WAGE GROWTH - September 2007 QUARTER

5 November 2007

Background

This report examines the wage growth measures for the September 2007 quarter from the Labour Cost Index (LCI) and Quarterly Employment Survey (QES), which were released by Statistics New Zealand on 5 November 2007. 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 related pay increases)
2. the unadjusted LCI (includes performance related pay increases)
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 remained high in the September 2007 quarter (Figure 1):

1. Annual wage growth in the adjusted LCI (which excludes performance related pay increases) fell slightly to 3.1% in the September 2007 quarter. This is down from 3.2% in June 2007. For more than two years, annual increases have remained at or above 3.0%. They peaked 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 4.8% in the September 2007 quarter, up slightly from 4.6% at June 2007 but down from a peak of 5.7% at March 2006.
3. Annual wage growth in the QES measure fell to 3.9% for the year to September 2007, down from 4.2% in the previous quarter.

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 average hourly earnings in the QES eased this quarter, the easing was small and wage indicators in the LCI stayed high. In the year to September 2007, 44% of all salary and ordinary-time wage rates rose by more than 3%, slightly down from the record high of 47% in the June 2007 quarter. In addition, the median increase of all wage rates that rose was 4.1%, marginally lower than the historical high of 4.2% recorded in the December 2006 quarter.

Wage growth in real terms was high at 3.0% in the year to September 2007, with 4.8% wage growth (unadjusted LCI) offset by consumer price inflation of 1.8%. Real wage growth during the last five years has averaged about 2.2% per annum which has been much higher than growth in labour productivity.

Annual wage growth in the public sector did not change between the June and September 2007 quarters, remaining at 3.0%. Private sector wage growth was 3.2% in the year to September 2007, the equal largest annual increase recorded by the LCI. This is the second consecutive quarter in which annual wage growth in the private sector was higher than in the public sector.

Growth in average hourly earnings for males fell to 3.0% in the year to the September 2007 quarter from 4.0% in the year to the June 2007 quarter. In contrast, female average hourly earnings increased from 4.5% to 5.1% over the same period. Over the past five years, growth in average hourly earnings for females has averaged 4.2% per annum compared to 3.7% for males.

Wage growth set to remain strong

Strong wage growth is likely to continue in the year ahead given the very low unemployment rate and the demand for labour remaining high. Furthermore, employers are continuing to report significant difficulty finding both skilled and unskilled labour¹. Figure 2 shows the historic relationship between skill shortage indicators and wage growth. Nevertheless, some minor easing is expected as a result of the large fall in consumer price inflation over the last year.

The QES also includes information on employment that can be used as a guide for the upcoming HLFS release. After seasonal adjustment², the QES shows growth in filled jobs of 0.6% in the September 2007 quarter. This result suggests that HLFS employment growth should be similar to that previously expected by the market.

Endnotes:

1 A net 41% of firms had difficulty finding skilled staff at September 2007 (up from a net 21% 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 and 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 pay increases (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.

APPENDIX II: DATA TABLES

Quarterly Employment Survey - September 2007 quarter

Average hourly earnings by sector ($)

	Number	Annual Change		Quarterly Change
Sector		#	%	#	%
Public Sector	28.97	1.39	5.0	0.23	0.8
Private Sector	21.59	0.74	3.5	0.28	1.3
Total	23.10	0.86	3.9	0.29	1.3

Average hourly earnings by region ($)

	Number	Annual Change		Quarterly Change
Region		#	%	#	%
Auckland	24.28	1.03	4.4	0.43	1.8
Wellington	25.62	0.30	1.2	0.05	0.2
Canterbury	21.93	0.65	3.1	0.14	0.6
Rest of New Zealand	21.52	1.02	5.0	0.25	1.2
Total	23.10	0.86	3.9	0.29	1.3

Average hourly earnings by gender ($)

Gender	Number	Annual Change		Quarterly Change
		#	%	#	%
Males	24.53	0.72	3.0	0.24	1.0
Females	21.35	1.03	5.1	0.36	1.7
Total	23.10	0.86	3.9	0.29	1.3

Average hourly earnings by industry ($)

