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Labour Cost

Index

Methodology

Index

1 Introduction

The Labour Cost Index (hereafter, LCI) replaces, as of 2001, the Wage Survey for Industry and Services (hereafter, WS) which the INE has been carrying out quarterly from 1963 to 2000.

The LCI is part of the euroindicators that Eurostat (European Communities Statistical Office), at the request of the ECB (European Central Bank), demands of euro zone countries to analyse, once nominal convergence has been contrasted, if convergence in real terms is occurring between these countries and, especially, if there exists a tendency towards homogenisation of labour costs by work unit in Europe.

In 1998, Eurostat demanded that the member countries statistical offices provide retrospective quarterly estimates of labour costs indices by effective hour worked, from 1995 until the present time.

The large majority of Member States (MSs), among them Spain, only had situational wage indicators available and lacked non-wage cost indicators (such as obligatory corporate contributions, voluntary contributions, direct social benefits, …).

As a consequence of this demand, the countries adopted different methods to estimate the indices since there was no time to implement an ad hoc survey, given the urgency of the demand, and since the indices were requested retrospectively back to 1995.

In the Spanish case, the quarterly aggregate of the remuneration of employees from the Spanish Quarterly National Accounts (QNA) has been used up until now as a good estimate of total labour expense. Using this aggregate as a base, series of indices corresponding to the total labour cost for wages and for other labour costs have been estimated and transmitted to EUROSTAT. These estimates are reviewed quarterly, when new accounting information is incorporated.

Faced with this need, the idea of carrying out a survey that will serve as a base for the construction of a new and improved LCI, and which will facilitate abandoning the current estimate system based on the QNA aggregate came into being. This is the first time that the provision of a statistical approximation for the cost of labour was attempted in Spanish continuous research.

The LCI replaces the Wage Survey, but offers more information than that obtained from the said survey. The index fieldwork started in 2000 with the object of being able to link the wage series (this coexisted with the survey during the said year).

The main difference between the two statistical operations is that the Index provides information not only on wage costs, such as the WS, but also on other costs companies incur through the use of the work factor. Other important differences are the population and sector scope, the definition of the worker object of the survey and the way of calculating effective work time.

The LCI, unlike the WS, includes the contribution accounts with five employees or less.

The index considers all workers who have contributed at least one day during the reference month , unlike the WS which only considered those who remained on the staff at the end of the month. In order to calculate average salaries per worker, the workers who have contributed less than 30 days are considered proportionally to the number of days contributed during the reference month.

The distinction between employees and workers has been suppressed, due to it being an administrative classification which does not correspond to the professional category of the worker, as well as the distinction by gender in the fourth quarter.

The scope of the sector was broadened with the inclusion of the National Classification of Economic Activities divisions included in the sections Education (M), Health (N) and other social activities and personal services (O), passing in this manner to include 54 branches of activity instead of the 48 which the former survey covered.

The calculation of effective work time is improved including entries for time not worked which were not in the WS (this survey only included holidays, temporary disability leave, for labour conflict and Employment Regulation Files). Moreover, the LCI entered into the accounts the holiday days taken each month in a real way, while the WS divided the agreed holiday days equally between the twelve months of the year.

In summary, the LCI is a much more complete and complex statistical operation than the Wage Survey.

2 Objectives

The LCI is a continuous quarterly statistical operation whose main objective is to ascertain the evolution of the average labour cost by employee and by effective hour worked.

The LCI tries to provide:

− Average labour cost by employee and month.

− Average labour cost per effective hour worked.

− Time worked and not worked.

National and Autonomous Community results are obtained.

The LCI facilitates:

− Wage information, as the Wage Survey has traditionally done, but of better quality due to the methodological improvements added to the project.

