We have just published the following research.
Data Flash (New Zealand)
Labour Costs and Employment (Q2 2002)
Result: Average hourly earnings in the private sector fell by 0.1% qoq in Q1, which compared to market expectations of
+0.9%. The weak result can largely be attributed to compositional changes in the labour force, with a strong increase in
low-paying part-time positions. The Labour Cost Index, which we consider a measure of unit labour costs, showed a stable
trend, increasing by 0.5% qoq (2.0% yoy). Implication for markets: While the wage data may have been biased down to some
extent, the lack of a clear upward trend despite buoyant employment growth has added to the likelihood of the RBNZ
staying on hold on 14 August.
Commentary
With all eyes on the US equity markets and increasing talk about a potential Fed easing, today's labour market data
received comparatively little attention. The employment component of the Quarterly Employment Survey confirmed that the
New Zealand economy continued its strong performance during the June quarter. The 1.5% qoq increase in filled jobs and
the 1.5% qoq increase in hours paid (seas. adj.) suggest that Thursday's Household Labour Force Survey (HLFS), which is
the more comprehensive labour market survey, will show employment growth closer to 1% than the 0.4% we had estimated
prior to the receipt of today's data (see charts on next page). That suggests that our provisional estimate for Q2 GDP
of 1.0% may also be too low, i.e. the New Zealand economy is starting its slowdown in growth momentum from a
higher-than-expected level of activity.
As far as the RBNZ's decision-making is concerned, the higher-than-expected level of activity is being offset, however,
by positive news on the wage front. While the fall in average hourly earnings in Q2 can be dismissed as a statistical
phenomenon (driven by a strong increase in low paying jobs), the more reliable Labour Cost Index confirmed that there is
no upward trend in wage inflation, despite the tight labour market. The degree to which the previously tight
relationship between skill shortages and average hourly earnings has broken down (see chart above) is a bit of a
mystery. The relationship may well re-establish itself over time. For now, however, the tight labour market can be
downgraded as a source of concern for the RBNZ and today's data has made the decision to leave the OCR unchanged on 14
August even easier. As we pointed out last week, we assess the probability of a RBNZ rate hike at a later stage as
relatively low, given the transition to a new Governor and new PTA, as well as an increasing stream of data confirming
the slowdown in growth. We expect the OCR to stay at 5.75% over the next year, with a potential easing in late 2003 or
early 2004.
The data
Private sector average hourly earnings (ordinary time) fell by 0.1% qoq in the June quarter, as measured by the
Quarterly Employment Survey (QES). This result was significantly weaker than market expectations of a 0.9% qoq rise.
In seasonally adjusted terms, hourly earnings growth was flat, continuing the downward from previous quarters (+0.7% qoq
and +0.3% qoq respectively).
Private sector average hourly earnings were only 1.6% above last year's level. The rate of change peaked at 3.5% in
mid-2001. Average hourly earnings (ordinary time) in the public sector fell by 1.4% qoq to be 4.9% higher than a year
earlier. The relatively high number compared to the private sector reflects several `catch-up' wage settlements,
following several years of zero adjustments.
The combined wage movement (ordinary time) in the private and public sectors was -0.2% qoq, taking the annual rate from
3.7% to 2.5%.
The weak average hourly earnings data (which is not seasonally adjusted) was largely a function of compositional changes
in the labour force, with relatively low paying part-time jobs having increased by 5.5% qoq in Q2 (more than 50% of
those jobs were created in the education sector). Full time jobs increased by 0.9% qoq (raw data).
The result for the Labour Cost Index (LCI) confirmed the influence of compositional changes in the labour force on the
average wage result. The LCI adjusts for the changing composition of the labour market and for productivity growth, and
thus is best interpreted as a measure of unit labour costs. The LCI for the private sector showed a stable trend,
increasing by 0.5% qoq and 2.0% yoy.
Adjusting for seasonal factors, the Quarterly Employment Survey recorded a 1.5% qoq increase in paid hours (annual
increase +4.4%), suggesting some upside risk to our GDP estimate for Q2 of +1.0% qoq.
Ulf Schoefisch, Chief Economist, New Zealand