Data Flash - Labour Cost Index - Dec Q 1999
Data Flash (New Zealand) Labour Cost Index - Dec Q 1999
Private sector labour costs rose by 0.3% qoq in the December quarter, compared to an average market expectation of +0.5%.
The annual increase over the year was 1.5%, unchanged from the previous quarter.
Public sector labour costs rose by 0.6%, which caused the annual rate of increase to rise from 1.4% to 1.8%.
The RBNZ has been using average hourly earnings data as their key indicator of wage inflation. However, the indicator value of that variable has diminished during recent quarters as compositional influences have significantly distorted the data - due to employment growth having been skewed towards sectors with below-average wage rates.
That has put the focus on the Labour Cost Index (LCI), which is usually treated as a secondary indicator. The index is based on wage rates for a fixed sample of around 6,000 jobs and is therefore not affected by quarterly changes within the labour force. However, the LCI is not a pure wage measure, given that any surveyed increase in wage rates is adjusted down if part of the pay rise reflects an increase in productivity or a change in job specification. That effectively makes the LCI a unit labour cost index.
According to the LCI, unit labour cost growth has been 1.5% during 1999. That is significantly higher than the +0.2% projection for unit labour cost growth over the year to March 2000 underlying the RBNZ's November forecasts. The latter is based on the ratio of average hourly earnings and productivity. The two measures of unit labour costs are not strictly comparable, with the RBNZ's wage/productivity variable oscillating around the LCI over the cycle. However, conclusions about the plausibility of the RBNZ forecasts can be reached when analysing the projected deviation over the forecast period.
Consistent with movements over the last cycle and increasing labour market tightness, we expect the annual rise in the LCI to rise to 2% over coming years. The RBNZ's November forecast for unit labour costs over the next year was 2% lower than that. That is a significantly larger downside deviation than has occurred in the past (see chart) and suggests upside risk to the RBNZ inflation forecasts - both through higher wage inflation and a weaker-than-assumed productivity track.
An upward revision to the RBNZ's wage outlook would be consistent with the fact that the labour market has developed significantly stronger than expected by the Bank - with an unemployment rate in late 1999 of 6.3% compared to a forecast of 6.9%. A downward revision to the RBNZ's productivity growth forecast would be consistent with latest trends falling well short of the annual increase of around 1.5% expected by the Bank for 1999.
While the case for an upward revision to the RBNZ's unit labour cost track can clearly be made, we do not expect the Bank to make any significant changes. Instead, the issue is likely to be treated as an upside risk at this stage.
However, even without a marked change in the labour cost assumptions, there is likely to be a sizeable upward revision to the Bank's medium- term inflation outlook, due to significantly higher-than-expected capacity utilisation, a stronger world outlook than underlying the previous forecast, as well as an underperforming NZ dollar.
Such an outlook, to be published in conjunction with the expected 50 bps cash rate tightening, will add an extremely hawkish tone to the 15 March Monetary Policy Statement.
Ulf Schoefisch, Chief Economist, New Zealand, (64) 9 351 1375