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When times are tough, wage growth slows

The labour cost index (LCI) for salary and wage rates (including overtime) increased by 0.3 percent in the June 2009 quarter, which is the lowest quarterly increase since an identical increase in the June 1999 quarter. This article examines periods during which quarterly salary and wage growth was low, in the context of the prevailing economic circumstances. Since the early 1990s, there have been three instances where domestic and international events have resulted in relatively low wage rate growth. This article focuses on the following periods of relatively low wage-rate growth:

  • economic adjustment (September 1991 quarter–June 1995 quarter)
  • Asian crisis (September 1997 quarter–June 2001 quarter)
  • global financial crisis (June 2009 quarter–present day).

Figure 1

 

 

These three periods of low growth can be seen in figure one, which shows the quarterly movements of the prevailing weekly wage rates index (PWWRI) and the LCI. The PWWRI measured changes in wage rates until it was superseded by the LCI after the December 1992 quarter.

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About the LCI

The quarterly LCI measures change in salary and wage rates. Along with the producers price index and the capital goods price index, the LCI measures changes in the costs that businesses face. Information is obtained through a quarterly survey of employers which asks questions about salary and wage rates for a set of job descriptions.

Changes in salaries and wages can be broken down into changes that relate to the quality of labour input, and changes that relate to the price of labour. When salaries and wages change because of improvements in the quality or quantity of labour input, the changes are not shown in the LCI. Therefore, a pay increase received due to an improvement in employee performance is not shown in the LCI. However, changes in salaries and wages to match market rates, reflect the cost of living, and retain staff are shown because they reflect changes in the price of labour.

Economic adjustment

When the LCI time series began in the December 1992 quarter, New Zealand was adjusting to deregulation of the economy, and recovering from the 1987 share market crash. As figure 2 shows gross domestic product (GDP) had begun to consistently increase after limited growth in some quarters of the previous five years, which was often undone by declines in other quarters.

Figure 2

 

The 1989 Reserve Bank Act meant the beginning of inflation targeting, which aimed to keep the annual consumers price index (CPI) percentage increase within the 0–2 percent range. Inflation in the year to the December 1991 quarter was within this target at 1.0 percent, after recording a 7.6 percent annual increase in the year to the June 1990 quarter.

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Figure 3

 


However, the labour market was very weak, and unemployment was high. As figure 3 shows, the unemployment rate peaked at 11.2 percent in the September 1991 quarter, and stayed above 10 percent until the September 1993 quarter when it dropped to 9.5 percent. The 11.2 percent unemployment rate is the highest recorded in the Household Labour Force Survey since the series began in the March 1986 quarter. In the September 1992 and March 1993 quarters, the labour force participation rates (1) were 63.0 percent. These rates are still the lowest recorded.

Over this period, employment decreased in a number of industries. Employment decreased in construction, influenced by an oversupply of non-residential property in the period following the 1987 crash. Employment in manufacturing decreased due to deregulation and opening of the manufacturing industry to foreign competition. There were fewer jobs in the public sector, with the privatisation of some state owned enterprises. Therefore, the New Zealand economy went through a period of adjustment to provide jobs in other industries.

Figure 4

 

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The way that employed people negotiated wage increases changed. Before the passing of the Employment Contacts Act (ECA) in 1991, bargaining was centralised and done through unions. After the passing of this legislation, wage increases were negotiated at an enterprise-based level. Union membership declined, and individual employment contracts became much more common.

The introduction of the ECA combined with weakness in the labour market and the economy meant that salary and wage growth was low. As figure 4 shows, the PWWRI showed low wage-rate increases from the September 1991 quarter to the December 1992 quarter. Therefore, it is not surprising that quarterly salary and wage rate increases were low when the LCI started to be published. In the September and December 1993 quarters, and the June and December 1994 quarters, the LCI quarterly increases were only 0.2 percent. The annual increase in the year to the June 1994 quarter was 0.9 percent. This is the only instance when the annual LCI increase has been below 1.0 percent. Quarterly increases continued to fluctuate around 0.3 percent until the June 1995 quarter, when a period of higher increases began.

