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Experimental Index of Labour Costs per Hour
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345
Technical report
The new experimental
Index of Labour Costs
per Hour
By Polly Hopwood, Employment, Earnings and Productivity Division, Office for National Statistics
■
■
■
■
■
The Index of Labour Costs per
Hour (ILCH) is a new
experimental statistic which
provides a timely indicator of
changes in the cost of labour per
hour worked to the employer.
This responds to demands for a
‘per hour’ indicator of labour
costs.
The ILCH goes beyond existing
earnings indicators to include
non-wage costs (sickness,
maternity and paternity costs,
pensions contributions, benefits
in kind and National Insurance
contributions), as well as the
wages and salaries component.
The ILCH satisfies the
requirements of a new EU
Council Regulation, and will be
used for international
comparison.
The ILCH will complement the
Average Earnings Index (AEI) and
new Average Weekly Earnings
(AWE), and will be used
alongside the AEI, the National
Statistic in earnings, as a timely
short-term indicator of earnings.
Introduction
his article introduces the new
experimental quarterly Index
of Labour Costs per Hour,
which provides a timely indicator of
changes in the cost of labour per
hour worked. This will reflect
changes in wages and salaries, nonwage costs, and the quantity of
hours worked over time and will
assist users in monitoring
inflationary pressures emanating
from the labour market. This article
describes the methodology used to
create an Index of Labour Costs per
Hour, presents the index, compares
this with other earnings indicators
and looks at future developmental
work.
T
Concept, scope and data
sources for the labour cost
index
The conceptual basis of the Index of
Labour Costs per Hour was
explained in an article in the June
2003 edition of Labour Market
Trends.1 This index uses hours
worked as its denominator and has a
more comprehensive numerator
than existing earnings indicators, by
including both wage and non-wage
costs. Information for the numerator
is available, either directly or
through estimation, from survey
sources. The sources used for each
component of total labour costs are
described below.
Wages and salaries
The wages and salaries component
of the numerator forms
approximately 83 per cent of total
labour costs2 and is obtained from
the Monthly Wages and Salaries
Survey. The data collected in this
survey are aggregated using a
method developed as part of the new
Average Weekly Earnings indicator.3
Sickness, paternity and
maternity costs
The estimate for sickness, paternity
and maternity payments is produced
using the results from the Labour
Force Survey. This survey measures
the number of hours an employee
usually works, the number of hours
actually worked and the reason why
Office for National Statistics
• Labour Market Trends • August 2005
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Key points
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the two measures are different. The
differences between usual and actual
hours that have been attributed to
sickness, paternity and maternity can
be calculated to estimate the cost of
these elements to an employer.
Benefits in kind
The measure of costs of benefits in
kind is derived using combined
estimates from the Inland Revenue’s
Survey of Personal Incomes and the
ONS Annual Survey of Hours and
Earnings. The approach allows ONS
to produce an estimate of the
average proportion of costs of
benefits in kind each year, within
each relevant industry, and the
proportion is applied for four
consecutive quarters.
National Insurance
contributions
Using data obtained in the ONS
Annual Survey of Hours and
Earnings allows the derivation of a
precise estimate of employers’
National Insurance contributions by
applying published rates (for each
year) to individual employee data.
This estimate uses not only the gross
pay for the employee, but also the
pension arrangements the employee
has made, which means adjustments
for rebates can be calculated
accurately. This is aggregated to
industry level and compared with
the gross wages and salaries from the
survey to create National Insurance
contribution factors.
Pension contributions
The issue of employers’ pension
contribution costs is complex, since
this depends on the employers’ and
employees’ occupational pension
arrangements. The data used to
provide information on this aspect
for the Index of Labour Costs per
Hour were obtained from the ONS
Office for National Statistics
Box
1
Summary
This article presents the new quarterly, experimental Index of Labour Costs
per Hour, which:
■ goes beyond existing earnings indicators to include non-wage costs
(sickness, maternity and paternity costs, pensions contributions, benefits
in kind and National Insurance contributions);
■ responds to demands for a ‘per hour’ indicator of labour costs;
■ satisfies the requirements of a new EU Council Regulation;
■ will be published in four parts: total labour costs, wages and salaries,
other labour costs and total labour costs excluding bonuses and arrears
of pay;
■ complements the new experimental Average Weekly Earnings;
■ will be developed further with a view to producing it as a National
Statistic.
