The latest Labour Costs Index, released by Statistics New Zealand this morning, shows a 1.1% increase in wage and salary costs for the past three months – and a 3.6% increase for the year to September.

That is the largest increase on both a quarterly and annual basis since the survey began in 1992.

Public and private sector increases are much the same – but within industry groups  the big increases show a clear surge within the public sector.

The two biggest increases are in the health and community workers sector – where by far the biggest employer is the state – and local government administration. These increases are, respectively, 5.7% and 5.4% for the year.

There has been some anticipation public sector unions would this year push for big wage and salary increases ahead of a probable change of government and a National-led administration which has talked of cutting government costs.

However, outside those two areas there has been little in the way of large increases.

The only other above trend increase was the predominantly private sector petrol coal and chemical and associated manufacturing employees, at 4.3%.

As well as being a record increase, the continued growth in wage and salaries was not expected – most economists were picking a tailing off after recent highs.

“The acceleration in wage growth was surprising given labour market conditions have eased this year,” JP Morgan economist Helen Evans says.

“Firms have been shedding human capital in a bid to cut costs as economic momentum has stalled. It appears, though, that employers have had to succumb to demands for higher wages as workers continue to battle with elevated food and petrol prices.”

Overall, the record increases could lead to the Reserve Bank holding off further interest rate cuts, or – more likely – not cutting as aggressively as some were anticipating. However the slowing economy is expected to lead to a downturn in wage and salary increases by the end of the year.

“It raises the hurdle for an official cash rate reduction, but the credit crunch will still easily clear that higher hurdle, so we haven’t changed our call, Westpac bank economist Dominick Stephens says. "We still continue to expect the Reserve Bank to reduce the OCR by half a per cent in December. 

“I would say this though: this data will be very, very frightening for them, but they’ve just got other fish to fry at present.”

The figures resoundingly settle the argument over whether wages would follow growth down or inflation up, as people are demanding compensation for the spiraling cost of living – successfully, because of the tight labour market.

“The reason is that while some workers are under the threat of layoff and don’t have a lot of bargaining power, most work within industries that have a chronic labour shortage and have reasonable bargaining power," he says..

Government statistician Geoff Bascand says the Quarterly Employment Survey (QES) results for September 2008 show the annual increase in total gross earnings continued to exceed the annual increase in total paid hours, resulting in a 5.5% increase in average total hourly earnings, to $24.37.

The mean increase for salary and ordinary time wage rates was 6.1%, compared with a mean increase of 5.8%t in the year to the June 2008 quarter, making it the largest annual mean increase since the series began.

Employment, as measured by full time equivalent employees (FTEs) grew 1.6%, the smallest amount for the September quarter since March 2007.