Labour costs accelerate, and keep an elevated floor under inflation

New Zealand's labour cost index came in slightly above market expectations
at 0.9%q/q (JPMorgan 0.8%, consensus 0.7%) for 3Q. The annual rate of total
wage inflation rose 3.1%, down slightly from 3.2% in 2Q. The annual rate of
private sector wages, however, accelerated to 3.3% (from 3.1%), and
continues to trend higher under an already inflated non-tradables measure
(chart). Not only is New Zealand's economy working at close to full
capacity, but the brain-drain of skilled workers to Australia and the
United Kingdom is keeping the pool of local skilled workers low and tight.
Rising wage inflation in such a tight labour force will prevent the RBNZ
from easing, and actually raises the risk of a further tightening. JPMorgan
continues to see the risk of a further tightening at 20-30%.

The mining boom in Australia has been the star attraction for Kiwi's
seeking to make six-figure salaries, even without a high skill base.
Unfortunately, from New Zealand's viewpoint, countries like Australia and
England are taking the best and brightest. Although net-permanent migration
has been positive since 2001 (more immigrants than emigrants), the
workforce is not being satisfactorily replenished. Of the 24 job categories
detailed by Statistics New Zealand in the migration reports, 18 are
regularly in deficit on a net-permanent annual average basis - even with
the absolute number of immigrants outweighing the number of emigrants. New
Zealand is losing skilled workers in place of people not considered part of
the labour force - children, students, retirees and housewifes (chart);
hence, the skill shortage.

Statistics New Zealand also released the Quarterly Employment Survey (QES)
for 3Q, which showed the annual increase in total gross earnings exceeded
the annual increase in total paid hours. This resulted in a 3.9%oya
increase in average total hourly earnings to $23.10.

New Zealand's labour report card due Thursday is likely to show a solid
employment gain of around 0.5%q/q (2.4%oya), keeping the unemployment rate
unchanged at an equal multi-decade low of 3.6% - further proof that the
Kiwi labour market remains airtight.

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