Annual Business Inquiry, which is an
annual survey of businesses that also
captures data on employer pension
contributions.
Using non-wage factors
To make the non-wage costs
coherent with the Monthly Wages
and Salaries Survey (the data source
for wage costs), relative proportions
are used rather than direct estimates.
The Index of Labour Costs per Hour
is designed to measure growth in
labour costs, and so the impact of
non-wage costs is greatest when their
proportionate contribution to labour
costs changes over the short term.
Any such changes are likely to be
small.
The denominator
The addition of non-wage costs
extends the numerator, but the most
significant change in producing the
Index of Labour Costs per Hour is in
the denominator. The new index
responds to demands for a ‘per hour’
earnings indicator by using an
estimate of total hours worked. The
move from a ‘per job’ index to the
‘per hour’ Index of Labour Costs per
Hour means the indicator is more
• Labour Market Trends • August 2005
sensitive to changes in the labour
market. It relates to employees only
(i.e. excludes the self-employed), and
total hours worked include those
worked and paid at both ordinary
time and at premium rate, together
with those worked for no payment
(typically unpaid overtime). The
total excludes time not worked
because of sickness, annual leave,
statutory holidays, special leave, meal
breaks and because of short-time
working. Some of these components
will be paid while others will not.
An ONS pilot business survey4 has
shown that, generally, businesses are
unable to provide information on
total hours worked. Given this, it has
been necessary to develop a
methodology to estimate hours
using alternative, existing sources.
The denominator of the Index of
Labour Costs per Hour therefore
estimates total hours worked by
using estimates of average total
hours worked in first and second
jobs by employees, as measured by
the Labour Force Survey (LFS),
together with estimates of total
employment produced using data
from the Monthly Wages and
Salaries Survey (MWSS).
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Experimental Index of Labour Costs per Hour
Box
Technical report
347
2
Formula to calculate Index of Labour Costs per Hour
E.g. for 2003 Q1:
g
s=1
LCI2003Q1 =
x2000,s
g
y2001,s
x2001,s
s=1
g
s=1
y2002,s
x2001,s
x2002,s
g
s=1
g
y2000,s
s=1
y2003Q1,s
x2002,s
x2003Q1,s
g
y2001,s
s=1
y2002,s
For a set of g SIC sections, s, the total returned wages and salaries and the calculated non-wage costs of the SIC section
in a period where
xyear,quarter,s = Quantity weights (hours worked) calculated over quarter
xyear,s = Quantity weights (hours worked) calculated over the whole year
yyear,quarter,s = Cost weights (labour costs) calculated over quarter
yyear,s = Cost weights (labour costs) calculated over the whole year
Alternatively, this equals (for 2003Q1)
s=1
LCI2003Q1 =
x2000,s
g
s=1
x2000,s
y2001,s
x2001,s
y2000,s
x2000,s
Thus the average earnings per hour
worked (the numerator and
denominator for the Index of
Labour Costs per Hour) is the ratio
of two, independent, self-consistent
terms:
EarningsMWSS/EmployeesMWSS
HoursLFS/EmployeesLFS
This method ensures that the
Labour Force Survey is used in a way
that best brings the business
(Monthly Wages and Salaries Survey)
and household (Labour Force
Survey) data onto a similar footing.
The estimation of total hours worked
is undertaken on a continuous basis
in the Labour Force Survey and so
the production of the denominator
for the Index of Labour Costs per
g
s=1
x2001,s
g
s=1
x2001,s
y2002,s
x2002,s
y2001,s
x2001,s
g
s=1
x2002,s
y2003Q1,s
x2003Q1,s
g
s=1
x2002,s
y2002,s
x2002,s
Hour can be accomplished for each
calendar quarter.
