Wages won't worry bank governor

Wages are rising at their fastest clip for years but the latest figures will neither soothe nor further inflame the Reserve Bank's inflation concerns.

The labour cost index for the private sector, including overtime (the bank's preferred wage inflation indicator) rose by a record 3 per cent for the year to March, exactly in line with the bank's forecast. Add the public sector and the increase was 3.3 per cent.

"The encouraging aspect was that wage growth showed no sign of accelerating," said ANZ National Bank chief economist Cameron Bagrie, "which is consistent with it reaching a peak in the cycle."

Private-sector ordinary-time wages and salaries grew 0.7 per cent in the March quarter, unchanged from December, while the public sector increase eased to 0.6 per cent from 0.8 per cent.

Of the pay rates surveyed, 25 per cent were between 3 and 5 per cent higher than a year ago and another 21 per cent had risen by more than 5 per cent, the highest proportion over 3 per cent for at least 10 years. For the pay rates which rose during the March quarter, the median annual increase was 4.1 per cent.

These figures are all adjusted by Statistics New Zealand to filter out pay rises that recognise an individual employee's increased responsibilities or productivity; they are intended to show changes in the pay rate for the same quantity and quality of work.

The unadjusted figures are a better indication of what is happening to pay packets and payroll costs. They showed private-sector wages 5.5 per cent higher than a year ago, a record high for this statistical series.

The combined effect of employment growth and wage rises in the household sector's income from paid work in the year to March was 7.1 per cent.

But the latest quarterly increase of 1.1 per cent was the weakest for a year.

Deutsche Bank chief economist Darren Gibbs said wage inflation tended to rise and fall in line with the reported difficulty firms had in finding skilled labour - but with a lag of seven quarters.

Skill shortages have been easing, according to business sentiment surveys, but given the lags involved wage inflation was likely to remain high for the rest of the year before beginning to ease gradually in 2007, he said.

Bank of New Zealand head of research Stephen Toplis said wage growth was close to peaking. "Nevertheless it will probably take a year or two before wage growth becomes consistent with contained inflation."

Governor Alan Bollard said last month that he would be vigilant against the higher prices arising from world oil prices and the lower exchange rate spilling over into wages.

Meanwhile, the quarterly employment survey showed weak growth in employment in the March quarter but enough to suggest the economy had not shrunk for a second successive quarter.

The number of "fulltime-equivalent" employees rose 0.3 per cent for the quarter, but 3.1 per cent for the year, while the number of filled jobs shrank 0.7 per cent, but that figure is not seasonally adjusted; if it was, it would record an increase of 0.7 or 0.8 per cent, economists reckoned, which would be in line with the increase in paid hours in the quarter.

Toplis said that was consistent with a modest rise in the unemployment rate, due out on Thursday, from 3.6 to 3.7 per cent.

Pay packets

* Wage inflation is strong but shows signs of peaking.

* Employment growth is weakening.

* The combined effect of employment growth and wage rises in the household sector's income from paid work in the year to March was 7.1 per cent.