NCEA-93 Economic Activity C D E F G

Mining and quarrying Manufacturing Electricity, gas and water supply Construction Wholesale and retail trade; repair of motor vehicles, motorcycles and mopeds and personal and household goods H I J K M

Hotels and restaurants Transport, storage and communication Financial intermediation Real estate, renting and business activities Education N O

Health and veterinary activities, social services Other community, social and personal service activities

The maximum level of economic activity breakdown is the NCEA-93 divisions level. Specifically, 54 activity divisions are analysed.

These sections are excluded: Agriculture (A), Fishing (B), Public Administration, Defence and Social Security (L), Domestic service (P) and the Extra-territorial bodies (Q).

3.5 REFERENCE PERIOD

Given that the quarterly evolution of monthly labour costs by work unit is intended to be investigated, the following are distinguished:

− The reference period for the results is the calendar quarter.

− The reference period for the information requested on the questionnaire is the calendar month.

4 Definitions

4.1 WORKERS

All persons tied to the producing unit by means of a work contract, independently of the type of said contract, are defined as workers.

The employees who are the object of the survey are all those associated to the contribution account for whom there has been a contribution required for at least one day of the reference month.

For the purposes of the labour costs calculation by worker, those that have been registered in the contribution account during a period of less than a month are

accounted for in proportion to the time that they have been registered in said account.

Employees are classified according to the type of working day by:

Full Time Workers - Are those persons who work a normal company working day in the activity involved.

Part Time Workers : Are those persons who work a shorter than usual or normal working day for a full time worker in the activity involved.

4.2 TIME WORKED AND TIME NOT WORKED

4.2.1 Hours worked

Effective hours: Are the hours actually worked both in normal work as well as in overtime work periods, including those hours lost in the workplace, which are considered as effective time by virtue of the regulations in force.

They are obtained as the sum of the agreed hours plus the overtime and/or complementary hours minus the hours not worked, from which are excluded those hours lost in the workplace since they are considered as effective time. In summary, it involves the hours worked (in a normal or overtime working day) minus the hours not worked.

Agreed working day : Are the hours legally established by verbal agreement, individual contract or collective agreement between the employee and the company.

Overtime hours : Are all those that are carried out outside the agreed working day, be they by acts of god ( structural overtime hours ) or voluntary ( non- structural overtime hours ).

Complementary hours: Are the hours agreed in the part time contract as an addition to the normal or usual hours. They are paid and contribute the same as ordinary hours.

4.2.2 Hours not worked

Hours not worked and not remunerated.

Hours not worked are included by the following causes:

− Vacations and holidays taken during the month.

− Days missed due to temporary disability.

− Maternity, adoption and personal leave days.

− Leave as compensation for overtime hours.

The cost must be measured in net terms for the employer, in other words, deducting the various subsidies received.

The labour cost comprises a wide range of entries that the survey covers in two main blocks: The cost of wages and other costs.

4.3.1 Wage Cost

Comprises all remunerations, both in cash and in kind, made to workers for the performance of their work services for others, whether it rewards effective work, whatever the method of remuneration, or the rest periods accounted for as work.

Wages include: the Base Wages, Wage Complements, Overtime and/or Complementary Payments, Bonuses and Wage in Kind.

The Overtime and/or Complementary wage payments : correspond to payments for overtime hours, both structural (by acts of god) as well as non-structural (voluntary) and to payments for complementary hours in the case of part time workers.

Bonuses : is remuneration that is received in periods which are greater than one month: bonuses, payments for participating in profits, premiums, objectives and any other exceptional payments.

Delayed Payments : are payments paid in the reference month but earnt in previous periods.

4.3.2 Other Costs

The other costs include non-wage amounts and the obligatory contributions to social security.

4.3.2.1 Non-wage payments

Are remuneration received by the worker not for their work activity, but rather as compensation for expenses occasioned in the rendering of their work or to cover needs or situations of inactivity not attributable to the worker.

Amongst these, the survey differentiates between:

Direct corporate contributions.

Payments made by the company directly to the worker, the former worker or their family to assist them under certain circumstances as a complement of certain social services, without implicating Social Security or other insurance companies. Their main characteristic is that we are dealing with benefit payments for well-being.

