Nominal and real

By Eric Crampton 07/02/2013

Stats New Zealand reports wage growth over the last year. It’s not great in nominal terms, as the Press points out:

For those who actually got a pay rise, the mean increase for all surveyed salary and wage rates that rose in the December 2012 quarter was 3.0 per cent, compared with 3.1 percent in the September 2012 quarter.
The latest mean increase is the lowest since a 3.0 per cent increase in the September 2000 quarter. Of all pay rates surveyed, 55 per cent showed annual increases in the year to December 31.

But hold on a minute..

Year-on-year CPI inflation in the September quarter was 0.8%; December quarter was 0.9%. It’s not been that low since December 1999. If we look at series SW512Q, which tallies mean percentage increase from previous quarter among those receiving a pay increase (presumably the one cited in the Press, above), we find that the median increase from December quarter 2003 through December quarter 2012 was 3.9%. If we look at CPI over the same time period, the median was 2.6%. I’d be happier getting a 3% nominal increase when the CPI is 0.9% than getting a nominal 3.9% increase when the CPI is 2.6%. And, the mean increase from the same quarter of the previous year (SW512A) is 3.7% (median increase against same quarter of the previous year is 3.0%).

If you net inflation out of wage growth, the last quarter is about double the median since December 2003 (note that the easy-to-get Stats series here starts December 2003).

Aha, that only counts increases among those getting an increase. What about the people who didn’t get an increase?

Actually, things are looking pretty good there – and surprisingly so given the below-the-lower-bound current inflation outcomes. Over the whole of 2012, 43.75% of workers reported zero wage increase. From 2003 to December quarter 2008, the average quarter saw 41.3% of workers reporting zero wage increase. If our current low inflation rates were causing serious problems given nominal wage rigidity, I for one would be expected a heck of a lot more bunching around the zero increase threshold. Instead, this year’s figures are about where they were in 2004.

I’ve put things into a Google Spreadsheet. The original LCI data is here.

The blue line traces nominal median wage increases, year on same quarter prior year, going back as far as the easy-to-get series goes. The red line traces CPI inflation. Note that I netted the GST increase out of those figures for December 2010-September 2011 as those were fully compensated by income tax cuts. The yellow line is simply the nominal wage increase less CPI.*

Here is the percentage of workers receiving a wage increase over the same quarter in the prior year. So if you were making more this year than the same time last year, you show up as a 1 in this series, otherwise a zero. If low inflation combined with nominal wage rigidity causes problems, I’d have expected a sharper increase in the proportion of workers receiving no pay increase, although you could tell a story around low inflation and nominal wage rigidity where employers cut on the extensive margin while compensating on the intensive margin (cut some workers but pay remaining workers more).

The unemployment numbers come out later this week. The unemployment numbers are now out. Though it’s a drop in the unemployment rate, it looks to be entirely on the back of declining labour force participation – not good.

* Note: the original at Offsetting Behaviour has interactive charts. I can’t get Javascript to work properly here though.

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