It feels like wages haven't kept up with the cost of living, but the data is less clear-cut. Photo / 123rf
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide,
Q: Hi Liam. In last week’s column, you talked about the cumulative inflation we’ve faced since the end of 2020. But while that was shockingly high (above 20%) you also noted that wages have risen by as much as 27% over the same period. If that’s the case are we really going backwards? I guess, some people must be doing okay for the rest of us to feel so much poorer. - Philip T.
A: This issue has bugged me for a while. I haven’t met many people who don’t feel like living costs have increased in the past few years.
As the graphs we put together last week showed (see below) we’re paying between 20 and 26% more for almost everything compared with 2019.
But if wages have risen by the same amount (or more) then shouldn’t the cost of living remain the same?
Theoretically, when we look at it on aggregate, wages have kept pace with inflation, at least by most measures.
So what have we all been complaining about for the past few years?
The devil in the detail
As always, we have to look at the different measures of wage growth and price rises to see what’s really going on. But even then it’s not clear-cut.
The figure I quoted last week was the average weekly wage (not including overtime) which is part of Stats NZ’s Quarterly Employment Survey (QES).
That showed a rise of 27% over the same period since the start of 2020.
Based on the hourly rate (see graph above) it comes in at 23.4%.
There’s also a median household income figure which is estimated using tax data. That also shows a rise of about 25% since the start of 2020.
Let’s stick with average ordinary-time hourly earnings. This is the mean value of wages and salaries paid per hour excluding overtime in jobs measured by the QES, Stats NZ says.
So it can rise or fall as the type of work being done changes.
There is also the Labour Cost Index (LCI) where employers are asked to record how much their wage costs have risen.
LCI’s primary measure of wage inflation adjusts for changes in employment quality, Stats NZ says.
So, employees receiving promotions or moving to different roles do not affect this measure of wage inflation. That makes it a good one for comparing with the Consumers’ Price Index (CPI).
Instead, these movements would be captured in the hourly earning statistics of the QES, Stats NZ says.
For the record, the unadjusted LCI increased 5.4% in the year to the March 2024 quarter, compared to an inflation rate of 4% for the same period.
Stats NZ notes the unadjusted LCI tends to increase at a higher rate than wage cost inflation because it includes market costs as well as factors such as employees’ individual performance or years of service.
For example, if an employee received a pay rate increase due to a rise in the cost of living, this would be reflected in both the LCI’s primary measure of wage cost inflation (adjusted LCI) and the unadjusted LCI.
However, if an employee gets a pay rate increase for quality reasons, such as acknowledging good performance, this would only be reflected in the unadjusted LCI.
The LCI reflects the cost of employing a worker in a specific job, this year versus last year, whereas the QES captures changes in the composition of the workforce.
In other words, people who got pay raises through upskilling, promotion or switching jobs will have lifted the average.
I’ve argued for a while now that the tight labour market and low unemployment rate we had through the first wave of inflation presented more opportunities for younger people.
Many younger people will have been able to make the most of the situation (through to the start of this year at least) to lift their earnings ahead of inflation through job mobility.
Meanwhile, older people are more likely to be entrenched in jobs and rely on annual pay reviews, which often don’t beat inflation.
But that’s just one contributing factor and it only accounts for the strong average growth in the QES measure.
Is Consumers’ Price Index inflation the right comparison?
I asked Westpac chief economist Kelly Eckhold for his thoughts on the dilemma.
It looked like wage growth had only just kept pace with inflation since March 2020, he said. But he also noted the LCI for the private sector is only up 15% when it is productivity-adjusted.
Meanwhile, he pointed out that we shouldn’t necessarily compare wage growth with the CPI, as it doesn’t include the significant living cost of covering your mortgage.
Over the same period since 2020, household living costs, which Stats NZ released last week, were up about 22-25% depending on the income quintile (compared to 20.9% for total CPI inflation), he said.
The CPI doesn’t include mortgage costs or the cost of residential property. It just includes rental prices and new builds. It isn’t supposed to capture the cost of asset prices and it treats houses as assets. While it gets all the media attention, it is really designed as a guide for monetary policy setting.
Last week the latest set of household living costs data dropped from Stats NZ and showed that, with mortgages included, the average cost of living increase was 5.4% – higher than CPI inflation at 4%.
That’s probably a more relevant figure for many. But even then it still seems to be in the same ballpark as wage growth.
A new Auckland-focused report, produced by Tātaki Auckland Unlimited, found that average earnings in 2023 were 20.6% higher than in the year to March 2019, with inflation (CPI) increasing 18.7% over the same period.
