New Zealand’s inflation rate will put pressure on wages

With 5.9% inflation and 3.2% unemployment there is the prospect of significant wage pressure with employees seeing a reduction in the real value of their wages and the increased scarcity of labour. The major driver of inflation is the 30.5% rise in the cost of petrol and a 15.7% rise in the associated cost in buying a new dwelling. The average wage is shown by the Labour Cost Index (LCI) and although this has been mainly hovering above the inflation rate (CPI) since 2011, the last year has seen a significant increase in prices which has not been matched by a subsequent increase in the average wage. Workers therefore are suffering from a reduction in real wages (nominal wages – inflation rate).

With this reduction in purchasing power from inflation and such low levels of unemployment employees have more bargaining power to command higher wages from their employers. This could result in workers moving between jobs where there is higher wages to keep up with inflation.

The situation is problematic for employers because they could experience a productivity loss from workers moving between jobs, as new workers take some time to adapt to their new roles. This would lead to employers incurring higher training costs.

Where company’s or sectors have union power this could have a damaging impact on a business as workers demand higher wages and threaten to strike if wage negotiations don’t come to fruition in their favour. Furthermore, with increasing the cost of living workers savings are losing value to inflation and reducing their ability to save. What is certain is growing tensions between employers and employees as they both try to lessen their losses introduced by inflation.

Source: BERL – Feb 2022

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