WAGE GROWTH - MARCH 2006 QUARTER

8 May 2006

Background

This report examines the wage growth measures for the March 2006 quarter from the Labour Cost Index (LCI) and Quarterly Employment Survey (QES), which were released by Statistics New Zealand on 8 May. A technical note and data tables are included in the appendices.

There are three measures of wage growth that we examine:

1. the adjusted LCI
2. the experimental unadjusted LCI
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 job positions. The LCI is the preferred measure of wage growth. The LCI has two measures of wage growth: changes in pay related to the performance of individual employees are excluded from the adjusted LCI but included in the unadjusted LCI.

Key points

Wage growth remains high...

All measures of wage growth stayed very high or rose further in the March 2006 quarter as a lagged response to the tightening of the labour market in 2004 and 2005 (see Table 1 and Figure 1 below):

1. Wage growth in the adjusted LCI (which excludes performance pay) rose to 3.3% in the year to March 2006 (Figure 1). This is up from 3.0% in the year to December 2005 and is the highest since the LCI began in 1992. During the year to March 2006, nearly half (46%) of all pay rates rose by more than 3%, the highest proportion since the LCI began.
2. The experimental unadjusted LCI (which includes performance pay) shows wage growth of 5.7% in the year to March 2006, the highest figure since the series started, and up from 4.7% a year earlier. The increased gap between the adjusted and unadjusted LCI suggests there may have been a further rise in labour productivity growth.
3. The wage growth measure from the QES was also strong at 5.2% in the year to March 2006, down only slightly from a 15-year high of 5.4% in the year to December 2005.

Fig 1: Wage Growth Measures

Source: LCI, QES, Statistics New Zealand

 

Table 1: Key wage growth results, annual % change

Years to March	2001	2002	2003	2004	2005	2006
Adjusted LCI	1.8%	2.0%	2.3%	2.2%	2.5%	3.3%
Unadjusted LCI	3.6%	3.9%	4.2%	4.2%	4.7%	5.7%
QES average wages	3.1%	3.6%	2.3%	3.3%	3.6%	5.2%

Source: Statistics New Zealand

Higher consumer price inflation may also be boosting wage demands. The Consumers Price Index rose by 3.3% in the year to March 2006 after rising by 2.8% the year before and 1.5% in the year to March 2004.

Wage growth in real terms (unadjusted LCI deflated by inflation) in the last six years has been moderate at about 1.5%-2.0 per annum. This trend has broadly matched labour productivity growth, which makes it possible to increase real wages without raising inflationary pressure.

The rise in wage growth has been driven by occupations and industries with the most severe skill shortages, such as professionals in health and trades workers in construction (see Table 3 in Appendix II). Wage settlements for nurses drove a large wage rise of 7.3% for health professionals. Wage growth remained high at 3.8% for building trades workers and rose to 3.9% for metal and machinery trades workers in the year to March 2006.

For semi-skilled occupations, customer services clerks had the strongest annual wage growth, recording a 4.0% rise in the year to March 2006. Salespersons, demonstrators and models recorded the lowest annual wage growth of any occupation, although a rise in wages of 2.4% in the year to March 2006 is still historically high.

The QES shows higher annual growth in average hourly earnings for females (5.7%) than for males (4.9%). This has led to a rise in female wages as a proportion of male wages to 87.0% in the March 2006 quarter, the highest since the QES began in 1989. However, this increase is possibly influenced by changes in the composition of employment, including a shift from part-time to full-time work for females (especially in the education industry).

...and this high wage growth is set to continue

Wage growth is expected to stay high despite the slowing of economic growth and easing of skill shortage indicators during the past year. It can take 1-2 years for changes in the labour market to affect wages due to the lags involved in wage negotiation, so current wage growth reflects labour market conditions in late-2004 and early-2005.

High skill shortages through to early-2005 will help support wage growth in the short-term. The recent easing of skill shortage indicators (eg from the Quarterly Survey of Business Opinion and Job Vacancy Monitor) suggest wage growth may moderate by late-2006, although it is more likely that the continued low unemployment rate will keep wage pressures high into 2007.

