Labour market unlikely to boost wages

Employment growth slowed in the June quarter and outside Canterbury it stalled altogether.

Nevertheless the labour market tightened, though not enough to put much upward pressure yet on wages, which tend to be the last cab off the cyclical rank.

The household labour force survey found a rise of 10,000, or 0.4 per cent, in the number of people employed, seasonally adjusted, less than half the increase in any of the three previous quarters.

Excluding Canterbury there was no net increase.

But the labour force rose by only 1000 in the quarter, resulting in a drop of 9000 to 137,000 in the number of people officially unemployed. That lowered the unemployment rate to 5.6 per cent, a five-year low, from a revised 5.9 per cent in March.

The essentially flat labour force figure was despite a migration-boosted rise of 20,000 in the working age population.

The participation rate dropped back from a record 69.2 per cent in March to 68.9 per cent, which is still a high rate by historical and international standards.

Over the year ended June, employment increased by 82,000 or 3.7 per cent - 30,000 of them in the construction sector - while unemployment fell by 17,000 or from 6.4 to 5.6 per cent of the workforce.

For market economists focused on what the Reserve Bank will make of yesterday's labour market data, indicators of wage inflation are more significant than the slowdown in employment growth.

The labour cost index (LCI) recorded a pick-up in the annual increase in private sector salary and ordinary time wage rates to 1.8 per cent from 1.6 per cent in March. It is the highest level since March last year. Without a 50c-an-hour increase in the minimum wage it would have been 1.7 per cent, Statistics New Zealand said. Only 57 per cent of pay rates have increased over the past year. The average increase among those which did was 3.1 per cent and the median 2.4 per cent.

ANZ economist Mark Smith pointed to the fact that of the salary and wage rates which rose, 63 per cent increased by less than 2 per cent, when 58 per cent had a year ago.

"That suggests that increasing pressures on labour market capacity are not yet filtering through." Another measure of wage growth, from the quarterly employment survey which surveys employers rather than households, recorded a 3.1 per cent annual rise in average hourly earnings in the private sector and 2.5 per cent when the public sector is included.

Westpac economist Michael Gordon said wage growth of 1.8 per cent (on the LCI measure) was still pretty low, even by post-recession standards. "The legacy of sub-2 per cent inflation over the last couple of years has clearly had an impact on pay negotiations. That situation will change as the degree of slack in the labour market is eroded."

BNZ head of research Stephen Toplis said overall the labour market data reflected a strong economy. "But ... the pace of economic expansion and job growth has probably now peaked. How households and businesses alike adjust to an inevitable slowdown in the expansion, and how much inflation is created in the interim, will be critical to the longer term health of the economy."