Eckhold also said we should factor in fiscal drag. Sometimes called tax bracket creep, it recognises inflation has pushed many people into higher tax brackets and means people have given up a bit of that extra marginal income in tax over the period.
This might also be making us feel a bit poorer. It is an issue the Government is addressing with new tax bracket adjustments that come into effect today.
That’s something for those struggling with the cost of living to celebrate (unless you’re more worried about the Government’s Budget deficit but let’s not reignite that debate again).
Still, even with all that it feels like the cost of living crunch has been worse than the data suggests.
Could there be psychological (or what economists call behavioural) reasons for why we hate inflation so much, even when wages are rising too?
Eckhold and his team offer a couple of other reasons why we might still feel the pain so acutely.
“I wonder if the story is whether people are feeling like they are getting ahead?” he said.
“Looking into the breakdown of price increases, price rises have been centred on essential areas – insurance, rates, food. But price declines are mainly discretionary areas (furnishings, apparel etc). So you might be earning more, but it’s all going on basics. i.e.... not items that really improve your quality of life. It’s easy to see why people don’t feel like they’re getting ahead.”
So basically we’ve been forced to spend more money on boring stuff!
Finally, Eckhold noted that “on a per capita basis (which reflects individuals’ perception of their economic reality and relative standard of living) income growth has been quite weak”.
“That’s not going to be positive for people’s perceptions of whether they are getting ahead. Low productivity growth is translating to weak real wage growth with resultant impacts on the standard of living.”
With any luck this era of high inflation will soon be behind us. But it is worth noting the era of high wage rises might also be over and it is the net difference between the two that really matters.
In a serious recession with high unemployment, sometimes prices fall and the economy is deflationary. This is never a good thing.
We’ll get a fresh read on wage growth and unemployment next Wednesday, with Stats NZ’s labour market data for the second quarter.
Economists will be hoping to see lower wage growth and higher unemployment, which is an odd state of affairs.
It doesn’t feel right to be cheering for higher unemployment. Every redundancy is a huge blow for the individual affected.
But if we step back and look at the macro-economic cycle then we can take a more pragmatic view. I’m certainly cheering for unemployment to peak below market expectations of about 5.5%.
If that happens we’ll have come out of the pandemic economic cycle with unemployment below New Zealand’s historical average. And that would be a win.
We didn’t avoid recession, so it would be a stretch to call this a soft landing. But compared to unemployment rates of 6.7% in the GFC and above 10% in the early 1990s we could claim to have done relatively well.
Unfortunately, if we want to avoid unemployment going much higher than 5% then we’ll need to see inflation under control ASAP and interest rates coming down this year.
And the most likely way to get there is for labour market conditions to deteriorate quicker rather than slower. So if unemployment numbers come in worse than the Reserve Bank had anticipated then the odds of interest rate cuts coming sooner will also shorten.
To be fair they are already pretty short. The latest market pricing puts the odds of an August rate cut at 50/50 and implies 75 basis points of cuts by the end of the year.
This seems a bit optimistic to me.
Anyway, as of its May Monetary Policy Statement, the RBNZ had forecast the annual unemployment rate to rise to 4.6% for the June quarter (from 4.3% in March).
How it lands next week will be fascinating to see.
Speaking of not working...
A fascinating piece from the Financial Times highlights the enormous costs China is facing as its population ages. Even a regime as powerful as the CCP seems to face political pressure when it comes to the retirement age.
The FT reports the controversy was sparked by a line in a report on the Communist Party Annual Congress’ resolutions that called for the retirement age to be raised as China’s demographic decline threatens to leave it with too few workers.
It recalls a similar controversy here.
In 2017, then Prime Minister Bill English planned to lift the local age of eligibility for superannuation slowly o from 65 to 67 by 2040. People didn’t much like it but it seemed to be happening. That was swept away by the new Labour-led Government later that year and it has never been back on the table.
Questions about how we’ll pay the burgeoning bill for superannuation remain but neither major party is prepared to talk about lifting the age of eligibility.
Anyway, spare a thought for Chinese officials trying to manage an enormous wave of retirement in the coming decades. In China, the retirement age is just 50 years for female blue-collar workers, 55 for female white-collar employees and 60 for all males.
I know there are cultural reasons for the early retirement. Traditionally grandparents have played a crucial role in caring for young children while parents go out to work.
But with fewer young workers coming through this presents another huge challenge for China which is already grappling with an economic slump.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
OPINION: The economy still feels bad but a recovery is slowly gaining momentum.