Methodology
The European regulation defines the
‘Labour Costs Index’ as an annually
chain-linked Laspeyres index of
labour cost per hour worked. (A
Laspeyres index is a fixed base index
whose component index numbers
are weighted arithmetic means of, in
this context, the ratio of the labour
cost per hour in the current period
to the labour cost per hour in the
base period, using weights derived
from aggregate labour costs in the
base period. Annual chain-linking
means that the base period changes
from year to year and the indices for
the different base periods are linked
together. See Box 2 for detailed
information.)
Labour cost indices, broken down
by sectors, including the public and
private sectors, manufacturing,
production and services, will be
provided separately for the following
labour cost categories:
• average total labour costs per
hour worked (ILCH(TOT));
• average wages and salaries per
hour worked (ILCH(WAG));
• average other labour costs,
primarily National Insurance
contributions and occupational
pensions, as well as sickness and
maternity pay, per hour worked
(ILCH(OTH));
• average total labour costs,
excluding bonuses and arrears,
per hour worked (ILCH (TXB));
Office for National Statistics
• Labour Market Trends • August 2005
▼
g
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Experimental Index of Labour Costs per Hour
Technical report
The indices will be published
quarterly on the National
Statistics website as experimental
indices.
Figure
1
Whole economy Index of Labour Costs per Hour by component;
Great Britain; 2000 to 2005, not seasonally adjusted
Index value 2000=100
Office for National Statistics
140
ILCH(TOT)
135
ILCH(WAG)
ILCH(OTH)
130
125
120
115
110
105
100
95
20
00
20 Q1
00
20 Q2
00
20 Q3
00
20 Q4
01
20 Q1
01
20 Q2
01
20 Q3
01
20 Q4
02
20 Q1
02
20 Q2
02
20 Q3
02
20 Q4
03
20 Q1
03
20 Q2
03
20 Q3
03
20 Q4
04
20 Q1
04
20 Q2
04
20 Q3
04
20 Q4
05
Q1
0
Source: Index of Labour Costs per Hour
Figure
2
Annual growth of the whole economy Index of Labour Costs per
Hour; Great Britain; 2001 to 2005, not seasonally adjusted
Per cent
20
ILCH(TOT)
ILCH(WAG)
15
ILCH(OTH)
ILCH(TXB)
10
5
0
20
01
Q3
Q2
01
01
20
20
Q4
20
02
Q1
20
02
Q2
20
02
Q3
20
02
Q4
20
03
Q1
20
03
Q2
20
03
Q3
20
03
Q4
20
04
Q1
20
04
Q2
20
04
Q3
20
04
Q4
20
05
Q1
-5
Q1
The four indices of labour costs
per hour are available quarterly for
the period quarter 1 2000 to
quarter 1 2005 for the whole
economy and also for additional
sectors.
Figure 1 shows that total labour
costs per hour worked and wages
and salaries per hour worked are
similar. This reflects the structure of
labour costs in the UK, which is
driven by wages and salaries. The
ILCH excluding bonuses and arrears
removes the large fluctuations
caused by bonuses and arrears from
the total series, and is therefore less
volatile. The path of other labour
costs follows that of the total, as
might be expected, but at points
moves differently, as changes in nonwage costs affect the series.The
prominent shift between the first
and second quarters of 2003 is a
result of an increase in National
Insurance contribution rates
introduced at the beginning of the
financial year.
Figure 2 shows the annual growth
rates in the indices. Total labour cost
increases have generally been in the
range 3 to 5 per cent compared with
a year earlier. The highest growth
rate is for ILCH(OTH) from the
second quarter of 2003. This can
again be explained by the significant
increase in the National Insurance
contributions in this quarter. These
growth rates decreased from the
second quarter of 2004. The less
volatile growth rates are in the
excluding bonuses and arrears
series.
