40/99
2 March 1999
OUTCOME OF THE REVIEW OF AVERAGE EARNINGS REVISIONS
Economic Secretary Patricia Hewitt today published the external review of revisions to the average earnings index (AEI) announced by the Chancellor of the Exchequer on 23 October 1998.
The index, suspended by the Office of National Statistics (ONS) on 2 November 1998 following revisions to the AEI announced on 6 and 14 October, is reinstated today. Details of the reinstated index are set out in a separate ONS First Release.
Welcoming the report and the reinstatement of the AEI, Ms Hewitt said:
"The Government is determined to protect the integrity of national statistics. That is why the Chancellor established an external review immediately it became clear that there were problems with the AEI. We have accepted all the recommendations of the review. Some have already been implemented.
"The review contains important lessons, both technical and managerial. Those lessons have been learnt. The new index, published today, is based on the immediate technical recommendations of the review, the Turnbull/King Report. As a result, I am confident that the new index provides a reliable picture of earnings growth in the economy. But further work will continue as recommended in the report to ensure a process of continuous improvement to the index.
"As I announced last week, I have already accepted recommendations from Dr Tim Holt, the Director of the ONS, to strengthen the management of the ONS. In particular, the appointment of a Director of Quality Assurance and Methodology at Board level should help to ensure that the problems that arose with the AEI do not occur again."
The Turnbull/King Report was prepared by Martin Weale (Director of the National Institute for Economic and Social Research) and Peter Sedgwick (Deputy Director at HM Treasury), under the direction of Sir Andrew Turnbull ( Permanent Secretary to the Treasury) and Mervyn King (Deputy Governor of the Bank of England).
The summary of the report sets out 37 principal recommendations, covering :
- improvements to the way in which the ONS publishes, explains and makes available information on its statistics. accelerating plans to locate ONS staff working on the AEI at a single site, so far as this is consistent with the assurances that have been given to staff .
- agreement of a service level agreement between the ONS and the Bank of England to cover the Bank's data needs, including those for the earnings data. This mirrors existing agreements with the Treasury and some other Departmental users of ONS statistics.
- strengthening of ONS project management of statistical change, including more systematic and regular use of non- ONS statistical experts and users of statistics.
- agreed procedures for the ONS to consult with and provide information to the Treasury and the Bank of England to deal with unexpected difficulties and developments.
- a number of technical changes to the handling of statistical data to enhance their quality.
- a number of technical changes to the AEI, including a programme of long term work on the index.
BACKGROUND TO THE REVIEW
Today's figures for the AEI are the first to be published since those released on 14 October 1998 as part of the regular package of monthly labour market statistics.
The 14 October release included revisions to the AEI reflecting the introduction of a number of technical improvements to the index, details of which were set out by ONS on the same day. The ONS had embarked on this programme of technical improvements in March 1997.
It followed a review between 1995 (when responsibility for the AEI was transferred from the former Employment Department to the Central Statistical Office - the forerunner to ONS) and early 1997. This review identified a number of unsatisfactory aspects of the index, in particular that the sample of firms on which the index was based was failing to keep pace with the changing structure of the economy.
As a prelude to publishing the revised AEI on 14 October 1998 taking account of the technical improvements to the index, the ONS began to introduce more firms into the sample from April 1998. These enlarged samples were used in producing estimates of the headline rates of earnings growth in May and June 1998, which were published in August and September 1998 respectively.
In preparing the index for publication on 14 October, the ONS discovered that the way in which the increase in the sample had been introduced had depressed the index artificially. Immediately this problem became clear, it was corrected and revised figures for the May and June 1998 rates of headline average earnings growth were published on 6 October.
On 23 October 1998, the Chancellor of the Exchequer asked Sir Andrew Turnbull and Mervyn King to review the circumstances surrounding the 6 and 14 October revisions to the AEI. On 2 November the ONS suspended the AEI.
The subsequent programme of intensive scrutiny of the AEI by Martin Weale and Peter Sedgwick, working with Professor Ray Chambers of Southampton University and the ONS, identified a number of shortcomings of the index. Some were significant in the original index, others were accentuated in the index of 14 October.
The main shortcomings identified are summarised on page 6 of the Turnbull/King report. This notes that, among other things, the revised methodology increased the chance that the index could be sharply affected by sharp wage movements in some individual firms. For example, the review found that the pay settlements of only two small firms in the financial intermediation sector had added nearly 1 percentage point to the growth rate of whole economy average earnings between April and May 1998 in the index published on 14 October.
The ONS has today reinstated the AEI. The new AEI has been calculated using the revised methodology proposed by the Turnbull/King Report and the Chambers review. The latter is the report of a study by Professor Ray Chambers of Southampton University, commissioned by Dr Tim Holt, Director of the ONS.
NOTES FOR EDITORS
1. The external review of the revisions to the AEI was announced by the Chancellor of the Exchequer on 23 October 1998 in a letter to Giles Radice, Chairman of the Treasury Select Committee (Treasury press notice 175/98).
2. Publication of the Turnbull/King report was announced by the Economic Secretary in response to a Parliamentary Question from Jackie Lawrence (Preseli Pembrokeshire). The full text of her reply is attached.
3. Media copies of the report can be obtained from and enquiries addressed to the Treasury press office on 020 7270 5188.
4. Non-media enquiries and requests for copies of the report should be addressed to the Treasury Public Enquiry Unit on 020 7270 4558.
5. Copies of the report of the study by Professor Ray Chambers can be obtained from the ONS press office on 020 7533 5713or on the internet at the address below.
6. The figures for the reinstated AEI are set out in ONS First Release (99) 80, published separately today. This is also available from the ONS press office and internet website. They are also set out Chapter 9 of the Turnbull/King report.
Derek Twigg (Halton) :
To ask Mr Chancellor of the Exchequer, when he expects to be able to announce the outcome of the review of the revisions to the average earnings index.
PATRICIA HEWITT
The report of the external review of the revisions to the average earnings index announced by the Chancellor of the Exchequer on 23 October 1998 is being published today. The review has been conducted under the direction of Sir Andrew Turnbull and Mervyn King. Copies of the report are available in the Vote Office.
The Office for National Statistics (ONS) has today separately published the report of the work on the average earnings index by Professor Ray Chambers of Southampton University, which was commissioned by Dr Tim Holt, the Director of the ONS. Copies of this report have been deposited in the Library of the House.
At the same time, following the implementation of the immediate technical recommendations made in the Turnbull/King report, the average earnings index which was suspended on 2 November 1998 has been reinstated by the ONS. Details of the reinstated index are set out in Chapter 9 of the Turnbull/King report and also in a separate ONS First Release.
The Government has accepted the recommendations of the Turnbull/King report and is firmly committed to their implementation. Dr Holt has already agreed to my request to draw up a programme of action designed to implement the remaining recommendations, including further work to ensure a process of continuous improvement to the index. I have asked Dr Holt to report to me regularly on the progress that is being made in implementing the recommendations.
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