Salary and wage data in Statistics NZ's latest labour market figures shows workers' pay increases lagging well behind inflation.
Statistics NZ's labour cost index (LCI) shows salary and wage rates, including overtime, up 2% in the June year. Annual private sector wages increased 2% and public sector wages increased 1.7%.
Measured against the consumers price index (CPI) and Statistics NZ's household living costs price indexes, costs are rising faster than wages. June year annual CPI inflation was 4.1%. The household living costs price index rose 3.2% for all households, and 4.3% for Statistics NZ's lowest-expenditure household group which represents the bottom 20% of households ranked by spending.
"This is different to COVID. The pandemic period saw the cost-of-living rapidly increase. But a tight labour market [with] lower unemployment gave employees more bargaining power. Wages rose much faster compared to today as a result," Kiwibank economists Alexandra Turcu and Elliott Lowe say.
"The lacklustre wage increases Kiwi workers are currently experiencing puts households further and further behind inflation. The divergence of the inflation (CPI) and labour costs (LCI) indices is the proof in the pudding. Wages have simply not caught up with prices," say Turcu and Elliott.
"Prices rose twice as fast, 4.1% annually, in the June quarter, compared with wages, up 2%."
ASB Mark Smith senior economist points out only 54% of private sector jobs recorded annual wage increases, remaining broadly flat in the last four quarters and near a four-year low.
And Westpac senior economist Michael Gordon says pay increases are converging in the 2% to 3% range.
"While more employers are citing the cost of living as a reason for increasing pay rates, fewer are citing the need to attract or retain workers – that is, it suggests a shift in the justification rather than a groundswell for larger pay rises," Gordon says.
Meanwhile, BNZ head of research Stephen Toplis suggests wage inflation, measured by the LCI, may have bottomed out.
"At 2.0% for the year the pace of increase in the private sector LCI was a smidgen above the Reserve Bank’s 1.9% pick. At this level it is entirely consistent with achieving the [Reserve Bank's] 2.0% inflation target. But the Reserve Bank is assuming that wage growth is trending lower. We don’t see it this way and think the gap between what the Bank has forecast and reality will grow," says Toplis.
10 Comments
A sad state of affairs, and big crocodile tears from me for the govern cabinet members whose on average 3 houses each rental incomes may not have kept up with inflation.
Putting the "Stagger" in Stagflation. Why economists said to avoid it, but prior Govt and RBNZ policy were deaf.
For wages not to keep up with inflation is, ironically, a good thing in my opinion.
Perhaps, because i have been self employed for most of my working life, adjusting my spending to the vagaries of income swings, to stave off penury is now engrained behaviour.
There is regular comment on limits to growth in this forum. And I subscribe to the thinking that because continuous growth is an exponential curve, it cannot be sustained ad infinitum.
We can't have it both ways - increasing input costs and increasing incomes to match. That's a wage/price spiral.
Businesses may have little option than to increase selling prices due to increasing input costs. Yet consumers have within their power to accept (buy at higher price) or reject those cost increases. If rejecting, demand falls for the given product/service and profitability declines for the provider. Perhaps leading to business down sizing or closure.
I think it is time for another economy structural adjustment. Ideally not as rapid or brutal as under Roger Douglas and Ruth Richardson. And this time aimed at the key drivers of what has got us to this critical point.
Possible targets would be:
Banks and lending. Perhaps a 15% debt forgiveness across the board.
De-commodifying housing by abolishing interest deductibility for investment housing.
Reintroduction of death duties and stamp duties on property transactions.
Some form of means testing national superannuation (affects me)
That we can continue on the current trajectory of wages increasing to match or exceed price inflation is, in my opinion, gravely delusional.
But remember people saying it was completely sustainable for house prices to double every 10 years (meaning 7% annual growth), while wages only went up cira 2%? If fact, it was more something to 'celebrate'.
And if anyone said it was complete stupidity that would have extremely bad long term impacts was ridiculed as a 'doom gloom merchant' (DGM). They wouldn't believe you even if you pointed out that from a cash flow basis it was impossible - it was only possible from 1990's - 2020 because of 3 decades of falling interest rates. As soon as interest rates went flat or started rising, the emperor would be exposed as being naked. As we are seeing post COVID - as some of us here warned about to prior to it occurring, despite being laughed at for predicting such a situation.
Many people wanted these problems because they didn't want to think long term and beyond their own net worth (in property) - so as far as I'm concerned, we are reaping what we sowed.
Pain follows stupidity.
From Tony Alexanders weekly review today:
"Perhaps a key thing worth noting is that this may be one of the sectors where people are getting on with their lives despite the woe presented on our country in mainstream media. Having been in this business since the mid-1980s I can observe that the popular negativism about our economy and everything in it is far greater than seen before but without the actual degradation people have been convinced is newly occurring.
The best example of this disconnection between media position advocacy and reality can be seen with regard to the cost of living “crisis”. On average since 2019 the cost of living in New Zealand as measured by the Consumers Price Index has risen by 30%. Average hourly ordinary time earnings have risen by 36%.
That means real wages have risen on average 1% a year since the end of 2019. The long-term average rate of growth in this measure of inflation adjusted earnings has been 1%. Despite high inflation above 7% in 2022 people’s disposable incomes are improving."
Asked Chat GPT to calculate a 4% CPI cost increase to superannuation:
The Government's forecast spending on NZ Super in 2025/26 is about NZ$23.1 billion per year.
Using that figure:
- Annual NZ Super expenditure: $23.1 billion
- Increase: 4%
- Additional annual cost:
- $23.1 billion × 4% = approximately $924 million per year
So the increase would cost the Government about NZ$0.9–1.0 billion per year.
However NZ Super isn't calculated from CPI
The after-tax NZ Super rate for couples (who both qualify) is based on 66% of the ‘average ordinary time wage’ after tax. For single people, the after-tax NZ superannuation rate is close to 40% of that average wage.
NZ Super adjustments are calculated from CPI. There is a second rule that the pension cannot be below 66% of the average wage, or above 72.5% of the average wage. With CPI above wage growth, this year the pension increased faster than wages.
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