Pay rises unlikely to worry RBNZ

A tight labour market maintained the upward pressure on wages in the June quarter.

The Reserve Bank's preferred indicator of wage inflation - private sector salary and wage rates (including overtime) in Statistics New Zealand's labour cost index - rose 0.7 per cent to make a gain of 2.6 per cent for the year.

That is the highest annual rate in the index's 12-year history, but is in line with the bank's forecast of 2.75 per cent wage inflation over the next two years.

"Nothing in today's data should be a cause for alarm at the Reserve Bank and it is unlikely they will envisage wage growth accelerating any more than is already factored into their projections," said Westpac chief economist Brendan O'Donovan.

Deutsche Bank chief economist Ulf Schoefisch said that despite the union campaign for minimum wage settlements of 5 per cent, the wages data showed only a modest upward trend, which should provide some comfort to the Reserve Bank.

The labour cost index is intended as a measure of underlying wage inflation - pay rises not justified by higher productivity. Increases reflecting more responsibility or other factors of individual merit are stripped out.

Before being adjusted for such factors, the index increased at an annual rate of 4.8 per cent, unchanged from March, or 4.9 per cent when the public sector is included, up from 4.7 per cent in March.

Of the pay rates that rose during the June quarter, the median increase was 3.2 per cent and the average 4.7 per cent. That is up from 3 and 4.4 per cent respectively in the March survey.

The distribution of annual movements in pay rates also shows mounting wage pressure. In the June quarter, 35 per cent of all surveyed salary and wage rates were more than 3 per cent higher than a year ago, and 16 per cent were more than 5 per cent higher - in both cases the highest proportion for at least nine years.

Another set of data released yesterday, the quarterly employment survey, recorded some moderation in the rate of earnings growth.

The number of paid hours fell 0.3 per cent in the quarter, pulling the annual increase down to 2.8 per cent, from 3.4 per cent in the year ended March.

Average hourly earnings were up 3.5 per cent compared with the same quarter last year.

Combined with the increase in hours worked, that meant a rise of 6.3 per cent in gross earnings from wages and salaries, down from 7.2 per cent in the year ended March.