Industry	Number	Annual Change		Quarterly Change
		#	%	#	%
Forestry & Mining	24.32	-0.42	-1.7	-0.06	-0.2
Manufacturing	21.64	0.65	3.1	-0.02	-0.1
Electricity, Gas & Water	32.37	1.40	4.5	0.38	1.2
Construction	21.39	1.39	7.0	0.41	2.0
Wholesale Trade	24.02	0.76	3.3	0.47	2.0
Retail Trade	15.85	0.66	4.3	0.32	2.1
Accommodation, Cafes & Restaurants	14.82	0.57	4.0	-0.14	-0.9
Transport, Storage & Communication	22.29	0.76	3.5	0.69	3.2
Finance & Insurance	31.03	0.36	1.2	-0.68	-2.1
Property & Business Services	26.58	0.32	1.2	0.12	0.5
Government Administration & Defence	29.52	1.81	6.5	0.62	2.1
Education	28.08	1.41	5.3	0.01	0.0
Health & Community Services	24.26	1.02	4.4	0.28	1.2
Cultural & Recreational Services	23.78	-0.10	-0.4	-0.03	-0.1
Personal & Other Services	22.70	1.42	6.7	0.51	2.3
Total	23.10	0.86	3.9	0.29	1.3

Filled jobs by industry (000s of jobs)

Industry	Number	Annual Change		Quarterly Change
		#	%	#	%
Forestry & Mining	12.8	0.1	0.8	1.1	9.4
Manufacturing	228.3	-6.4	-2.7	-6.3	-2.7
Electricity, Gas & Water	7.2	0.0	0.0	0.3	4.3
Construction	127.4	6.7	5.6	-2.2	-1.7
Wholesale Trade	117.0	4.4	3.9	2.9	2.5
Retail Trade	231.3	-8.0	-3.3	-9.3	-3.9
Accommodation, Cafes & Restaurants	103.7	0.2	0.2	-0.4	-0.4
Transport, Storage & Communication	106.5	1.4	1.3	-3.3	-3.0
Finance & Insurance	52.7	-1.6	-2.9	0.3	0.6
Property & Business Services	228.7	5.6	2.5	4.7	2.1
Government Administration & Defence	60.8	1.2	2.0	0.2	0.3
Education	151.0	3.4	2.3	3.9	2.7
Health & Community Services	187.6	-1.1	-0.6	1.1	0.6
Cultural & Recreational Services	48.9	-0.3	-0.6	4.4	9.9
Personal & Other Services	67.4	1.7	2.6	0.1	0.1
Total	1731.4	7.6	0.4	-2.6	-0.1

Table 2: Adjusted Labour Cost Index - September 2007 quarter

All salary & wage rates by sector

	Annual change	Quarterly change
	%	%
Public Sector	3.0	1.3
Private Sector	3.2	0.9
Total	3.1	0.9

All salary & wage rates by occupational group

Occupational Group	Annual change	Quarterly change
	%	%
1 Legislators, Administrators & Managers	2.6	0.7
2 Professionals	3.1	1.5
3 Technicians & Associate Professionals	2.8	0.7
1,2,3 Managers, Professionals & Technicians	2.9	1.0
4 Clerks	3.2	0.9
5 Service & Sales Workers	4.1	1.2
4,5 Clerks, Service & Sales Workers	3.6	1.1
6 Agriculture & Fishery Workers	2.7	0.7
7 Trades Workers	3.8	1.3
8 Plant & Machine Operators & Assemblers	3.8	1.1
9 Elementary Occupations	3.2	0.8
6,7,8,9 Other Occupations	3.6	1.0
Total	3.1	0.9

All salary & wage rates by industry

Industry	Annual change	Quarterly change
	%	%
Agriculture	2.7	0.9
Forestry & Logging	3.0	1.0
Agriculture, Forestry & Fishing	2.7	0.9
Mining	4.9	2.4
Food, Beverage & Tobacco Manufacturing	3.8	0.5
Textile & Apparel Manufacturing	3.2	1.2
Wood & Paper Product Manufacturing	3.5	0.8
Printing, Publishing & Recorded Media	3.4	1.2
Petroleum, Coal, Chemical, Associated Product Manufacturing	3.2	0.5
Non-metallic Mineral Product Manufacturing	3.0	0.7
Metal Product Manufacturing	3.1	1.1
Machinery & Equipment Manufacturing	3.8	1.2
Furniture & Other Manufacturing	2.2	0.6
Manufacturing	3.4	0.9
Electricity, Gas & Water Supply	2.8	1.6
Construction	3.2	1.0
Wholesale Trade	3.1	1.0
Retail Trade	2.9	0.7
Accommodation, Cafes & Restaurants	1.6	0.6
Transport & Storage	3.0	1.2
Communication Services	0.6	0.2
Finance & Insurance	4.8	0.4
Property & Business Services	3.2	1.1
Central Government Administration & Defence	3.3	1.5
Local Government Administration	2.3	0.4
Government Administration & Defence	3.2	1.3
Education	3.1	1.7
Health & Community Services	3.4	1.1
Cultural & Recreational Services	2.7	0.5
Personal & Other Services	3.0	1.0
Total	3.1	0.9