Distinction is made between:

Temporary Disability Payments: Payments that the company makes directly to workers who are in a TD situation. Includes Delegated Payments^1 for TD, payments for TD undertaken exclusively by the company (the first fifteen days) and voluntary supplements or improvements to the TD benefit.

Unemployment Payments: Payments made by the company to workers affected by temporary suspension or work day reduction in the event of work regulation during the reference month. They include Delegated Payments *^ for partial unemployment, as well as voluntary improvements for partial unemployment paid for by the company with the object of complementing unemployment benefits.

Payments for Other Direct Services : Payments that the company makes directly to the active workers and/or former workers and/or their family members, as a complement to social security or private insurance subsidies or pensions. They include payments for retirement, payments for death and survival, payments for disability or handicap, payments for medical assistance and payments for family assistance.

Indemnities for Dismissal: Include the total payments made for dismissal and contract termination, as well as the wages not received during the transcourse of the dismissal proceedings that the employer must pay in this situation (dismissal proceedings wages). Both indemnities for individual dismissals as well as indemnities for group dismissals are considered here. That paid under pending obligations, such as wages owed, vacations not taken, … (compensations) are excluded, since these amounts are considered delayed payments.

Other non salary payments

Encompass the rest of payments made to the worker: compensation for the expenses derived from the execution of their work and indemnities for contract termination.

They comprise: Currency devaluation, wear and tear of tools, acquisition of work clothes, travel expenses, distance and urban transport allowance, relocation indemnities, contract termination indemnities, products in kind conceded voluntarily by the company whose delivery is not due by virtue of regulation, Group Agreement, or work contract, the delivery of products at reduced prices that are carried out in company canteens or dining rooms or corporate cooperative stores.

4.3.2.2 Obligatory contributions to Social Security

These are the legally established contributions that the employer makes to the Social Security System in favour of their employees to cover the services the

(^1) Delegated payments: Benefits given as Delegated Payments are those which, previously recognised by

the competent managing unit, is paid by the business person and subsequently compensated upon liquidation of the Social Security quotas, which in this manner assumes responsibility for same.

Unemployment, Wage Guarantee Fund (WAGUFU) and Professional Training : Determine the contribution concepts whose object it is to cover this type of contingencies.

Compensation for partial unemployment : Are the amounts that the companies have given their workers under the concept of partial unemployment services, as a delegated payment.

4.4 SUBSIDIES

Reductions, bonuses and subsidies that employers apply in the liquidation of Social Security contributions, motivated by the contracting of determined groups of workers or by aid recognised by the unemployment office as part of its budget.

5 Indices and rates

The LCI is a simple index of labour cost variation.

In order to obtain it, the year 2000 is taken as the base period, so that the average cost for 2000 becomes 100.

A random simple index is calculated by means of the formula:

C

C

I

0

t t = ⋅

being:

C

C

IV

tI

2000 t 0

∑ = = cost in the base period (2000), is the average cost in the year

2000

C (^) t cost in the current quarter (t)

The Inter-annual labour cost variation rates are calculated in this form:

I

I I

r t 4

t t 4 t ⋅

−

−

where,

It (^) − 4 value of index for the same quarter of the previous year

6 Survey design

6.1 STATISTICAL UNIT AND POPULATION FRAMEWORK

The statistical unit of the LCI is the Social Security Contribution Account, a concept traditionally used in wage and labour cost surveys, both by the INE as well as by other organisms with competence in this matter.

The Social Security Contribution Account is made up of a set of workers who work for others, who carry out their work activity in one or various work centres of one same company, within the same province and generally, but not necessarily, under one same main activity and with homogeneous characteristics in that referring to contributions to Social Security.

The population scope used to extract the sample is the Social Security Contribution Accounts Directory, updated to 30 September of the year prior to the reference year.

6.2 SELECTION OF THE SAMPLE

The sample type used is a random stratified sample with optimum affixation, in which the sample units are the contribution accounts.

