WAGE GROWTH - December 2007 QUARTER

5 February 2008

Background

This report examines the wage growth measures for the December 2007 quarter from the Labour Cost Index (LCI) and the Quarterly Employment Survey (QES), which were released by Statistics New Zealand on 5 February 2008. 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); and
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 adjusted LCI is therefore the preferred and most commonly used measure of wage growth because it reflects changes in salary and wages for the same quality and quantity of work.

Key points

Wage growth at a record high

The latest figures show wage growth remained high in the December 2007 quarter as shown in Figure 1. Detailed results are:

1. Annual wage growth in the adjusted LCI (which excludes performance related pay increases) increased to 3.4% in the December 2007 quarter. This is the highest rate recorded since the LCI began in 1992 and is up from 3.1% in the September 2007 quarter. For more than two years, annual increases have remained at or above 3.0%.
2. The unadjusted LCI (which includes performance related pay increases) shows annual wage growth of 5.0% in the December 2007 quarter, up slightly from 4.8% at September 2007.
3. Annual wage growth in the QES measure increased to 4.1% for the year to December 2007, up from 3.9% 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

Other indicators from the LCI and QES also showed continued pressure on wages.

In the year to December 2007, 45% of all salary and ordinary-time wage rates rose by more than 3%, up slightly from 44% in the September 2007 quarter. The median increase of all wage rates that increased fell slightly to 4.0% from 4.1% in the September quarter which is marginally lower than the historical high of 4.2% recorded in the December 2006 quarter.

Wage growth in real terms was high at 1.8% in the year to December 2007, with 5.0% wage growth (unadjusted LCI) offset by consumer price inflation of 3.2%. Real wage growth during the last five years has averaged about 2.2% per annum which has been considerably higher than growth in labour productivity.
Annual wage growth in the private sector was 3.4% in the year to December 2007, the largest annual increase recorded by the LCI. Annual public sector wage growth increased slightly to 3.1% in December 2007 from 3.0% in September 2007. This is the third 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, as recorded by the QES, increased to 3.3% in the year to the December 2007 quarter from 3.0% in the year to the September 2007 quarter. In contrast, growth in female average hourly earnings increased only slightly from 5.1% to 5.2% over the same period. Over the past five years, growth in average hourly earnings for females has averaged 4.3% per annum compared to 3.7% for males.

Wage growth set to remain strong

Strong wage growth is likely to persist in the year ahead given the sustained low unemployment rate and hiring intentions remaining high. Furthermore, employers are continuing to report significant difficulty finding both skilled and unskilled labour^[1]. Figure 2 shows the historic relationship between skill shortage indicators and wage growth. Annual consumer price inflation rose above 3% in the December 2007 quarter which may also boost wage demands in the future

Endnotes:

1 According to the Quarterly Survey of Business Opinion (QSBO) from NZIER, a net 46% of firms had difficulty finding skilled staff at December 2007 (up from a net 29% at December 2006) while a net 33% of firms had difficulty finding unskilled labour in the Dec 2007 quarter, the highest result since March 2005.

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 - December 2007 quarter

Average hourly earnings by sector ($)

	Number	Annual Change		Quarterly Change
Sector		#	%	#	%
Public Sector	29.52	1.41	5.0	0.55	1.9
Private Sector	21.78	0.82	3.9	0.19	0.9
Total	23.32	0.92	4.1	0.22	1.0

Average hourly earnings by region ($)

	Number	Annual Change		Quarterly Change
Region		#	%	#	%
Auckland	24.45	1.01	4.3	0.17	0.7
Wellington	26.10	0.85	3.4	0.48	1.9
Canterbury	22.24	0.73	3.4	0.31	1.4
Rest of New Zealand	21.67	0.95	4.6	0.15	0.7
Total	23.32	0.92	4.1	0.22	1.0

Average hourly earnings by gender ($)

Gender	Number	Annual Change		Quarterly Change
		#	%	#	%
Males	24.72	0.76	3.2	0.19	0.8
Females	21.57	1.07	5.2	0.22	1.0
Total	23.32	0.92	4.1	0.22	1.0

Average hourly earnings by industry ($)

