WAGE GROWTH - December 2006 QUARTER

05 February 2007

Background

This report examines the wage growth measures for the December 2006 quarter from the Labour Cost Index (LCI) and Quarterly Employment Survey (QES), which were released by Statistics New Zealand on 5 February. A technical note and data tables are included in the appendices.

There are three key measures of wage growth that we examine:

1. the adjusted LCI (excludes performance pay)
2. the unadjusted LCI (includes performance pay)
3. average hourly earnings from the QES

The QES is affected by changes in the composition of the workforce as well as changes in pay rates, while the LCI measures changes in pay rates for a fixed set of jobs. The LCI is, therefore the preferred measure of wage growth because it reflects changes in salary and wages for the same quality and quantity of work.

Key points

Wage growth remains high...

The latest figures show wage growth weakened slightly but remained high in the December 2006 quarter (Figure 1):

1. Annual wage growth in the adjusted LCI (which excludes performance pay) remained high at 3.2% at December, a similar increase to that recorded at September and June 2006. This is down from 3.3% at March 2006, which was the highest since the LCI began in 1992.
2. The unadjusted LCI (which includes performance related pay increases) shows annual wage growth of 4.9% at December 2006, down from 5.1% at September 2006 and a peak of 5.7% at March 2006.
3. Annual wage growth in the QES measure fell to 4.9% at December 2006, down from 5.1% at September 2006, but up on the 4.4% measured at June 2006. The QES measure is volatile because it is affected by changes in the composition of employment.

Fig 1: Wage Growth Measures

Source: LCI, QES, Statistics New Zealand
Data Table for Figure 1

Fig 2: Wage Growth and Skill Shortages

Source: LCI, QES, Statistics New Zealand; QSBO, NZIER
Data Table for Figure 2

Although some of the main wage growth measures have eased, the easing was small and other wage indicators stayed high.In the year to December 2006, 45% of all salary and ordinary-time wage rates rose by more than 3% and the median (ie middle) increase of all wage rates that rose was 4.2%. Both of these figures are the highest since the start of the adjusted LCI.

Wage growth increased slightly in the private sector from 3.0% in the year to September 2006 to 3.1% in the year to December 2006. In contrast wage growth in the public sector fell from 3.9% in the year to September 2006 to 3.6% in the year to December 2006.

Wage growth in real terms was high at 2.3% in the year to December 2006, with 4.9% wage growth (unadjusted LCI) offset by consumer price inflation of 2.6%. Real wage growth during the last five years has averaged about 1.5% per annum which has broadly matched growth in labour productivity.

...but appears to be easing

Wage growth is likely to ease over the coming year (Figure 2). This outlook is based on the fall in skill shortages since late-2004 and the 1 to 2 year lag between skill shortages and wage growth (wages change infrequently and take time to be negotiated).¹

Despite some expected easing, wage growth is likely to stay high in the year ahead. Unemployment has remained very low, and workers will seek higher wages to make up for the recent rises in consumer price inflation.

Endnotes

1 A net 29% of firms had difficulty finding skilled staff at December 2006 (down from a net 61% at December 2004), according to the Quarterly Survey of Business Opinion (QSBO) from NZIER.

APPENDIX I: TERMS AND DEFINITIONS

The QES and LCI surveys both measure wage growth over time. However, the two surveys have different approaches to the measurement of wage growth, and therefore can often have different results. The LCI tends to show lower wage growth and be less volatile than the QES, but over time the two measures tend to move in the same direction.

The LCI is a quality controlled measure, and calculates the wage growth for a number of job descriptions, while the QES measures average wages. When the level or composition of employment changes, the average earnings data in the QES will be affected, while the LCI will be unaffected. For example, if employment falls and the job losses come from low paid jobs, the average earnings for those remaining in employment will rise (QES), even if individual rates of pay do not change (LCI).

Only changes in salary & wage rates for the same quality and quantity of work are reflected in the Labour Cost Index. The index excludes increases in pay due to service increments, merit promotions, or one-off payments in lieu of pay rises. Irregular bonuses and commissions are also excluded. Hence, performance or productivity-based bonuses are excluded from the index. The QES includes all shift, penal, other allowances and bonuses, paid leave, and commissions earned in the survey week. The experimental unadjusted LCI includes performance or productivity based bonuses (so does not adjust for quality changes like the adjusted LCI) but measures wage growth for a fixed quantity of work (so is not affected by compositional changes like the QES).

The LCI and QES have different sample sizes and are conducted at slightly different time points. The QES collects information relating to the pay-period ending on, or immediately before, 20 February, May, August and November, while the LCI collects information for the pay period ending on, or immediately before, the 15th of the same four months. Also, the QES excludes agriculture, hunting, and fishing, which are included in the LCI.