Strong wage growth good news for workers - a headache for Reserve Bank

Firms are having to pay up to secure staff in a struggle to fill vacant positions, Kiwibank chief economist Jarrod Kerr says. Photo / Supplied

The unexpected rise in unemployment will do little to ease Reserve Bank concerns about spiralling wage inflation, economists say.

Wage inflation, measured by the labour cost index (LCI), was 3.4 per cent in the year ended June 2022. Average ordinary time hourly earnings rose 6.4 per cent, StatsNZ said today.

That prompted Westpac economists to lift their expectations for the peak of the official cash rate.

They expect the Reserve Bank to lift the OCR to a peak of 4 per cent, by the end of this year - bringing there view in to line with others like the ANZ.

"The June quarter had the largest increase in LCI salary and wages rates since late 2008," StatsNZ business employment insights manager Sue Chapman said.

"Nearly two-thirds of roles surveyed in the LCI saw an increase in ordinary time wage rates in the year ended June 2022, the highest level since this series began in 1993."

That continued surge in wage inflation is a serious concern for the Reserve Bank, said ANZ economist Finn Robinson.

"The labour market is likely to remain a driver of persistently too-high domestic inflation over the next year, and with wages growing even faster than we or the RBNZ expected, the risk of a wage-price spiral is certainly not abating," he said.

"That should keep the RBNZ on track to hike the OCR to 4 per cent by the end of the year as per our forecasts."

Labour cost growth "soared" to a post-GFC high and there were more sizeable rises to come as workers sought compensation for the skyrocketing cost of living, said ASB senior economist Mark Smith.

Despite the slight easing of the unemployment numbers (still clouded by the Omicron effect) the labour market looked set to remain exceptionally tight heading into 2023, he said.

"A relaxation in tight labour market conditions is needed to cool inflation," Smith said.

The data pointed to the "RBNZ needing to increasingly lean on aggregate demand so as to cool medium-term inflationary pressure."

In other words, it would need to keep the squeeze on the economy with higher interest rates to ensure inflation begins to ease.

A better reflection of underlying wage pressure was the unadjusted Labour Cost Index, Smith said.

On this measure wage inflation for the private sector accelerated to 5.2 per cent in the June 2022 year, but still below the 7.4 per cent overall increase in the cost of living for households (7.3 per cent annual increase in the CPI).

Firms were having to pay up to secure staff as they struggled to fill vacant positions, said Kiwibank chief economist Jarrod Kerr.

Rising wages could add to the risk that inflation becomes embedded, economists say. Photo / 123RF

"In an environment of limited labour supply, and restrictions on sourcing foreign workers, the bidding up of wages to retain and attract workers is pushing official wage data higher," he said.

"In addition, the surge in the cost of living is hardening the argument from employees for decent pay rises this year."

BNZ head of research Stephen Toplis argued that the topline rise in unemployment shouldn't be completely ignored as noise and could potentially signal the beginning of some easing of labour market pressure.

"Overall, the detail of today's report suggests the labour market might be softening even faster than the Reserve Bank has anticipated," he said.

"This is not to say we are anywhere near approaching the RBNZ's goal of maximum sustainable employment but there are some signs that progress is starting to be made."

Of significant importance was the fact that there has now been no employment growth for three consecutive quarters, he said.

"In fact, cumulatively 3,000 jobs have been lost over that period. That said, it is difficult to see how employment can grow when the supply of labour is so restricted."

Jarden investment strategist and economist John Carran agreed, noting wages tend to lag changes in the unemployment rate.

"If the current weakening trend in employment and rise in unemployment continues, we may soon see upward pressures on wages ease, he said.

"Together with indications inflation pressures have peaked, slacker wage growth may cause the RBNZ to become less assertive in its monetary policy tightening later this year."

Meanwhile, Business NZ chief executive Kirk Hope warned that the tight market would continue to put businesses under pressure.

"Now is the time to make sure our immigration policy is working to welcome more international skills and workers, during a global war for talent," he said.

"Despite today's figures, there is simply not enough give in the labour market. We still have skill shortages across the board and net loss migration which is compounding the issue."

Despite working a record number of hours people are still not seeing real terms wage rises, New Zealand Council of Trade Union economist Craig Renney said.

"The labour market continues to be experienced differently by different communities. Unemployment fell for men, Māori, and Pacific peoples, but rose for women," said Renney.

Annually, the unemployment rate (not seasonally adjusted) for Māori fell to 5.5 per cent, from 7.8 per cent.