2001 quarter (used to derive costs per employee per week), and administrative information (ie fringe benefit tax (FBT) data, ACC levy rates and workplace safety management discount information).
Base period expenditure weights by sector of ownership and cost appear in table 6 of this release.
Details of the reweighting and rebasing of the index can be found in the technical notes of the Labour Cost Index (All Labour Costs): June 2002 quarter Hot Off The Press.
How information is obtained
Salary and ordinary time and overtime wage rates for a fixed set of job descriptions are obtained from a quarterly postal survey of employers. Each quarter, salary and wage rates are surveyed for the pay period in which the 15th of the middle month of the quarter falls.
Information on superannuation costs and annual leave entitlements is collected in mid-May of each year. Information on ACC employer premiums is also collected in the June quarter.
Questionnaires relating to medical insurance costs, motor vehicles available for private use, and low interest loans are posted out about two weeks after the end of each June quarter, as the information collected relates to the June quarter as a whole.
The salary and wage rates indexes are released quarterly.
From 2000 onwards, the indexes of non-wage labour costs and all labour costs are available for only the June quarter of each year. Up until the June 1999 quarter, these indexes were released quarterly.
The salary and wage rates component of the index 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. Therefore, bonus and other irregular payments are excluded, as are increases due to service increments and merit promotions. One-off payments in lieu of pay rises are also excluded, as they do not result in changes to pay rates, as such.
Workplace accident insurance costs
The movement in the ACC Employer Premiums Index from the June 1999 quarter to the June 2000 quarter reflected the year-long deregulation of the provision of workplace accident insurance. In the lead-up to deregulation on 1 July 1999, employer premium rates were split into two parts: an ongoing 'residual claims levy' to fund historical injuries, and a 'base premium' relating to the 15-month period, which ended on 30 June 1999. The residual claims levies and base premiums were added together at the disaggregated industry (ie five-digit ACC 'classification unit') level for use in calculating the index for the June 1999 quarter.
For the June 2000 quarter index, residual claims levies applicable to earnings for the year to March 2000 and payable by 31 May 2000 were, at the five-digit industry level, added to average premium rates (adjusted for risk sharing) for workplace accident insurance contracts in force at 31 March 2000. The average premium rates for workplace accident insurance contracts were derived from information obtained from the Department of Labour's Accident Insurance Regulator. For a small number of workplace accident insurance contracts taken out by big employers, downward adjustments to risk sharing amounts were made following consultation.
From 1 July 2000, the provision of workplace accident insurance was renationalised, with ACC again becoming the sole provider. Under the renationalised scheme, employers continue to pay residual claims levies, and they also pay base ACC WorkPlace Cover premiums to cover the costs of ongoing injuries.
There are two optional programmes now offered by ACC: the ACC Workplace Safety Management Practices Programme and the ACC Partnership Programme. Under the latter programme's two options, the Partnership Discount Plan and the Full Self Cover Plan, employers are able to share various levels of risk in return for reductions in base premium rates.
Under both the ACC Workplace Safety Management Practices Programme and the ACC Partnership Programme, employers passing safety audits at one of three levels (primary, secondary and tertiary) are eligible for safety management practices discounts of 10, 15 or 20 percent off standard WorkPlace Cover premium rates.
For the June 2001 quarter index, residual claims levy rates (applicable to earnings for the year to March 2001) were, at the disaggregated industry level, added to ACC base premium rates (applicable to earnings for the nine months to March 2001), which were discounted to reflect actual eligibility (at the disaggregated industry level) for safety management discounts for the period to 31 March 2001. For employers in the ACC Partnership Programme sharing various levels of risk in return for reductions in base premium rates, standard WorkPlace Cover premium rates, less safety management discounts, were used in the index to represent changes in costs.
For the years 2002 to 2008, the following statement can be applied:
"For the June quarter index, residual claims levy rates (applicable to earnings for the year to March and collected in arrears) were, at the disaggregated industry level, added to ACC WorkPlace Cover levy rates (applicable to earnings for the year to March and collected during the period), which were discounted to reflect actual eligibility (at the disaggregated industry level) for safety management discounts for the period to 31 March. For employers in the ACC Partnership Programme sharing various levels of risk in return for reductions in base premium rates, standard WorkPlace Cover levy rates, less safety management discounts, were used in the index to represent changes in costs."
Fringe benefit tax changes
The non-wage component of the LCI includes three costs that are subject to fringe benefit tax (FBT). These are:
- medical insurance
- motor vehicles available for private use
- low interest loans.
The three costs have a combined base weight of 1.83 percent of the overall index.
For each of these costs, the taxable value of the benefit and the number of employees are collected in the survey. The taxable value plus FBT and excluding GST is averaged over all employees or specific occupations to give the average cost per employee per week of providing the benefit.
FBT had in the past been calculated as 49 percent of the taxable value. In December 1999, when the top personal tax rate was increased from 33 percent to 39 percent, the FBT rate was increased from 49 percent to 64 percent for fringe benefits provided on or after 1 April 2000.
An FBT rate of 64 percent was used to calculate the June 2000 quarter LCI indexes of medical insurance, motor vehicles available for private use, and low interest loans. This was the rate employers were required to pay, and were liable for, under legislation in force at the time. This had an upward impact of about 11 percentage points on the movement in other non-wage costs from the June 2000 quarter to the June 2001 quarter.
Under legislation enacted in late September 2000, employers were given the choice of either:
- continuing to use the flat 64 percent FBT rate; or
- opting to use new multi-rate FBT rules.
The multi-rate FBT regime allows fringe benefits attributed to individual employees to be subject to FBT rates based on the remuneration levels of employees receiving the benefits, thereby reducing the effect of the increase in the FBT rate to 64 percent.
For employers that elected to undertake the multi-rate end-of-year (ie March quarter) 'square-up' for the year to March 2001, benefits attributed to individual employees during the year were subject to FBT rates based on employees' remuneration levels. Employers providing about two-thirds of fringe benefits by value chose the multi-rate option for the year to March 2001. Collectively, these employers significantly reduced their FBT liability.
FBT rates derived at the industry group level from FBT data for the year to March 2001, and taxable values for the June 2001 quarter, were used to calculate the June 2001 quarter indexes for medical insurance, motor vehicles available for private use, and low interest loans.
For the years 2002 to 2008, FBT rates derived at the industry group level from FBT data for the year to March, and taxable values for the June quarter, were used to calculate the June quarter indexes for medical insurance, motor vehicles available for private use, and low interest loans.
Proportion of FBT value for employers that chose the multi-rate option is given in the following table:
Proportion of FBT Value for Employers Using Multi-rate FBT Rules
|| Percent |
| March 2001–2002
| March 2002–2003
| March 2003–2004
| March 2004–2005
| March 2005–2006
Index number rounding
Index number rounding (using standard Statistics NZ rounding procedures) can occasionally result in percentage movements for a particular cost being slightly higher or lower than would be expected, given movements recorded for component costs.
For more information, follow the link from the technical notes of this release on the Statistics NZ website.
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