The stratification criteria is carried out attending to three variables: the Autonomous Community (17 in total, considering Ceuta and Melilla together with Andalucía), the economic activity (NCEA-93 division, 54 divisions in total) and the size of the units (8 strata or size groups).

The unit size is defined by the number of employees covered.

The following groups are considered for the stratification:

Stratum Number of employees 1 2 3 4 5

1-4 employees 5-9 employees 10-19 employees 20-49 employees 50-99 employees 6 7 8

100-199 employees 200-499 employees 500 and over employees

The strata of 500 and more workers are exhaustively investigated.

Within each stratum, the units are selected via random systematic samples

The sample distribution by divisions of the NCEA-93 and sizes is the following

Divisions Sizes NCEA-93 Total 1 2 3 4 5 6 7 8 TOTAL 19.531^ 5.054^ 2.431^ 2.254^ 2.387^ 1.721^ 1.409^ 2.917^ 1. 10 72 17 11 8 9 8 5 8 6 11-12 56 31 7 7 3 4 1 2. 13 103 51 17 10 15 2 3 3 2 14 196 42 35 39 44 23 6 7. 15 568 92 55 49 57 43 53 185 34 16 95 27 11 4 14 8 6 20 5 17 267 48 39 41 36 26 22 49 6 18 262 59 40 39 43 33 25 17 6 19 255 56 44 45 47 34 22 6 1 20 315 101 43 44 49 34 20 22 2 21 232 42 32 35 32 30 21 35 5 22 299 75 38 36 41 32 28 41 8 23 85 22 11 12 17 6 5 4 8 24 372 57 38 38 39 28 30 112 30 25 283 45 36 39 38 29 25 55 16 26 328 51 40 40 46 36 35 65 15 27 283 42 36 39 35 28 24 54 25 28 391 80 53 45 51 39 33 82 8 29 308 51 40 42 44 31 25 59 16 30 98 32 25 14 12 5 2 3 4 31 309 48 38 35 38 29 22 77 22 32 161 37 25 20 20 19 13 19 8 33 202 66 34 37 22 13 13 15 2 34 347 38 36 34 33 30 25 109 42 35 203 34 32 26 30 23 17 23 18 36 304 78 46 40 51 33 24 28 4 37 131 34 31 28 28 6 4.^. 40 250 41 37 28 36 29 26 35 18 41 221 44 33 33 40 26 22 18 5 45 2.006^415 354 336 315 225 184 142 50 396 119 63 61 65 45 24 14 5 51 570 165 71 63 66 50 43 90 22 52 905 349 69 57 60 41 44 176 109 55 697 263 71 61 64 51 49 98 40 60 477 151 55 44 45 37 28 80 37 61 94 23 32 15 15 2 1 3 3 62 139 24 20 19 24 16 13 12 11 63 330 74 45 41 45 35 27 48 15 64 308 43 36 32 33 28 22 64 50 65 523 39 35 36 36 35 34 183 125 66 274 51 35 38 42 31 22 38 17 67 369 206 50 43 31 18 11 9 1 70 541 345 54 44 46 34 14 4. 71 286 102 45 41 47 26 16 8 1 72 290 59 42 41 40 33 21 37 17 73 227 38 42 36 46 33 17 12 3 74 1015 168 66 63 69 64 84 316 185 80 495 80 50 43 70 45 38 93 76 85 802 105 39 43 48 44 55 225 243 90 257 41 34 34 40 31 30 32 15 91 508 253 48 52 56 36 25 30 8 92 463 155 53 57 64 43 31 39 21 93 563 345 59 47 50 31 18 10 3

The total sample is divided into five rotation groups in such a way that in the first quarter of each year the oldest group is replaced, which implies a renewal of 20% of the sample.

An exception should be made of the exhaustive units (units with more than 500 workers and those belonging to strata so small that their sample size necessarily coincides with the population), which due to their exhaustive character do not give rise to any renewal whatsoever and, except for termination, should continuously remain in the sample. These units make up 28% of the sample.

