KEY POINTS:
Wages continued to grow strongly in the June quarter.
But as wage growth is the last cab off the rank during both upturns and downturns in the business cycle, yesterday's data did little to resolve a key disagreement among economists about how wage inflation will develop from here.
Private sector ordinary time wages and salaries rose 0.8 per cent in the quarter, which kept the annual increase at 3.5 per cent, as high as it has been since Statistics NZ began compiling these statistics in 1992.
The Reserve Bank's preferred measure, which includes overtime, rose 0.8 per cent in the quarter and 3.4 per cent over the year. While the annual rate was down from 3.5 per cent in the March quarter, the quarterly increase was higher than the March quarter's 0.7 per cent. So overall the out-turn is seen as in line with the bank's forecasts of wage inflation.
"There is nothing in [the] data to stand in the way of the Reserve Bank continuing to cut rates this year," ANZ National Bank chief economist Cameron Bagrie said.
The labour cost index is a "quality adjusted" measure of wage growth. It filters out pay increases which compensate an individual for becoming more proficient or better qualified, taking on more responsibility or other merit-based increases.
The unadjusted measure, which leaves those things in, is a better indicator of what is happening to payroll costs and take-home pay.
On an annual basis the unadjusted measure is running at 5.5 per cent, but the quarterly increases have been declining for the past year.
Pay rises are becoming more frequent; 61 per cent of wage and salary earners had an increase in the past year, the largest proportion in at least 10 years. The great majority (73 per cent) of the increases, representing 47 per cent of all pay rates, were over 3 per cent and a record 23 per cent were over 5 per cent.
A record 43 per cent of employers cited the cost of living as the reason for wage increases, far more than any other reason like matching market rates, or retaining or attracting staff.
ASB chief economist Nick Tuffley said that while employers were under pressure to compensate employees for rising food and fuel prices, falling profitability as they struggled with mounting costs and slowing demand was likely to keep a cap on wage growth.
"Indeed the Reserve Bank is betting on lower demand keeping these pressures in check," he said.
But for inflation hawks like Westpac chief economist Brendan O'Donovan that is wishful thinking.
With inflation set to climb to 5 per cent or more for the rest of 2008, wage inflation would also accelerate in consequence, he said.
"Our view that wages follow inflation rather than [economic] growth is backed by Reserve Bank research, by the tight relationship between inflation expectations and wages, and by historical experiences such as late 2005 and early 2006 when economic growth slowed but wages accelerated sharply."
However the doves, like the Bank of New Zealand and ANZ National Bank, maintain it is only a matter of time before the weak state of economic activity flows through to fewer jobs and more modest pay rises.
"It is still possible that we see further gains in wage inflation over the coming quarters, particularly for industries with skill shortages such as health and information technology," Bagrie said. "Nevertheless we are of the view wage inflation is at, or very close to, its peak."
Firms were reporting less difficulty in finding staff, he said, and as the unemployment rate rose employees would have less bargaining power.
BNZ economist Craig Ebert said that to wait for the evidence that the steam had gone out of wage inflation before easing would be at least a year too late.
The financial markets regard another 25 basis point cut on September 11 as a done deal, with a 25 per cent chance it will be 50 basis points.