WAGE GROWTH - March 2007 QUARTER

14 May 2007

Background

This report examines the wage growth measures for the March 2007 quarter from the Labour Cost Index (LCI) and Quarterly Employment Survey (QES), which were released by Statistics New Zealand on 7 May. 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 March 2007 quarter (Figure 1):

1. Annual wage growth in the adjusted LCI (which excludes performance pay) remained high at 3.1% at March 2007. This increase is similar to other increases recorded over the last 18 months. Over this period annual increases have remained above 3.0%, peaking at 3.3% in 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 4.5% at March 2007, down from 4.9% at December 2006 and a peak of 5.7% at March 2006.
3. Annual wage growth in the QES measure fell to 4.6% at March 2007, down from 4.9% at December 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 March 2007, 46% of all salary and ordinary-time wage rates rose by more than 3%, the equal highest percentage since the LCI began. In addition, the median (ie middle) increase of all wage rates that rose was 4.1%, marginally lower than the historical high of 4.2% recorded last quarter.

Wage growth increased slightly in the public sector to 3.8% in the year to March 2007 from 3.6% in the year to December 2006. In contrast, wage growth in the private sector fell slightly to 3.0% in the year to March 2007 from 3.1% in the year to December 2006.

Wage growth in real terms was high at 2.0% in the year to March 2007, with 4.5% wage growth (unadjusted LCI) offset by consumer price inflation of 2.5%. Real wage growth during the last five years has averaged about 1.5% per annum which has broadly matched growth in labour productivity.

The outlook for wage growth remains high

Wage growth is likely to remain high over the coming year. Unemployment has remained very low, and workers will seek higher wages to make up for rises in consumer price inflation. The current momentum in the economy also boosts the demand for labour and will encourage wage growth.

In addition, a strong rebound in skill shortage indicators over the last two quarters is likely to keep upward pressure on wages¹ Figure 2 shows the historic relationship between skill shortage indicators and wage growth.

The QES also includes information on employment that can be used as a guide for the upcoming Household Labour Force Survey (HLFS). After seasonal adjustment² , the QES shows growth in filled jobs of 0.0% in the March 2007 quarter. This result suggests potential further weakness in the labour market, following slight declines over the last few quarters (as measured by the HLFS). Per annum growth in filled jobs fell to 1.1% in March 2007 down from 1.8% per annum in December 2006. Until September 2006, QES filled jobs had not been below 2% per annum since June 2003.

Endnotes:

1 A net 41% of firms had difficulty finding skilled staff at March 2007 (up from a net 22% at September 2006), according to the Quarterly Survey of Business Opinion (QSBO) from NZIER.

2 The filled jobs series from the QES is seasonally adjusted by the Department of Labour.

APPENDIX I: Terms and definitions

The QES and LCI both survey wage growth over time. However, they 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 adjusted 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 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 changes in the composition of employment 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 and fishing, which are included in the LCI.