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Quarterly Employment Survey - Dec Q 1999

Quarterly Employment Survey - Dec Q 1999

Data Flash (New Zealand) Quarterly Employment Survey - Dec Q 1999

Key Points

Average ordinary time hourly earnings in the private sector (the RBNZ's wage forecast variable) fell by 0.8% qoq during the December quarter, following a 1.2% qoq increase in Q3.

The annual rate of private sector wage inflation was 1.4%, down from 3.0% during the September year.

Commentary

Statistics NZ attributed a significant portion of the Q4 average earnings result to compositional effects, with rapid employment growth (+1.4% qoq) having occurred mainly in low wage sectors. A similar compositional effect was apparently behind Q3's surprisingly high increase of +1.2% qoq.

The question is how meaningful those raw figures are and what the underlying trend rate is. Statistics NZ points to the Labour Cost Index (LCI) as a better measure of wage inflation. However, that variable is really a proxy for unit labour costs, given that, for the purpose of compiling the index, increases in paid wages are being adjusted for changes in productivity and job specifications. According to the LCI, unit labour cost growth has been around 1.5% p.a. Using latest GDP and hours worked data, aggregate productivity growth over the past year has been 1.0%, which suggests that the change in wages underlying the LCI would have been around the 2.5% mark. That appears to be a plausible estimate, considering past cycles and the increasing tightness of the labour market that has emerged during the second half of 1999.

Today's data suddenly makes the RBNZ's November forecast of a modest rise of 1.9% in average hourly wages for the year to March look achievable. In terms of the bottom-line number, significant compositional effects have been offsetting the Bank's forecast error with respect to underlying wage pressure arising from stronger-than- expected employment growth. The Bank expected a Q4 unemployment rate of 6.9%, compared to an actual figure of 6.4%.

The RBNZ is likely to go through the same calculations as above in an attempt to identify the underlying trend in labour cost growth. With both hourly wage and productivity data giving unreliable messages, the LCI is likely to receive increasing attention as a labour cost measure. We expect next week's Q4 result to show a continued LCI trend growth rate of around 1.5% yoy - significantly above the RBNZ's zero change projections for unit labour costs in both 1999 and 2000. In summary, today's result is unlikely to carry significant weight in the Bank's decision-making process regarding the March Monetary Policy Statement. We continue to expect a 50 bps cash rate tightening in March, driven primarily by capacity utilisation running ahead of expectations and concerns about the underperforming NZD. As Dr Brash noted last week, he wants cash to return to neutral `fairly quickly', with `neutral' being in the 6.0-6.5% range.

Ulf Schoefisch, Chief Economist, New Zealand, (64) 9 351 1375

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ENDS


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