Industry	Number	Annual Change		Quarterly Change
		#	%	#	%
Forestry & Mining	24.81	0.01	0.0	0.49	2.0
Manufacturing	22.09	1.03	4.9	0.45	2.1
Electricity, Gas & Water	33.31	1.65	5.2	0.94	2.9
Construction	21.59	1.21	5.9	0.20	0.9
Wholesale Trade	23.96	0.57	2.4	-0.06	-0.2
Retail Trade	16.02	0.63	4.1	0.17	1.1
Accommodation, Cafes & Restaurants	15.06	0.62	4.3	0.24	1.6
Transport, Storage & Communication	22.68	0.90	4.1	0.39	1.7
Finance & Insurance	31.49	0.49	1.6	0.46	1.5
Property & Business Services	26.44	0.38	1.5	-0.14	-0.5
Government Administration & Defence	30.77	2.37	8.3	1.25	4.2
Education	28.13	0.85	3.1	0.05	0.2
Health & Community Services	24.70	1.41	6.1	0.44	1.8
Cultural & Recreational Services	24.19	0.53	2.2	0.41	1.7
Personal & Other Services	22.88	1.28	5.9	0.18	0.8
Total	23.32	0.92	4.1	0.22	1.0

Filled jobs by industry (000s of jobs)

Industry	Number	Annual Change		Quarterly Change
		#	%	#	%
Forestry & Mining	12.4	-0.3	-2.4	-0.4	-3.1
Manufacturing	236.0	1.3	0.6	7.7	3.4
Electricity, Gas & Water	7.4	0.2	2.8	0.2	2.8
Construction	129.1	8.4	7.0	1.7	1.3
Wholesale Trade	123.4	10.8	9.6	6.4	5.5
Retail Trade	239.3	0.0	0.0	8.0	3.5
Accommodation, Cafes & Restaurants	111.7	8.2	7.9	8.0	7.7
Transport, Storage & Communication	108.9	3.8	3.6	2.4	2.3
Finance & Insurance	55.8	1.5	2.8	3.1	5.9
Property & Business Services	239.0	15.9	7.1	10.3	4.5
Government Administration & Defence	61.9	2.3	3.9	1.1	1.8
Education	150.8	3.2	2.2	-0.2	-0.1
Health & Community Services	192.1	3.4	1.8	4.5	2.4
Cultural & Recreational Services	47.7	-1.5	-3.0	-1.2	-2.5
Personal & Other Services	68.5	2.8	4.3	1.1	1.6
Total	1783.9	60.1	3.5	52.5	3.0

Table 2: Adjusted Labour Cost Index - December 2007 quarter

All salary & wage rates by sector

	Annual change	Quarterly change
	%	%
Public Sector	3.1	0.9
Private Sector	3.4	1.1
Total	3.4	1.1

All salary & wage rates by occupational group

Occupational Group	Annual change	Quarterly change
	%	%
1 Legislators, Administrators & Managers	2.9	1.0
2 Professionals	3.1	0.7
3 Technicians & Associate Professionals	3.6	1.6
1,2,3 Managers, Professionals & Technicians	3.1	1.0
4 Clerks	3.1	0.8
5 Service & Sales Workers	5.0	1.8
4,5 Clerks, Service & Sales Workers	3.9	1.2
6 Agriculture & Fishery Workers	2.8	0.8
7 Trades Workers	3.6	0.9
8 Plant & Machine Operators & Assemblers	3.6	1.0
9 Elementary Occupations	3.2	0.9
6,7,8,9 Other Occupations	3.4	0.9
Total	3.4	1.1

All salary & wage rates by industry

Industry	Annual change	Quarterly change
	%	%
Agriculture	2.8	0.9
Forestry & Logging	2.2	0.1
Agriculture, Forestry & Fishing	2.8	0.8
Mining	5.1	1.1
Food, Beverage & Tobacco Manufacturing	3.1	0.7
Textile & Apparel Manufacturing	3.1	0.6
Wood & Paper Product Manufacturing	3.2	0.9
Printing, Publishing & Recorded Media	2.7	0.4
Petroleum, Coal, Chemical, Associated Product Manufacturing	3.3	0.8
Non-metallic Mineral Product Manufacturing	3.4	1.4
Metal Product Manufacturing	2.9	0.9
Machinery & Equipment Manufacturing	3.7	1.0
Furniture & Other Manufacturing	1.9	0.4
Manufacturing	3.1	0.8
Electricity, Gas & Water Supply	4.3	2.2
Construction	3.2	0.8
Wholesale Trade	2.8	0.6
Retail Trade	3.4	1.4
Accommodation, Cafes & Restaurants	1.8	0.5
Transport & Storage	3.2	0.9
Communication Services	0.6	0.3
Finance & Insurance	6.3	3.6
Property & Business Services	3.4	0.8
Central Government Administration & Defence	3.4	1.0
Local Government Administration	5.1	3.4
Government Administration & Defence	3.8	1.5
Education	2.5	0.2
Health & Community Services	4.1	1.9
Cultural & Recreational Services	3.3	1.0
Personal & Other Services	3.0	0.3
Total	3.4	1.1