Wages Growth Strong

Thursday 13 November, 2008

For what it's worth – because clearly the data have been superseded by events - wages growth was quite strong during the September quarter and the year to September. Private sector ordinary time wage rates measured in the Labour Cost Index rose by 1.1% in the September quarter after rising 0.8% during the June quarter. The increase from a year ago was a record high of 3.7% compared with 3.3% one year ago and 2.9% two years ago. An alternative measure published by Statistics New Zealand which attempts more closely to track changes in wage rates for the same jobs recorded a rise for all sectors of 1.5% in the September quarter from 1.1% in the June quarter and 1.7% a year ago. The annual increase in this measure was 5.3% from 5.5% in the June quarter and 4.8% a year ago.

Private sector ordinary time earnings rose 1.1% in the September quarter after rising 2% in the June quarter and 1.3% in the September quarter of 2007. The annual rate of change was 5.2% from 5.4% in the June quarter and 3.7% year ago. The rate of increase is high but there are hints of a slowing in wages growth.

With the unemployment rate over the coming year likely to head towards 6% it seems fair to conclude wages growth is going to slow down and this will be one of the factors constraining household spending through 2009. Having said that however there are some positive things underway and what we can do is take some of the data from the Quarterly Employment Survey to get a feeling for how affordable houses are becoming.

Average weekly earnings for all individuals (not families and only those earning wages or salaries please note) across all industries rose to $919 in the September quarter from $910 in the June quarter and $873 a year earlier. The median dwelling sale price calculated using REINZ numbers was $333,000 in the September quarter. Comparing this price with average earnings one can calculate it would take 6.97 years to fully purchase the average priced dwelling. In the June quarter it would have taken 7.25 years. A year ago it would have taken 7.7 years. The latest result is the lowest since the March quarter of 2006 though as the graph below shows houses are still far less affordable than in previous years.

Note that over the time between 2003 and the June quarter of this year when this measure rose from around five years to seven years, residential construction costs rose 38%. (The measure of residential construction costs for the September quarter won't be released for another couple of weeks.) Over the same period of time the consumers price index rose by just 16% and average weekly earnings rose by 22%. This means about one quarter of the increase in the number of years taken to buy a dwelling over the past five years – or approximately half a year - can be attributed to higher construction costs.

Source: Tony Alexander, Chief Economist of the Bank of New Zealand.