KEY POINTS:
No let-up in wage inflation and only a marginal rise in the low unemployment rate are expected when the statisticians report on the state of the labour market this week.
The Reserve Bank is publicly fretting about the danger of a wage-price spiral emerging.
Governor Alan Bollard said on April 24 there was a risk wage settlements would respond to increases in food and energy prices rather than adjusting to changing economic conditions, thus perpetuating inflation pressures.
Market economists expect today's wages data and Thursday's employment data to offer little to reassure him.
Their average forecast is that the labour cost index will record wage inflation of 0.8 per cent in the March quarter. That would be down from the 1 per cent recorded in December but it would still push the annual rate up to 3.5 per cent from a record 3.4 per cent for calendar 2007.
That measure of wage growth excludes performance-related pay increases. If they are included, wages rose 5 per cent last year or 1.8 per cent in real terms.
"Real wage growth has averaged 2.2 per cent a year over the past five years, which has been considerably higher than growth in labour productivity," the Department of Labour said.
Wages tend to be the last cab off the rank during an economic upturn but they also lag when the cycle turns down.
Westpac economist Dominick Stephens said: "It took a long time for shortages of labour, which began in 2004, to translate into commensurate wage increases.
"Equally, pressure on wages will linger long after employment softens. Adding fuel to the fire, employees now are demanding and receiving compensation for higher inflation."
ANZ National Bank chief economist Cameron Bagrie said the close historical relationship between the unemployment rate and wages 18 months later suggested wage inflation could remain above 3 per cent well into next year.
But given how much firms' profit expectations had deteriorated - as recorded by the bank's business confidence survey - they were unlikely to be able to afford the kind of pay increases seen in recent years.
"This suggests wage growth will start to moderate over the second half of this year."
At this stage firms were looking to recover lost profit margins by raising prices, Bagrie said. But with economic demand weakening that would get harder to do.
"With cost pressures intensifying, it will be only a matter of time before staff levels are reassessed as stresses on bottom lines mount."
When the household labour force survey is released on Thursday, the market is expecting an unemployment rate of 3.5 per cent, up from the 22-year low of 3.4 per cent in December.
But annual jobs growth is expected to drop back to 1.4 per cent, from 2.5 per cent for calendar 2007, as the very strong March 2006 quarter figure drops out of the annual tally.
That would be slightly weaker than the Reserve Bank's forecast of 1.6 per cent.
Westpac's Stephens said that with unemployment so low, most of the increased demand for labour had been met by growth in the labour force.
But in the March quarter migration did little to increase the working age population, with a net inflow of fewer than 1000 people.
And the main effects of recent policy changes like Working for Families and increased child care subsidies on women's participation in the labour force were probably now behind us, he said.
"Unfortunately this quarter will be the last good one of employment data. Over the remainder of 2008 we expect layoffs to outweigh hiring," Stephens said.
"Some companies will hoard labour through the slowdown, but others, such as real estate and finance companies, will be thinking more about their prospects for survival. Ultimately we expect 15,000 people to become unemployed during this slowdown, pushing the unemployment rate to a peak of 4 per cent."
TIGHT MARKET
* Economists predict a 0.8 per cent rise in wages for the March quarter.
* This would push the annual rate to 3.5 per cent.
* Unemployment is at 22-year lows.