145
01
Index of Labour Costs per
Hour results
20
▼
348
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Source: Index of Labour Costs per Hour
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Experimental Index of Labour Costs per Hour
Figure
Technical report
3
Index of Labour Costs per Hour; Great Britain; 2000 to 2004,
seasonally adjusted and non seasonally adjusted
Index value 2000=100
130
Non seasonally adjusted
125
Seasonally adjusted
120
115
110
105
100
95
20
00
20 Q1
00
20 Q2
00
20 Q3
00
20 Q4
01
20 Q1
01
20 Q2
01
20 Q3
01
20 Q4
02
20 Q1
02
20 Q2
02
20 Q3
02
20 Q4
03
20 Q1
03
20 Q2
03
20 Q3
03
20 Q4
04
20 Q1
04
20 Q2
04
20 Q3
04
20 Q4
05
Q1
0
Source: Index of Labour Costs per Hour
Publication of the Index of
Labour Costs per Hour
The Index of Labour Costs per Hour
has been produced from the first
quarter of 2000, with a base period
of 2000. Ultimately, ONS will
produce the index from 1996.
The Index of Labour Costs per
Hour release procedure will follow
the protocol for experimental series.
It is planned that the indices will be
released each quarter via the
National Statistics Website. The
results will be prepared to allow a
thorough interpretation and will
include historic estimates, index
values and growth rates.
The index values and quarter on
same quarter (previous year) growth
rates with be published for each of
the sectors for the non-seasonally
adjusted series. A seasonal adjusted
series has been developed (see
Figure 3).
Data will be available from the first
quarter of 2000 up to the current
quarter. Analysis has been completed
to explain the differences between
the existing National Statistic, the
Average Earnings Index, the new
Average Weekly Earnings and the
Index of Labour Costs per Hour, and
the following section sets out the
main conclusions of this work.
Comparisons with other
indicators
Prior to publication the ONS has
compared the Index of Labour Costs
per Hour with current indicators to
assess and explain any differences.
This report compares total labour
costs per hour worked
(ILCH(TOT)) with the Average
Earnings Index, which is designed to
measure changes in earnings per
head. It does so by looking at
intermediate stages between the
methodologies underpinning both
series in order to examine the main
differences between them.
349
From the Average Earnings
Index to Average Weekly
Earnings
Differences between the National
Statistic, the Average Earnings Index
and the new experimental Average
Weekly Earnings are discussed in the
article ‘The new experimental
measure of Average Weekly
Earnings’ (see pp337-344). It shows
that the main reasons for the
differences between the two
indicators, and the differences in
their results, can be explained by:
• the move to current weighting
from weighting updated once a
year (in July);
• incorporating estimates for
employees working in business
with fewer than 20 employees;
• moving from matched-pairs
estimation to ratio estimation;
• developing automated
imputation and outlier
methodology.
From Average Weekly
Earnings to the Index of
Labour Costs per Hour
The Average Weekly Earnings
measure and Index of Labour Costs
per Hour are constructed
fundamentally to measure different
aspects of earnings. The Average
Weekly Earnings indicator is
designed to measure the level of
weekly earnings per job, that is, the
ratio of earnings to employment,
and the growth in the earnings per
job for different sectors and the
whole economy. The Index of
Labour Costs per Hour, alternatively,
attempts to capture the changes in
the total cost of labour per hour, that
is, the ratio of labour costs to hours
worked. This report compares
ILCH(TOT) with Average Weekly
Earnings. The difference between
these two indicators can be
Office for National Statistics
• Labour Market Trends • August 2005
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Experimental Index of Labour Costs per Hour
Technical report
Figure
4
Comparison of the Average Earnings Index, Average Weekly
Earnings, Average Hourly Earnings and Index of Labour Costs per
Hour; Great Britain; 2000 to 2005, not seasonally adjusted
Index value 2000=100
140
Average Earnings Index
130
Average Weekly Earnings
Average Hourly Earnings
Index of Labour Costs per Hour
120
110
100
90
0
00
20 Q1
00
20 Q2
00
20 Q3
00
20 Q4
01
20 Q1
01
20 Q2
01
20 Q3
01
20 Q4
02
20 Q1
02
20 Q2
02
20 Q3
02
20 Q4
03
20 Q1
03
20 Q2
03
20 Q3
03
20 Q4
04
20 Q1
04
20 Q2
04
20 Q3
04
20 Q4
05
Q1
calculated by considering an
intermediate measure: Average
Weekly Earnings with an hours
worked denominator (Average
Hourly Earnings). This separates the
fundamental differences between
Average Weekly Earnings and the
Index of Labour Costs per Hour into
two parts:
• the difference between measuring
earnings per job and measuring
earnings per hour; and
• the addition of the non-wage
costs.
