Wage growth remained subdued in the first three months of the year but Statistics New Zealand data out yesterday suggests that the labour market and economy appear to be improving more rapidly than previously thought.
The labour cost index (LCI) advanced just 0.3%, below market expectations.
Wage pressures remained subdued due to the lagged effect of the weak labour market and low inflation.
Annual private sector wage inflation has hit a nine-year low of 1.3%.
Confirming the picture of weak wage growth, the unadjusted LCI registered quarterly growth of just 0.5%.
Westpac chief economist Brendan O'Donovan said the unadjusted LCI mismeasured wage inflation but it was often a superior guide to the state of the wage cycle.
The quarterly employment survey (QES) showed that average hourly earnings fell 0.4% but Mr O'Donovan did not read that as a sign of weakness.
The QES was a simple average of wages actually paid, not a measure of wage inflation.
"During the recession, low-paid workers were laid off disproportionately, meaning the average of wages paid actually rose strongly.
We have long anticipated that during the recovery, firms would rehire low-paid workers, which would drive down the average of the wages paid.
"Perversely, falling QES wages could be a sign that the employment recovery was under way."
That was backed up by the employment indicators in the QES which were clearly stronger than expected, he said.
Seasonally-adjusted full-time equivalent employment rose 1%, posing some upside risk to the forecast 0.1% employment growth in tomorrow's household labour force survey.
Hours paid rose 1.1% suggesting that economic growth might have been stronger in the first quarter than previously forecast, Mr O'Donovan said.
Wage growth was unlikely to remain that weak for long.
The improving economy would soon lead to greater employment growth and pressure on wages.
The Australian boom would add a boost to wages over and above what would normally be expected from a New Zealand recovery, especially in the construction industry.
Rising GST, ACC charges, tobacco excise, the emissions trading scheme and the rising cost of food and petrol could all add to the cost of living over the next year, giving employees added motivation in wage negotiations, he said.
Those who had been forecasting a double-dip recession would be rethinking.
Overall economic activity was accelerating, not decelerating.
"The recession has been over for so long that now, even the labour market has had time to respond," Mr O'Donovan said.
ASB economist Jane Turner said yesterday's results alone would be unlikely to strongly sway the Reserve Bank either way towards a June or July hike in the official cash rate.
Subdued income growth continued to weigh on consumer confidence, with the majority of households noting in confidence surveys they remained worse off relative to a year ago.
However, indicators of employment strongly suggested the labour market had turned and the Reserve Bank could be increasingly confident of the underlying economic recovery taking place, she said.
The focus turned to tomorrow's household labour force survey.
The strength in full-time employment in yesterday's report, along with the pick-up in hours worked, backed the ASB view of employment growth in the first quarter.
Ms Turner was expecting the unemployment rate fall to 7.1% from 7.3% previously.
