Labour data was a mixed bag last week, but overall confirmed what will come as a surprise to no one – the labour market is exceptionally tight, and a strong source of inflation pressure.
Nonetheless interest rates eased, taking a breather after ratcheting up the previous week.
Private sector ordinary-time wage costs rose at a record annual pace of 3.3% in the September quarter, according to the Labour Cost Index. The 0.9% quarterly increase was the fastest in the history of the series. When overtime is included, annual private sector wage inflation was 3.2%. The Quarterly Employment Survey was also strong, with the average hourly wage jumping by 1.3%. Wage growth has steadily accelerated over the past five years, reflecting a rising trend in underlying inflation. Wage inflation is only just getting going. There is much more to come, since wage growth normally follows a tight labour market with a lag. With wage growth already firmly entrenched above 3% per annum (not including soaring non-wage costs due to more leave and bureaucratic requirements), the Reserve Bank should be very worried about its ability to deliver inflation of between 1% and 3% over the medium term.
Thursday’s HLFS was a mixed bag – unemployment fell to a 21-year low, but employment unexpectedly fell by 0.3%, much weaker than market (and our)expectations. Full-time employment was the culprit, decreasing by 0.6% in the quarter and registering its first full-year decline since the 1998 recession. The total number of hours worked in the economy also decreased 0.3%. The fall in employment was mainly due to 9,000 fewer jobs in the construction industry, further confirmation that the housing market is reeling. With less paid work getting done, our growing concern that Q3 GDP might exceed our expectations has now been eliminated – we are sticking with our forecast of 0.7% qtr/qtr.
