Wage-inflation indexes show market still tight

By BRIAN FALLOW

Two measures of wage inflation out yesterday continue to show the effects of a tight labour market.

Statistics New Zealand's labour cost index recorded a 0.5 per cent increase in the June quarter for the private sector, keeping the annual rate at 2.2 per cent - unchanged from March but still as high as it has been since September 1997.

Of the pay rates surveyed, 46 per cent have not increased over the past year but for those which did the average rise was 4.3 per cent.

The labour cost index, the Reserve Bank's preferred measure, is regarded as a trend measure of wage pressures. It records changes in salaries and wage rates for a fixed quantity and quality of work; increases related to performance or years of service are not included.

Such changes are included in the average earnings data of the quarterly employment survey (QES) also released yesterday, but it is volatile, its figures blown around from one quarter to the next by changes in the composition of the survey sample.

The QES recorded a 1.5 per cent increase in average ordinary-time hourly earnings in the private sector in the June quarter, which pushed the annual increase to 4.2 per cent from 2.5 per cent in the year to March. That is the highest annual increase since the early 1990s.

If the public sector and overtime payments are included, annual wage growth was 3.7 per cent or 2.2 per cent after inflation.

Bank of New Zealand economist Craig Ebert said that when that was added to an estimated 1.4 per cent growth in employment it was hardly surprising that households continued to spend up large.

But the labour market tended to lag behind changes in the wider economy so both wage and jobs growth were likely to come under pressure next year as the economy slowed.

"We believe wage growth has now peaked," he said.

Westpac economist Nick Tuffley expected the Reserve Bank to conclude that wage pressures remained high but not excessively so, consistent with the tightness of the labour market over the past year.

"The Reserve Bank expects slackening inflation pressures to come through the export sectors and tradeable goods prices - not the labour market. From that front the bank's inflation outlook will change little."