Brian Fallow: Wages going nowhere fast

Illustration / Anna Crichton

Unemployment rate is down, but economic growth is not boosting incomes as it once did

So, the unemployment rate has plunged to 5.3 per cent from 6 per cent three months ago.

It is the most cheery news about the labour market we have had from the statisticians for a long time.

But it is worth one cheer, not three. The accompanying wages data in particular, tell us the labour market is still very much a buyer's market.

The economy added 32,000 jobs over 2015, an increase of 1.3 per cent.

About two-thirds of that increase in the demand for labour was met by an increase in supply.

The labour force - the employed, plus people actively looking for a job and available to start one - rose by 22,000 over the same period.

The result was a net fall of 10,000 in the number of people unemployed, to 133,000.

But much of the drop in unemployment is explained by declines over the past three quarters in the participation rate - the labour force as a share of the working age population (everyone over 15).

It has dropped from a record - and internationally high - 69.5 per cent in the March quarter last year to 68.4 per cent.

So while the working age population rose by 82,000 last year, boosted by strong net migration inflows, the labour supply grew by only 22,000.

About half of the difference, Statistics NZ reckons, can be attributed to a rise in the number of retired people. In addition, there was a rise of 15,400 in the number of people at home but not looking after children.

All of these numbers are subject to sampling error. The Household Labour Force Survey looks at a large sample of households, about 15,000, one in eight of which is rotated out and replaced every quarter.

But there is still a margin of error around the results.

Strictly speaking, Statistics NZ is saying, for example, that the number of unemployed is 133,000 - give or take 8500 - and it is confident the unemployment rate is somewhere between 5 and 5.6 per cent, having been somewhere between 5.7 and 6.3 per cent in the September 2015 quarter.

Then there are definitional niceties.

A further 83,000 people are jobless but not officially unemployed. They answered "yes" to the question "If you had been offered a job, would you have started last week?" but they are not actively seeking work, which you have to be to count as unemployed.

Even so, taken at face value, the December quarter numbers are evidence that the labour market has tightened, in defiance of the forecasters.

But that has yet to show up in the wages data.

The Labour Cost Index, which reflects pay rates for the same quantity and quality of work, continued to drift lower, to an annual increase of 1.5 per cent in the December quarter.

For the private sector alone it was only slightly higher at 1.6 per cent, the lowest since September 2010.

Some 46 per cent of pay rates did not increase in the latest year. Among the 54 per cent that did, the average increase was the lowest for 16 years, at 3 per cent, and the median rise 2.4 per cent.

Retailers, however, might take heart from the Quarterly Employment Survey's finding that total weekly gross earnings rose 6 per cent last year.

That is an aggregate measure of labour market incomes reflecting the combined effect of more jobs, longer hours and higher wages.

Six per cent does not sound too bad, especially when inflation was just 0.1 per cent in the same period.

But wages and salaries are not the only source of household income; in fact, they represent about 57 per cent of it according to the annual national accounts.

Total gross weekly earnings had also risen 6 per cent in the year to March 2015. But when the incomes of the self-employed, superannuitants and beneficiaries are included, plus income from interest, dividends and rents, households' collective income rose a more modest 2.2 per cent.

Disposable or after-tax income rose just 0.8 per cent, in a year when the number of households would have risen by at least as much, implying it was flat or negative for the average household - in a year which is likely to have been the peak of the cycle for economic growth.

How come?

Reserve Bank governor Graeme Wheeler gave a speech on Wednesday reflecting on why inflation is so weak, just 0.1 per cent year to December.

Though he laid most of the blame on offshore factors, particularly the collapse in oil prices, that is only part of the story.

Excluding vehicle fuels, annual CPI inflation is just 0.5 per cent. Non-tradables or domestic inflation in the second half of last year was running at the lowest rate we have seen for 14 years.

Part of the reason, Wheeler suggested, is structural: the Phillips curve (named after New Zealand economist Bill Phillips) has flattened since the 1990s.

In other words, the relationship between unemployment and inflation, very strong in the 1970s and 1980s, has weakened markedly.

"[That] means the economic recovery has translated into less inflation than historically might have been the case," Wheeler said.

One possible reason, he suggested, is that inflation expectations embodied in firms' wage- and price-setting behaviour have fallen and become more stable.

Another is that globalisation and increased competition from offshore are limiting the ability of businesses to raise prices.

Yet another possible explanation is that greater labour mobility, high levels of net immigration, and concerns about job security might mean workers do not press as much for higher wages when domestic demand increases.

"Over the past three years, higher than expected immigration appears to have been an important factor in moderating labour market pressures and wage outcomes," he said.

We won't know until the middle of next month how much the economy grew last year.

But unless the forecasters are as wrong about that as they seem to have been about the jobs data (and in the opposite direction), it was significantly more than the 1.3 per cent employment grew by, or the 1.5 per cent pay rates grew by.

This week's data are prima facie evidence of a weakening of the relationship between economic growth on the one hand and employment and wage growth on the other.