Upside risk to future employment results

The QES also includes information on employment that can be used as a guide for the upcoming Household Labour Force Survey (HLFS). The QES shows robust growth in filled jobs of 0.6% in the March 2006 quarter, which suggests that HLFS employment growth was fairly strong, compared to our preview forecast of 0.1%.

It should be noted that employment growth in the QES and HLFS are often different because they: measure employment in different ways (number of jobs in the QES and number of workers in the HLFS), they are recorded at different time periods, and the QES excludes agriculture and fishing.

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.

In 2003, Statistics New Zealand changed the reference quarters in the QES to bring them into line with other surveys. Therefore, the February, May, August, and November quarters have become the March, June, September, and December quarters. This is a change in name only as the survey period is unchanged.

In addition, Statistics New Zealand has updated the QES sample design. Previously a firm was included in the sample if it had one full-time equivalent (FTE) employee. Now a firm is in the sample if it has an employee count (EC) of one, irrespective of whether the employee is part-time or full-time. The EC is a more timely method of including businesses in the QES sample as it is taken from tax data, which is updated monthly. When FTEs were used, firms were added or removed from the sample only once a year. The adoption of ECs in the sample design has not changed the outputs produced in the QES, but has caused downward revisions in some series. Estimated averages, such as average hourly earnings, have not been significantly affected.

APPENDIX II: DATA TABLES

Quarterly Employment Survey - March 2006 quarter

Table 2a: AVERAGE HOURLY EARNINGS BY SECTOR ($)

	Number	Annual Change		Quarterly Change
		#	%	#	%
Private Sector	28.42	1.99	7.5	1.4	5.2
Public Sector	20.01	0.86	4.5	0.12	0.6
Total	21.63	1.07	5.2	0.28	1.3

 

Table 2b: AVERAGE HOURLY EARNINGS BY REGION ($)

	Number	Annual Change		Quarterly Change
		#	%	#	%
Auckland	22.57	1.13	5.3	0.30	1.3
Wellington	24.26	0.68	2.9	-0.09	-0.4
Canterbury	20.79	1.21	6.2	0.23	1.1
Rest of New Zealand	20.12	1.04	5.5	0.41	2.1
Total	21.63	1.07	5.2	0.28	1.3

Table 2c: AVERAGE HOURLY EARNINGS BY Gender ($)

	Number	Annual Change		Quarterly Change
		#	%	#	%
Males	22.96	1.07	4.9	0.13	0.6
Females	19.97	1.08	5.7	0.43	2.2
Total	21.63	1.07	5.2	0.28	1.3

 

Table 2d: AVERAGE HOURLY EARNINGS BY INDUSTRY (000s of jobs)

	Number	Annual Change		Quarterly Change
		#	%	#	%
Forestry and Mining	23.74	1.60	7.2	0.83	3.6
Manufacturing	20.52	0.94	4.8	0.21	1.0
Electricity, Gas and Water	31.47	2.39	8.2	1.02	3.3
Construction	19.12	0.74	4.0	-0.10	-0.5
Wholesale Trade	22.52	1.06	4.9	-0.07	-0.3
Retail Trade	14.90	0.65	4.6	-0.04	-0.3
Accomodation, Cafes and Retaurants	13.68	0.20	1.5	0.10	0.7
Transport, Storage and Communications	21.68	1.60	8.0	0.92	4.4
Finance and Insurance	29.38	0.64	2.2	0.51	1.8
Property and Business Services	25.15	1.75	7.5	0.13	0.5
Government Administration and Defence	27.30	0.94	3.6	0.10	0.4
Education	28.90	2.76	10.6	2.73	10.4
Health and Community Services	22.60	1.44	6.8	0.41	1.8
Cultural and Recreational Services	21.82	-0.52	-2.3	-1.33	-5.7
Personal and Other Services	20.43	0.33	1.6	0.14	0.7
Total	21.63	1.07	5.2	0.28	1.3

 