The intermediate series presented
below is the ratio of earnings to
hours worked. It is calculated on a
quarterly basis, changing the
denominator of the Average Weekly
Earnings indicator.
20
▼
350
26/7/05
Effect on the data series
Figure 4 shows a comparison of the
Average Earnings Index, Average
Weekly Earnings, Average Hourly
Earnings and the total Index of
Labour Costs per Hour series. The
existing Average Earnings Index and
the Average Weekly Earnings series
are produced monthly, whereas the
Average Hourly Earnings and the
total labour costs series are quarterly
so the monthly series have been
converted to quarterly time periods
to make comparison easier. The
series follow the same general trends,
although there are significant
differences in the detail.
The year on year growth rates are
shown in Table 1. Causes of
differences between the series are
described below.
Average Weekly Earnings to
Average Hourly Earnings
The switch from a per head to a per
hour denominator produces the
most significant differences between
the series, moving from the cost of
Office for National Statistics
Source: Office for National Statistics
labour per job to the cost of labour
per hour worked. The hours worked
denominator will allow changes in
cost to be observed as changes in
work patterns are accounted for,
whereas the per person estimate is
not affected by these. The hours
based denominator provides a more
accurate measure of labour input by
measuring short-term fluctuations
(e.g. increased overtime) or changes
in working patterns, for example the
employment of more part-time staff.
The main differences between the
Average Weekly Earnings indicator
and the Average Hourly Earnings
series are in the first and third
quarter of each year. This is because
Average Weekly Earnings measures
the movement in total earnings per
job. The Average Hourly Earnings
(and Index of Labour Costs per
Hour) uses hours worked (rather
than paid) in the denominator of the
calculation. In July, August and
• Labour Market Trends • August 2005
September, and around Christmas
and New Year, employees generally
take holidays and therefore work
fewer hours in these periods. This
reduces the magnitude of the
denominator, although the
numerator (wages and salaries)
remains broadly constant. Therefore
the Average Hourly Earnings series
increases over these quarters,
whereas Average Weekly Earnings
does not, as shown on the graph. In
terms of year on year growth rates,
the largest differences are explained
below.
Quarter 1 (2001 to 2004)
There is a difference in growth rates in
all of the first quarters, between
Average Weekly Earnings and Average
Hourly Earnings. The difference in
the growth rates implies that the
difference in average pay levels in
quarter 1 is increasing each year. This
difference in growth rates also appears
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Experimental Index of Labour Costs per Hour
Table
Technical report
1
Annual growth rates for earnings indicators; Great Britain; 2001 to
2005, not seasonally adjusted
Per cent
Average
Earnings
Index
Average
Weekly
Earnings
Average
Hourly
Earnings
Index of
Labour Costs
per Hour
2001 Q1
5.2
5.8
6.7
7.3
Q2
4.7
5.4
5.7
5.7
Q3
4.3
4.8
4.5
4.3
Q4
3.4
4.1
4.5
4.4
2002 Q1
2.9
3.7
4.7
4.4
Q2
3.7
3.8
5.1
5.0
Q3
3.6
3.3
3.4
3.0
Q4
4.0
3.0
3.0
2.9
2003 Q1
3.6
3.1
4.0
3.9
Q2
3.0
2.6
2.7
3.4
Q3
3.8
3.3
4.3
5.1
Q4
3.1
3.7
4.1
4.9
2004 Q1
5.3
5.0
5.7
6.8
Q2
4.4
4.2
5.8
6.1
Q3
3.8
3.9
7.1
7.5
Q4
4.3
3.9
4.0
4.1
2005 Q1
4.8
5.0
5.1
5.1
Source: Office for National Statistics
in the other three quarters although to
a much lesser extent. This implies that
average working hours are decreasing
(which is confirmed by the Labour
Force Survey, which shows estimates
of total employees are increasing at a
faster rate than total hours worked).
The differences in growth rates are
more significant in quarter 1, which
suggests that the average working
hours are decreasing more quickly
early in the year (again this is
confirmed by Labour Force Survey
estimates). One possible explanation
of this is the increasing prevalence of
winter holidays (e.g. skiing) and
extended Easter breaks (for quarter 2).