6.4 ESTIMATORS

6.4.1 Total estimates

Separate ratio estimators are used, using the number of workers in the Social Security Contribution Accounts Directory as an auxiliary variable.

Given: h stratum defined by the crossing of the branch of activity, Autonomous Community and size variables. N (^) h population size for the stratum h nh sample size for stratum h

Xhi value of variable X in unit I of stratum h Dhi nº of workers, according to the directory, in unit I of stratum h

Dh = (^) ∑

N h

i 1

Dhi

total workers, according to the directory, in directory centres belonging to stratum h

dh = (^) ∑

n h

i 1

Dhi

total workers, according to the directory, in centres of the sample selected within stratum h

The ratio estimator for the whole of one variable X in one stratum h is given by the expression:

h

n

i 1

hi n h h

i 1

hi

n

i 1

hi Rh h h d

X

D D

D

X

Xˆ Rˆ D

h

h

h ∑

∑

∑

=

= ⋅ = =^ ⋅ = ⋅

Grouping the terms that accompany each value X (^) hi, observing in a stratum h, that the factor of elevation within each stratum h is:

h

h h (^) d

D

F ≡

Where,

PH Paid hours

AH Agreed hours

OT Overtime

NWNRH Non-worked and non-remunerated hours

Rest hours as compensation for overtime hours are paid hours, which have a cost that we wish to discover.

Total (net) labour costs is defined by:

NTLC=W+OW+NWP-SUB=(W-OW)+OW+OC-OHCO+OHCO+NWP-SUB=

=W-OTW + OC-OHCO+NWP –SUB + OTW+OHCO

Salary minus Other costs minus Direct cost per extra hour overtime overtime

Where,

NTC net total labour cost

S Wages

OTW Overtime wage

OC Obligatory contributions

OHCO Overtime hour contribution

NWP Non-wage payments

SUB Subsidies

The total cost of hours paid except overtime hours is called the ordinary hours cost (TCOH):

TCOH=S-OW + OC-OHCO+NWP-SUB

If we define ordinary hours paid (OH) as OH = AH-NNRH

The cost of an ordinary hour would be COH=TCOH/OH

And thus , the cost of compensated hours will be HO x COH

Where, HO hours off as compensation for overtime hours.

If one overtime hour can be paid with money or hours off or a mixture of the two, the cost for the business person will be:

COT=OW+OHCO+HO x COH

and the cost by extra hour:

HCOT= (OTW+OHCO+HO x COH)/OT

The total cost parting from these results will be equal to the cost of ordinary hours except the compensated hours plus the cost of overtime hours:

CNT= COH x (AH-NNRH-HO)+COT

9 Links of wages series

The Wage Survey for Industry and Services (with the last base change occurring in 1996) has undergone certain methodological and coverage modifications, in order to give way to the LCI, with base in the year 2000.

Whenever there is a change of system there is always a variation in the structures, thus the indices and levels elaborated after the entry into force of the new system are not comparable with the former. That is why it is necessary to perform some operations that will allow for the comparison and that, in short, give continuity to the series and allows for the availability of historical series.

To perform this series link, in a determined period, it is necessary to overlap both structures, in other words, both methodologies must coexist during a common period of time T. In this manner, it is possible to calculate a link coefficient that will allow for an estimate of the data for previous years in accordance with the new methodological framework.

9.1 LINK COEFFICIENTS

9.1.1 Link coefficients for levels

Given:

X 95 (T)^ ≡^ level of variable X obtained in the common period T calculated with 95

metodology 95.

X 2000 (T) ≡ level of variable X obtained in the common period T calculated with 95 metodology 2000.

K is a coefficient that transfers the levels calculated with the old methodology into the new one, in other words:

(T)

X (T)

X 2000 (T) K X 95 (T) K^2000

X 95

= × ⇒ =

For any period t prior to the common period T the new values with the new structure can be obtained simply by applying this coefficient: