Brian Fallow: Employers have had it good

The surprising thing about yesterday's pay data is not that wage growth is accelerating, but that it hasn't done so sooner or more strongly.

A 2.5 per cent average increase in wage rates when inflation is running at 2.7 per cent represents a pretty lousy growth dividend, as the Council of Trade Unions was quick to point out.

Current levels of profitability and productivity justify better pay, it says, noting wages are still on average 25 per cent lower than in Australia.

Australia's unemployment rate, on the other hand, is consistently and significantly higher than New Zealand's, currently 5.3 per cent versus 3.8 per cent.

In crude terms, since the labour market reforms of the early 1990s it has been easier for employers to expand production by piling on labour, rather than investing in capital goods.

Capital-to-labour ratios are much higher in Australia, boosting productivity and incomes.

But with unemployment at barrel-scraping levels, the Kiwi approach is no longer an option for more and more firms. They must invest.

As ANZ National Bank economists have argued, wage growth on this side of the Tasman has broadly kept pace with inflation plus productivity growth over the past 10 years.

Any more undermines competitiveness, is unsustainable and would cost jobs.

Because of the long intervals between pay negotiations - often more than a year - wages respond only sluggishly to tightenings or loosenings of the labour market.

That suggests the relentless upward pressure on wages evident in yesterday's data will continue for another year or two, even if the economy slows.

Clearly this is not a comfortable prospect for employers. But, collectively at least, they have had it pretty good.

In the six months to December the company tax take was 18 per cent up on the same period in 2003.