Modest wage growth likely to reinforce RBNZ's 'low till second half of 2010' OCR policy (Update 1)

Public sector wages continued to grow faster than private sector wages in the September quarter as wage growth from June came out in line with economist expectations, figures released by Statistics New Zealand (Stats NZ) show. (Update 1 includes economist comment.) Meanwhile, in the year to the September 2009 quarter, average hourly earnings rose 4.9% as total paid hours fell. The number of full-time equivalent employees in the labour force fell annually for the fourth consecutive quarter. There were 1.294 million full-time equivalent employees in the labour force at September 2009, down from 1.307 million at June and 1.341 million at September 2008 according to the Quarterly Employment Survey (QES). Stats NZ said the manufacturing industry was the main contributor to the fall. ASB Chief Economist Nick Tuffley said wage growth was showing clear evidence of moderating and that the figures would likely reinforce the Reserve Bank's view that it can wait until the second half of 2010 before raising the Official Cash Rate off its record low of 2.5%. Official unemployment figures for the September quarter are due on Thursday and are expected to show New Zealand's unemployment rate rose to around 6.4% from 6% in June. Salary and wage rates excluding overtime, as measured by Statistics New Zealand's Labour Cost Index (LCI), rose 0.5% in the September quarter, on top of 0.3% growth in June. Private sector wage rates (excluding overtime) grew 0.4% over the quarter (0.3% in June), in line with market expectations. Public sector wage rates rose 1.1% over the three months, its highest quarterly growth since September 2008 and up from 0.4% in June. Overtime wage rates also grew by 0.5% during the quarter, with both private and public sector growth at 0.5%. Dividing up the public sector, local government overtime wage rates were up 1.5% over the quarter, while central government wage rates only rose 0.4%. From the September quarter last year, overall wage growth (including overtime) was 2.1%. This was the lowest recorded annual increase in the LCI series since a 2.1% increase in the year to December 2002, Stats NZ said. Meanwhile, Stats NZ's Quarterly Employment Survey (QES) indicated average hourly earnings increased 4.9% in the year to the September 2009 quarter. Despite the rise in earnings, the number of full-time equivalent employees, filled jobs and seasonally adjusted total paid hours all fell over the year to the September 2009 quarter. "This is the fourth consecutive quarter in which all three labour market measures have decreased on an annual basis," Stats NZ said. Here are Stats NZ's comments on the LCI and QES:

In the year to September 2009, employment as measured by the number of full-time equivalent employees decreased 3.5 percent and filled jobs decreased by 2.6 percent. The manufacturing industry was the main contributor to both these annual decreases. Seasonally adjusted gross earnings increased 1.6 percent for the year to September 2009, while seasonally adjusted total paid hours decreased 3.0 percent for the same period. Despite a fall in paid hours, total gross earnings increased over the year, leading to a 4.9 percent increase in the average total hourly earnings in the year to September 2009. The labour cost index (LCI), also released today, showed that salary and wage rates (including overtime) were 2.1 percent higher in the September 2009 quarter than in the September 2008 quarter, following a 2.8 percent increase in the year to the June 2009 quarter. The latest annual increase is the lowest since the December 2002 quarter. In the September 2009 quarter, salary and wage rates (including overtime) increased 0.5 percent, following a 0.3 percent increase in the June 2009 quarter. Salary and wage rates (including overtime) for the private sector increased 2.0 percent in the year to the September 2009 quarter, and 0.4 percent in the September 2009 quarter. Public sector salary and wage rates (including overtime) rose 2.9 percent in the year to the September 2009 quarter, and 1.1 percent in the September 2009 quarter.

The QES average earnings statistics reflect not only changes in pay rates, but also compositional and other changes across and within the paid workforce. In comparison, the LCI measures changes in salary and wage rates for a fixed quantity and quality of labour input. Service increments, merit promotions, and increases (or decreases) relating to the performance of individual employees are not shown in the index.

Ignoring the volatile QES survey wage growth is showing clear evidence of moderating, albeit not quite to the extent expected. For the second quarter in a row labour cost growth has been muted in the private sector. Public sector wage growth has been less affected by the recession. The LCI series prior to adjustment for job quality factors further reinforces that the pace of wage increases is slowing rapidly. The private sector unadjusted series has fallen to 3.7% yoy from peak growth of 5.5%, and the all-sector measure is down to 3.8% yoy from 5.6% in the second half of 2008. These readings are the lowest since 2001-02. The jobs measures in the QES survey imply at face value a still-weak hiring market, though new data and Statistics NZ technical problems mean no comparison to Household Labour Force Survey employment figures is possible at the time of writing. Full-time Equivalent Employee figures remain substantially down from a year earlier. Seasonally-adjusted paid hours have, however, registered their first quarterly increase since the June 2008 quarter, some further tentative evidence that the economy is stabilising. Continued decline in wage growth reinforces that the recession is still exerting some downward pressure on inflation. The RBNZ's September MPS incorporated a March 2010 forecast of 1.6% yoy for the LCI private sector (including overtime). The current run rate suggests wage growth could undershoot that forecast, and at least should be as contained as the RBNZ anticipated. Meanwhile, the QES jobs figures imply the labour remained soft over the quarter (though the QES survey has been an unreliable indicator of the HLFS survey results). The RBNZ will likely see the modest labour cost growth as reinforcing its view that there is no hurry to lift the OCR until "the second half of 2010". We still expect the RBNZ will hike sooner than that in April. Underlying inflation pressures, including wage growth, will be once more on the rise heading into 2011 and an OCR of 2.5% for nearly another year will become inappropriate. Softness in the labour market will continue to suppress wage growth in the short term but as hiring resumes wage restraint will start to ebb. We expect Thursday's HLFS survey to register a slight (0.2%) decline in employment, and for the unemployment rate to drift up to 6.3%.