Tight labour market boosts wage inflation

By Tracy Withers

New Zealand's annual wage inflation probably accelerated in the third quarter because a record-low jobless rate prompted companies to pay more for workers.

Ordinary time wages for non-government workers rose 0.8 per cent from the second quarter, when they gained 0.7 per cent, according to the median estimate of 12 economists surveyed by Bloomberg News.

From a year earlier, wages probably increased 3.1 per cent, matching a record. Statistics New Zealand will publish the figures at 10.45 this morning.

Rising wages may stoke consumer spending, adding pressure to inflation and ensuring Reserve Bank Governor Alan Bollard will not cut the benchmark interest rate anytime soon.

Bollard said last month a tight labour market might lead to sustained inflationary pressures.

Craig Ebert, senior markets economist at the Bank of New Zealand, said: "We can't see any real guarantee that inflation is going to come out of the system until the labour market comes off. Over the past 18 months, wage increases have started to show how tight the labour market is."

In September, Bollard forecast annual inflation of 3 per cent by the end of this year and 3.1 per cent a year later.

He is required to keep price increases between 1 per cent and 3 per cent.

Eleven of 16 economists surveyed by Bloomberg News say the central bank will keep the official cash rate unchanged at 8.25 per cent until at least June 30 next year. Three expect a cut before then and two predict an increase.

Wages rose 3.1 per cent in the year ended June 30, the biggest increase since the statistician began the series in 1992. They gained 2.5 per cent the previous fiscal year.

Pay rates are underpinned by a shortage of skilled workers, falling immigration and record-high workforce participation rates, which Ebert said meant most of the people wanting a job had one.

In the third quarter, 44 per cent of 456 companies surveyed by the New Zealand Institute of Economic Research said it was harder to find skilled workers than in the previous three months.

Job vacancies advertised in the major newspapers rose for a third straight month in September, suggesting employers are finding it harder to recruit workers.

Annual immigration growth fell to a 19-month low in September with arrivals exceeding departures by just 8309, according to a Government report on October 19.

A report on Thursday will probably show New Zealand's jobless rate remained at a record-low 3.6 per cent in the third quarter, according to the median estimate of 12 economists. The labour force participation rate rose to a record 68.8 per cent in the second quarter. Workers who stand to lose jobs at Fisher & Paykel Appliances and Cadbury Schweppes are unlikely to be out of a job for long, according to Ebert. "We've run out of employable people," he said. "There's so much demand that even when people lose their jobs they are just getting snapped up."

Total wages for non-government workers, which include overtime, probably also rose 0.8 per cent in the quarter for an annual gain of 3.1 per cent, according to six economists who forecast that series.

That is slower than the 3.2 per cent pace in the year ended June 30.

The central bank expects total wages will rise 3.1 per cent in the year ending March 31, 2008, according to its latest forecasts published on September 13. A second report due today will show average ordinary time hourly earnings for non-government workers rose 1.1 per cent in the third quarter, according to the median forecast of nine economists.

Hourly earnings rose 1 per cent in the second quarter.

WAGE PRESSURE

* Wages rose 3.1 per cent in the year ended June 30, the biggest increase since the statistical series began in 1992.

* A report this week is likely to show jobless rate remaining at a record low 3.6 per cent

- Bloomberg

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