Wage costs have record surge, may abate as economy slows

Monday 3rd November 2008

New Zealand wage costs rose by a record amount in the year ended September 30 as workers demanded compensation for higher household costs.

Wages for non-government workers, excluding overtime, rose 3.7% in the year to the September quarter, the biggest increase since Statistics New Zealand began the survey in 1992. Wages rose 1.2% in the third quarter from the second.

The increase probably won't be enough to deter the central bank from extending the steepest easing cycle since the official cash rate was introduced in 1999 because Governor Alan Bollard had predicted inflation would peak in the third quarter. Government figures on Thursday are expected to show the unemployment rate rose to 4.3% in the latest three months, from 3.9% in June.

"Workers will have less bargaining power to push for the wage increases they experienced over recent years," economists at ANZ Bank said. "We don't expect such wage growth to be sustained given the weakening labour market outlook. Wage inflation "will not stand in the way of further interest rate cuts."

Some 43% of those companies surveyed say they raised wages to make it for higher living costs such as food and fuel. Since the end of the third quarter, the cost of fuel has tumbled and prices of foods such as milk have declined.

Robin Clements, senior economist at UBS New Zealand, says he still predicts the central bank will cut the official cash rate by 50 basis points to 6% in December though the wages data "probably cautions against anticipating any further mega-cuts from the RBNZ."

By Jonathan Underhill

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