Growth in pay rates slows down to a crawl

Wage growth slowed to a crawl in the June quarter as the recession sank its teeth into the labour market.

The labour cost index recorded the smallest quarterly increase, 0.3 per cent, in private sector salaries and ordinary time wage rates since December 1999. That cut the annual increase to 2.6 per cent, down from a peak of 3.7 per cent in September last year.

Even the raw number, which includes elements of pay increases that reflect individual merit and not just the rate for the job, was the weakest since 1999 at 0.6 per cent for the quarter.

The figures were weaker than the Reserve Bank expected in its June forecasts. Its preferred measure of underlying wage inflation was 2.7 per cent for the year to June, down from 3.1 per cent for the year to March and barely higher than the 2.6 per cent it had forecast for the year to March next year.

The proportion of wage and salary earners getting no increase at all over the past year, at 45 per cent, is the highest since September 2003 and among those who did get a rise, the average increase of 3.9 per cent was the lowest since December 2004.

"The scene is set for even weaker wage growth as the bulk of employees receive their pay increases later in the year," Westpac economist Donna Purdue said.

"Our forecasts see growth in annual private sector salary and wage rates slowing from 2.7 per cent currently to 1.8 per cent by March 2010."

Meanwhile Statistics New Zealand's quarterly employment survey, also published yesterday, shows equally comprehensive weakness.

Total gross earnings - Kiwis' collective wage and salary incomes - were up just 1 per cent in the year to June, compared with an increase of 7 per cent in the year to June 2008.

It reflected fewer employees working shorter hours for rates of pay that had increased by less than in previous years.

The number of employees, in full-time equivalent terms, was down 0.7 per cent on March and 3.2 per cent on June last year. Paid hours were down 1.2 and 3.4 per cent respectively.

Official unemployment figures from the June household labour force survey, due tomorrow, are expected to show a sharp rise in the unemployment rate as employment shrinks and the working age population is boosted by fewer New Zealanders leaving for greener pastures abroad. Some economists are picking a rise from 5 per cent now to 5.7 or 5.8 per cent.

ASB chief economist Nick Tuffley said if the pace of decline evident in the June quarter continued, the downward pressure would be a substantial drag on economy-wide inflation pressures.

That would present a further challenge to the Reserve Bank to keep inflation around the mid-point of the 1 to 3 per cent target band rather than near the bottom, he said.

Bank of New Zealand economist Craig Ebert said how high the unemployment rate got would be moderated by the negotiability of wage and salary rates at play in this recession.

He said sharing the pain in that way was a better way of managing things.

SMALL GAINS
* Private sector ordinary time wage rates rose just 0.3 per cent in the June quarter, the smallest increase in nearly 10 years.
* Economists see the weak wage growth as evidence firms are trying to manage weak demand through pay freezes rather than redundancies where they can.
* Tomorrow's jobs figures are still expected to be ugly.