Table 2e: FILLED JOBS BY INDUSTRY (000s of jobs)

	Number	Annual Change		Quarterly Change
		#	%	#	%
Forestry and Mining	12.0	-1.1	-8.4	0.2	1.7
Manufacturing	241.3	-4.3	-1.8	1.3	0.5
Electricity, Gas and Water	7.3	-0.2	-2.7	-0.1	-1.4
Construction	114.9	4.1	3.7	3.2	2.9
Wholesale Trade	112.8	1.6	1.4	-1.4	-1.2
Retail Trade	242.5	10.4	4.5	-0.2	-0.1
Accomodation, Cafes and Retaurants	111.3	12.1	12.2	7.8	7.5
Transport, Storage and Communications	103.4	3.3	3.3	2.7	2.7
Finance and Insurance	53.8	4.4	8.9	2.9	5.7
Property and Business Services	208.0	-2.7	-1.3	0.8	0.4
Government Administration and Defence	58.8	3.4	6.1	0.6	1.0
Education	118.7	-6.6	-5.3	-31.1	-20.8
Health and Community Services	183.5	1.7	0.9	-3.0	-1.6
Cultural and Recreational Services	48.0	4.9	11.4	3.5	7.9
Personal and Other Services	66.5	6.0	9.9	1.7	2.6
Total	1682.8	36.9	2.2	-11.1	-0.7

 

Adjusted Labour Cost Index - March 2006 quarter

Table 3a: ALL SALARY & WAGE RATES BY SECTOR

	Annual Change	Quarterly Change
	%	%
Public Sector	4.0	0.4
Private Sector	3.0	0.6
Total	3.3	0.7

Table 3b:ALL SALARY & WAGE RATES BY OCCUPATIONAL GROUP

	Annual Change	Quarterly Change
	%	%
Legislators, Administrators & Managers	2.9	0.7
Professionals	4.1	0.8
Technicians & Associate Professionals	2.8	0.5
Managers, Professionals & Technicians	3.3	0.7
Clerks	3.0	0.7
Service & Sales Workers	3.2	0.5
Clerks, Service & Sales Workers	3.0	0.6
Agriculture & Fishery Workers	3.2	0.5
Trades Workers	3.7	0.7
Plant & Machine Operators & Assemblers	3.0	0.4
Elementary Occupations	3.2	0.6
Other Occupations	3.2	0.5
Total	3.3	0.7

Table 3c:ALL SALARY & WAGE RATES BY INDUSTRY

	Annual Change	Quarterly Change
	%	%
Agriculture	2.8	0.4
Forestry & Logging	0.8	0.1
Agriculture, Forestry & Fishing	2.4	0.4
Mining	3.9	0.3
Food, Beverage & Tobacco Manufacturing	2.5	0.8
Textile & Apparel Manufacturing	2.6	0.3
Wood & Paper Product Manufacturing	2.3	0.5
Printing, Publishing & Recorded Media	2.3	0.7
Petroleum, Coal, Chemical, Associated Product Manufacturing	3.1	1.1
Non-metallic Mineral Product Manufacturing	3.4	0.4
Metal Product Manufacturing	3.1	0.3
Machinery & Equipment Manufacturing	2.6	0.4
Furniture & Other Manufacturing	3.7	0.5
Manufacturing	2.7	0.5
Electricity, Gas & Water Supply	4.0	1.5
Construction	4.1	0.6
Wholesale Trade	2.6	0.9
Retail Trade	3.3	0.4
Accommodation, Cafes & Restaurants	2.0	0.5
Transport & Storage	3.0	0.3
Communication Services	2.2	0.5
Finance & Insurance	4.5	1.4
Property & Business Services	2.8	0.5
Central Government Administration & Defence	2.9	0.1
Local Government Administration	3.9	0.9
Government Administration & Defence	3.0	0.3
Education	4.0	0.6
Health & Community Services	4.9	1.0
Cultural & Recreational Services	3.5	0.9
Personal & Other Services	3.6	1.5
Total	3.3	0.7