Labour costs likely to jump

By BRIAN FALLOW

WELLINGTON - A tightening labour market has yet to put the squeeze on unit labour costs but economists expect the pressure to mount later this year.

Statistics New Zealand's labour cost index recorded a 0.3 per cent rise in private sector salary and ordinary time wage rates in the December quarter.

This was weaker than the 0.5 per cent the market had expected and kept the annual increase steady at 1.5 per cent.

The index measures changes in salary and wage rates for a fixed quantity and quality of labour. Service increments and merit increases are not reflected.

In the December quarter, 11 per cent of the surveyed private sector wage rates rose compared with 13 per cent in September and 11 per cent in the December 1998 quarter.

Statistics NZ said: "These figures indicate there has not yet been a general pick-up in the proportion of private sector pay rates increasing, or in the size of the increases, despite increases in the employment and decreases in the unemployment rate."

However, Bank of New Zealand economist Geoff Mason said wages tended to lag behind employment growth by several quarters.

"With difficulties in finding skilled labour building and unemployment set to fall below 6 per cent soon, for the first time since 1998, we expect increased wage pressures to become apparent in wages data later this year."

The Reserve Bank's November forecasts had wages growth roughly balanced by productivity growth for the current March year and next year, implying little pressure on labour costs, but those projections are looking increasingly wide of the mark.

Deutsche Bank chief economist Ulf Schoefisch expects unit labour costs over the next couple of years to run 2 per cent higher than the Reserve Bank forecasts. Nevertheless, he does not expect the bank to revise its wage inflation track up significantly in its March 15 forecasts, instead treating it as an upside risk.

Mr Schoefisch said that with capacity utilisation much higher than expected and the currency remaining weak the statement was still likely to be extremely hawkish, with the official cash rate to be raised 50 per cent.