Introduction
The labour cost index (all labour costs) is made up of two parts – a salary and wage rates component and a non-wage component. 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
- superannuation
- Accident Compensation Corporation (ACC) employer premiums
- medical insurance
- motor vehicles available for private use
- low-interest loans.
Minimum annual leave entitlements increased from 1 April 2007, with employees being entitled to at least four weeks of annual leave per year, up from a minimum of three weeks.
This article looks at the annual leave and statutory holidays index and its impact on the LCI (all labour costs) for the June 2007 quarter.
The annual leave index
The annual leave entitlements survey is used in the LCI (all labour costs) to measure changes in the costs to employers of annual leave and statutory holidays. It is the largest of the six non-wage surveys with an overall weight in the index of 11.49 percent.
The survey asks respondents to supply all the annual leave entitlements that employees can have, the conditions of the entitlements, and the number of employees with each entitlement. The entitlements that are used in the index are matched to specific wage and salary occupations. As most entitlements are not occupation specific, the surveyed wage and salary position is matched to any entitlements that the occupation may have. In most cases, the entitlement used in the index is the average annual number of leave days per employee. This is added to the number of statutory holidays falling on weekdays in the current calendar year. The total, as a percentage of the number of weekdays in the year is the annual leave proportion. This is then applied to surveyed (ordinary time plus overtime) pay rates in order to determine the average weekly cost (in dollars per employee) to employers of annual leave and statutory holidays. This is the annual leave cost that is used in the calculation of the index.
Impact of annual leave entitlement increases
In the year to the June 2007 quarter, the labour cost index (all labour costs) recorded a 3.9 percent increase, the largest annual increase recorded since the series began in the December 1992 quarter. This was due to a 3.2 percent increase in the salary and wage rates (including overtime) component, and an 8.1 percent rise in the non-wage labour costs component. In the same period, the cost of annual leave and statutory holidays to employers increased 9.3 percent, also the largest annual increase recorded since the series began in the December 1992 quarter. In the year to the June 2007 quarter, the annual leave and statutory holidays index contributed approximately 28 percent to the 3.9 percent increase in all labour costs and 83 percent to the 8.1 percent increase in non-wage labour costs. The main reason for the increase in the annual leave and statutory holidays index was the change in minimum annual leave entitlements. There were 11 paid statutory holidays in 2007, the same as in 2006, and therefore statutory holidays did not contribute to the increase in the year to the June 2007 quarter.
Compared with the 2007 results, the labour cost index (all labour costs) increased 3.7 percent in the year to the June 2006 quarter with the salary and wage rates (including overtime) component being the main contributor to the increase, while the cost of providing all non-wage labour costs increased 6.2 percent in the same period. The cost of annual leave and statutory holidays to employers rose 7.1 percent in the year to the June 2006 quarter, with increases in annual leave entitlements and the number of statutory holidays increasing from 10 to 11 in the year as well as salary and wage rates (including overtime) all having an impact on the overall increase. In the year to the June 2006 quarter, the annual leave and statutory holidays index contributed approximately 22 percent to the 3.7 percent rise in all labour costs and 60 percent to the 6.2 percent rise in non-wage labour costs.
Figure 1 shows the annual percentage change in annual leave and statutory holiday costs from the June 2000 quarter to the June 2007 quarter. This graph clearly shows that the increase in the year to the June 2007 quarter is significantly greater than that of previous years.
Figure 1
As mentioned previously, the increase in minimum annual leave entitlements from three weeks to four weeks was a major contributor to the increase in the annual leave and statutory holidays index. Within the sample, the unweighted proportion of employees entitled to four weeks or more annual leave increased from less than 2 in 3 employees in the June 2006 quarter, to about 9 in 10 employees in the 2007 quarter. Therefore, the unweighted proportion of employees entitled to at least four weeks increased by over 20 percentage points in the year to the June 2007 quarter.
In the year to the June 2006 quarter, it was noted that some employees became entitled to four weeks annual leave in anticipation of the increase in minimum entitlements. Therefore, not all of the change in costs due to the increase in minimum entitlement will have been captured in the year to the June 2007 quarter. Similarly, because only about 9 out of 10 employees within the sample were entitled to four weeks annual leave as at May 2007, it is expected that the remainder of the increase will be captured in the year to the June 2008 quarter as those employees who were reported as receiving less than four weeks annual leave will move to the increased minimum entitlement on their next anniversary date.
In the year to the June 2007 quarter, some employees who were previously entitled to four weeks of annual leave, received increases in their entitlement. Some of these increases were reported as being due to the changes in the Holidays Act 2003. However, the changes in the act only require all employees to be eligible for a minimum of four weeks, so any increases above this minimum were as a result of clauses in employment agreements and negotiations between employees and employers, resulting in some employees receiving additional entitlements above the minimum.
Private sector compared with public sector
In the year to the June 2007 quarter, annual leave and statutory holiday costs for private sector employees rose more than those for public sector employees. For the private sector, annual leave and statutory holiday costs rose 10.6 percent, the largest increase recorded for the private sector since the series began in the December 1992 quarter. In comparison, the public sector recorded an increase of 6.3 percent in annual leave and statutory holiday costs in the year to the June 2007 quarter. Within the private sector, there were relatively fewer employees who were previously entitled to four weeks or more than in the public sector. This meant that there was a larger proportion of employees eligible for the increase in minimum entitlement within the private sector than in the public sector.
Another difference is that the private sector recorded its largest recorded annual increase in annual leave and statutory holiday costs in the year to the June 2007 quarter, while the year to the June 2006 quarter was the period where annual leave and statutory holiday costs increased the most on record for the public sector.
More information on the LCI is available here or by contacting:
Nicola Argyle
Wellington 04 931 4600
Email: info@stats.govt.nz
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