Wages rising faster than expected

New information on the job market shows wages rising faster than economists had been expecting, raising concerns that inflation could also pick up at a brisker pace.

The figures come out of the September quarter labour cost index (LCI) and quarterly employment survey (QES) published today by Statistics New Zealand (SNZ).

BNZ economist Craig Ebert said that by far the biggest message in the reports was that wage inflation was picking up, as shown by a 0.6 percent rise during the quarter in private sector salaries and wages as measured by the LCI.

That was significantly faster than the 0.4 percent advance expected by the market, and was a pretty solid result for a unit labour cost proxy, particularly this early into a recovery.

While the public sector LCI rose a "relatively sedate" 0.3 percent in the September quarter, that simply seemed to be evidence that the general government sector was capping public sector pay rises, as it promised to do.

That was happening among rising budget deficits, and followed a long period of strong public sector pay outpacing the private sector, Mr Ebert said.

It might be argued that the pickup in private wages mainly reflected a catch up phase, following wage freezes that appeared to be in favour during the depths of the recession.

"However, it seems a dangerous game to be finding excuses on inflation."

Along with the headline results, much else in the LCI report suggested things had definitely been turning up since the start of 2010, Mr Ebert said.

For example, the proportion of wage and salary rates rising on an annual basis had risen to 49 percent, from 43 percent.

ASB economists Jane Turner and Christina Leung said they expected a recovery in wage growth would underpin a rise in underlying inflation during the coming years.

But inflation pressures were unlikely to become apparent until the end of the year, at the earliest, while softness in recent activity data reduced the urgency for the Reserve Bank to raise the official cash rate.

While wage growth had been stronger than expected in the September quarter, measures of employment demand in the QES were slightly weaker than anticipated, the ASB economists said.

The two key measures of labour demand in the QES were the growth in paid hours, and the growth in full time equivalent (FTE) employees.

During the September quarter growth in both those measures was more subdued than expected, with total hours paid up 0.2 percent, and the number of FTE employees flat on a seasonally adjusted basis.

But the softer result did follow two quarters of very strong growth, while employment intentions from business confidence surveys continued to point to continued recovery in labour demand, the ASB economists said.

"We remain confident that employment growth will continue to recover, albeit gradually, over the next year, helping lay the foundations for a more self-sustaining recovery."