Asian Crisis

On 2 July 1997, the Thai government was forced to float the baht, and its value plummeted. Indonesia, Malaysia and South Korea were also affected, and the effects of what became the Asian Crisis were felt in New Zealand. As figure 5 shows, GDP decreased for three consecutive quarters from the September 1997 quarter to the March 1998 quarter.

Figure 5


The labour market weakened quickly. In the 1997 June quarter, the unemployment rate was 6.8 percent, but as figure 6 shows, it rose in the following quarter and reached a peak of 7.9 percent in the June 1998 and December 1998 quarters. Employment declined by 17,000 from the September 1997 quarter to the December 1998 quarter. The CPI recorded annual decreases for the years to the March 1999, June 1999 and September 1999 quarters, including a decrease of 0.5 percent in the year to the September 1999 quarter.

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Figure 6

 

Figure 7

The weakening of the labour market and consumers price deflation meant that LCI increases, which were at 0.6 percent in the June 1997 quarter, began to drop. LCI growth was at 0.4 percent for the September 1998 to March 1999 quarters, before reaching a low of 0.3 percent in the June 1999 quarter. During 2001, higher LCI increases began to be recorded, and New Zealand entered a long period of economic growth.

Global financial crisis

During the mid-2000s, New Zealand’s GDP grew, house prices rose, and the unemployment rate dipped below 4 percent. The labour market was tight, and employment and labour force participation rates climbed to historic highs. The heating up of the economy meant that annual inflation was higher than the target band of 1–3 percent, peaking at 5.1 percent in the yea to the September 2008 quarter due to rising oil and food prices. Interest rates rose to combat this. House prices and the number of building consents issued began to decline at the beginning of 2008, and jobs in construction began to decline from the middle of 2008.

During the mid-2000s, house prices were also increasing in the United States, and complex webs of loans allowed people to get mortgages easily. Investment banks purchased these loans from commercial banks, because high interest rates were offered. When house prices began to fall at the beginning of 2007, many homeowners defaulted on their loans, and the mortgage investments, which had given seemingly good returns in previous years, declined markedly in value. Many banks collapsed or needed government support to stay in business, and they were not prepared to lend money as easily as before, which created a ‘credit crunch’. The credit crunch was the beginning of what has become known as the global financial crisis.

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Figure 8

The consequences of the global financial crisis, combined with the cooling down of the housing market, began to affect the New Zealand economy. As figure 8 shows, GDP began to decline in the March 2008 quarter, and continued to do so for five consecutive quarters, before registering a very small increase in the June 2009 quarter.

Figure 9

 

Despite the decrease in GDP, some labour market indicators continued to grow. While the unemployment rate began to increase (as figure 9 shows), the labour force participation rate and employment continued to rise, peaking in the December 2008 quarter. The LCI recorded a 1.2 percent increase for the September 2008 quarter, which is the highest recorded increase since the series began. However, within six months, the situation had reversed. The unemployment rate rose to 6.0 percent by the June 2009 quarter, and employment began to decline after the December 2008 quarter. Labour force participation has also declined, although it still remains relatively strong.

Figure 10

The LCI rose by 0.3 percent in the June 2009 quarter. Only 10 percent of salaries and wages in the LCI sample increased in the June 2009 quarter, which is the lowest percentage increase since at least the June 1995 quarter. Upward effects on the LCI included changes to collective agreements, matching of market rates and an increase in the minimum wage on 1 April 2009. These increases were partly offset by a few reported cuts in salaries and wages in the construction, wholesale trade, and manufacturing industries. Future LCI releases will indicate how long relatively low salary and wage rate growth continues, and how low salary and wage increases will go during this period of economic weakness.

(1) The number of people employed plus the number of people unemployed, as a percentage of the total population aged 15 and over.

 

Back to Price Index News: October 2009 

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