Wages and salaries rose by 1.9 per cent in the year to the December quarter, says Stats NZ, the lowest annual growth since June 2001.

The Labour Cost Index released today shows the decline in wage growth continued last year, with falls for the past 15 months.

Salary and wage rates - including overtime - for the public and private sectors grew in the year to the December 2009 quarter by 2.4 per cent and 1.6 per cent, respectively.

The public sector rise is the lowest since an identical increase in the year to the September 2004 quarter, while the private sector increase is the lowest since a 1.6 per cent rise in the year to the March 2001 quarter.

This slow-down in annual wage rate growth has occurred during a period in which the business demand for labour has declined, says Stats NZ.

The Quarterly Employment Survey results also released today show that for the year to the December 2009 quarter, employment, as measured by the number of full-time equivalent employees, decreased 2.5 per cent and filled jobs decreased by 1.7 per cent.

The manufacturing and construction industries were the main contributors to both these annual decreases.

ANZ economist Mark Smith said the soft wage growth was slightly weaker than market expectations for the December quarter.

"Wage growth is typically one of the last 'indicators' to turn as the economy slows and so the generally soft numbers today shouldn't really come as a surprise," said Smith.

"However, the speed at which wage growth has slowed has been reasonably pronounced. Employers are likely to have been rather pragmatic when it comes to staffing decisions during this cycle (perhaps due to memories of previous shortages in the previous cycle) and are often looking at other means - other than job losses - to contain the wage bill."

Limiting wage increases was one of the options that they had used, said Smith. "As such, we continue to expect that wage inflation will remain moderate going forward, even as the economy continues to gather forward momentum."

Today's data confirmed the ANZ's view that employment growth in Thursday's Household Labour Force Survey was likely to be weak.

"We expect that employment will remain flat (-0.1 per cent) and for the unemployment rate to rise to 6.8 per cent. While the level of the latter is modest by historical standards, it's near doubling since the late 2007 trough (3.5 per cent) represents a sizeable deterioration in labour market prospects."

The critical thing to watch for the labour market was the fact that the significant slack that was currently present within the current workforce could mean that the economic recovery is "less employment rich".

Firms would likely look to increasing their current workforces' hours rather than adjust absolute staffing levels, he said. "This would mean the unemployment rate could stabilise at a higher level than we had been accustomed to in past recoveries.

- NZ HERALD STAFF