Quarter 2 2002
In June 2002, the Queen’s Jubilee
meant that many employees were
given extra time off to celebrate, and
also a significant number of extra
people went abroad during that
time. This meant that although
people got paid the same, they
worked fewer hours. Therefore
Average Hourly Earnings increased
more than Average Weekly Earnings,
and so the growth rate was higher.
Quarter 3 2003
Employees took more holidays in
summer 2003 and so the number of
hours worked decreased, whereas the
351
payment remained the same.
Therefore the growth rate increased
more on Average Hourly Earnings
than Average Weekly Earnings.
Quarter 3 in 2003 has a particular
peak because its growth is based on
quarter 3 2002. As extra holidays
were taken in quarter 2 2002, there
was a reduction in holidays taken the
following quarter, so the return to
normal holidays in quarter 3 2003
produced an apparent boost in the
annual growth of Average Hourly
Earnings. This is confirmed by the
data for quarter 3 2002, and in terms
of growth rates is demonstrated by
the fact that the increase in Average
Hourly Earnings from quarter 2 to
quarter 3 was much less in 2002 than
in other years.
Average Hourly Earnings to
Index of Labour Costs per
Hour
When other labour costs are added
into the equation there are small
differences between the growth in
wages and salaries, and the growth in
total labour costs. The non-wage
labour costs are applied as factors of
the wages and salaries, so the
distribution over time of the major
non-wage cost components is likely
to be stable, as the rates change
annually. The exception is the
impact of payments for days not
worked through sickness, maternity
and paternity, as these are more
likely to be seasonal. In terms of year
on year growth rates, the addition of
non-wage labour costs has one
significant effect. (The difference in
quarter 1 2001, is explained entirely
by the introduction of chain-linking
and the new index construction
methodology for the Index of
Labour Costs per Hour.)
Quarter 2 2003 to quarter 1 2004
In April 2003, a new National
Office for National Statistics
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Insurance rate was introduced which
was higher than in previous years.
Therefore when these four quarters
are compared with the same quarters
a year previously there is a
significant difference caused almost
entirely by these increased National
Insurance rates.
Conclusions
The analysis above concludes that
the most significant difference
between the Average Earnings Index
and the Index of Labour Costs per
Hour is caused by the use of an
hours worked rather than
employment denominator. The main
differences are in the third quarter of
the year where the Index of Labour
Costs per Hour has higher growth.
Fewer hours are worked in the
summer months and wages stay
broadly constant, and so the relative
cost of labour increases. This is not
reflected in the Average Earnings
Index series as it measures changes
in per capita gross earnings, which is
not affected by hours worked. This
effect is removed on the seasonally
adjusted index (which also adjusts
for bank holidays).
Future developmental
work
towards a National Statistic. This
includes:
• establishing an accurate back
series to 1996 (on a consistent
basis from 2000), to allow users
to look at historical data;
• producing a revisions history;
• assessing how to estimate for
Northern Ireland to move the
Index of Labour Costs per Hour
from a GB to a UK measure; and
• including improvements to the
Average Weekly Earnings
indicator as it develops from an
experimental to a National
Statistic.
Work will continue to move the
Index of Labour Costs per Hour
Notes
1
2
3
4
5
‘Developing a quarterly labour costs index’, Labour Market Trends, June 2003, pp311-319.
This figure is taken from the Labour Costs Survey 2000 (see
www.statistics.gov.uk/downloads/theme_labour/LabourCostSurvey2000/LCS2000.pdf).
For more details on Average Weekly Earnings, please refer to the article on pp337-344.
See ‘Developing a quaterly labour costs index’, Labour Market Trends, June 2003, pp311-319.
The author wishes to acknowledge the development work on ILCH carried out by Derek Bird at ONS.
Further information
For further information, contact:
Polly Hopwood,
Room 2.001,
Office for National Statistics,
Cardiff Road,
Newport
NP10 8XG.
E-mail:
[email protected],
Tel. 01633 813379.
Office for National Statistics
• Labour Market Trends • August 2005