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Unemployment headed for 4%, but wage growth strong
August 4th, 2008
It appears to be the worst of both worlds for a central bank — a softening employment market, but still firm wage inflation. Either it’s a case of a very lagging indicator of inflation or a sign of stagflationary pressure. Economists are united in saying wage growth is lagging and that the Reserve Bank should look through this wage inflation and keep cutting interest rates.
Jobs and wages data out today from Statistics New Zealand showed wages still growing strongly, but the labour market is slowing down and the unemployment rate is expected to have picked up to almost 4% when figures are reported this Thursday, economists said.
The Labour Cost Index and Quarterly Employment Survey for the June quarter showed private sector ordinary time earnings rose 0.8% in the quarter and remained at a record high 3.5% in the June quarter from the same quarter a year ago.
Here’s what ANZ’s economists had to say.
Wages are typically one of the last indicators to turn and are showing classic late-cycle persistence. As a result, we are not reading too much into the strength in today’s numbers. However, we do note that a number of respondents reported cost of living adjustments as a key reason for wage increases in the quarter and this will be of some concern to the RBNZ. Although it is to be expected to a degree, the RBNZ will not want this behaviour to become fully entrenched.
There is nothing in today’s data to stand in the way of the RBNZ continuing to cut rates this year. While elevated inflation expectations still poses the risk of seeping into wage and therefore price setting behaviour, on balance the RBNZ’s judgement that the weak growth environment will limit the extent of future wage increases remains.
Here’s what ASB’s economists had to say.
The Labour Cost Index measures continue to show labour cost increases are holding around their cyclical peak. As yet there are no signs that wage growth is moderating. But equally, from an inflation perspective, there are no signs wages are accelerating either.
We expect the Q2 HLFS to show fairly flat employment, coupled with continued growth in the labour force, is likely to push the unemployment rate to the vicinity of 4%.
BNZ’s economists also saw wage growth as strong, but a lagging indicator.
The labour market is about to loosen up noticeably, with its usual lag to softening GDP. This, in turn, will take the steam out of wage inflation, albeit with an even longer lag. To wait for the evidence would be for monetary policy to be at least a year too late with its easing
Tags: LCI, OCR, QES, Reserve Bank, Wage inflation
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August 4th, 2008 at 6:23 pm
Hickey when you wrote the following in relation to Labour’s last budget:
Whatever happened to their mantra that they wouldn’t pay for tax cuts by running up debts? Their (quite powerful) argument that it wasn’t right for National to pay for tax cuts with debt is now dead as the proverbial. Their rebuttal that the debt is only paying for infrastructure is, strictly speaking, true, but debt wouldn’t have to be raised without the tax cuts. There’s no getting away from this. They are raiding the Reserve Bank’s cookie jar and borrowing from foreigners for an irresponsible spending and tax cutting budget.
And then go on to defend National’s plans which will increase government debt and tax cuts more than Labour do you not think that you are being hypocritical?
August 4th, 2008 at 11:02 pm
I see Bernard that you are not allowing my comments to appear on your “Show me the money” blog. Why don’t you actually explain yourself on this one Bernard instead of just removing comments. If you don’t think you are contradicting yourself then say why. Is this politcally motivated censorship or just vanity? I’m sure you would deplore political censorship, so why do it yourself? I understand that it is the experience of others, that you remove comments that don’t agree with you. I would like to see my comments appear on your other blog so as to demonstrate to me that you are not censoring your blog for politcal or vanity reasons.
August 5th, 2008 at 8:32 am
[...] Other sites on employment: The Standard, Tumeke, Rates Blog. [...]
August 5th, 2008 at 1:40 pm
Sorry Bernard my comment was too long I’ll shorten it and repost it on your “Show me the money” blog.
August 5th, 2008 at 4:05 pm
On the day of the Household Quarterly Survey, you only have to have worked for one hour of paid employment in the last week to be deemed to be employed for statistical purposes, this changed from 30 hours per week after the Structural Adjustment Program imposed upon us by the IMF when we were liquidated by them in 1984. A more acurate measure of employment, is underemployment, that is those with one or more jobs that are not getting enough hours or income to achieve financial dignity.
Cheers
Iain