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

Baffling unemployment figures in New Zealand

The New Zealand economy Q3 2021 labour market data published today was simply bizarre and cannot be maintained. Below is a summary of the data:

Unemployment rate is now at a 14-year low of 3.4% which is well below the NAIRU which is estimated to be around 4.5%. Consequently the labour cost index has increased annually by 2.5% which is well above the 2% considered consistent with the Reserve Bank of New Zealand (RBNZ) meeting its inflation target of between 1% – 3%. With inflation already at 4.9% you can be reasonably certain that the RBNZ will be tightening the OCR (interest rate) on the 24th November.

Despite having over a third of the country in lockdown for half the survey period annual employment growth increased to 4.2% from 1.6%. The increase was driven by full time positions – 2.3%. Why is this the case?

  • Businesses are afraid of losing staff when COVID restrictions are lifted
  • Demand for labour in growth industries cancels out those jobs lost in affected sectors
  • The wage subsidy is keeping people in jobs
  • The government is taking on a lot of staff – contact tracing and health sector.
  • Construction industry is booming

Some key questions to be asked:

How long will the COVID workforce be maintained?
What impact will the removal of the wage subsidy have (1.27 million jobs are covered by it)?

With this added pressure on inflation will the RBNZ raise the OCR by 50 basis points?

Source: BNZ ‘Maximum unsustainable employment’ 3rd November 2021

New Zealand’s unemployment and wages

In the September quarter New Zealand’s unemployment rate was 4.2% which was up 0.3% from the June quarter. Since the global financial crisis unemployment figures have been trending downwards since it peak of 6.7% in the September 2012. Despite the quarterly rise in unemployment, the underutilisation rate, which is a broader measure of spare capacity in the labour market, has fallen to the lowest level in over eleven years. The fall in underutilisation this quarter was driven by a drop in the number of underemployed people, those who work part time but are looking to work more hours.

Source: Economic Overview – Westpac November 2019

During 2019 the labour market appears to have tightened but it does appear to lag behind the growth cycle meaning that with the slowdown in growth in 2019 higher levels of unemployment will be apparent early this year. It is interesting to note that as labour becomes more scarce with lower levels of unemployment wage growth usually follows – see graph.

Annual wage growth is at its highest level since the 2008 global financial crisis, after which wage growth remained largely flat. The percentage of wages that increased is at its highest level since March 2015, at 59%. This shows there has been more broad-based wage growth across the Labour Cost Index* (LCI). Salary and wage rates for the public sector increased 3.0 percent annually, the highest rate since June 2009. This compares to a 2.2 percent increase in the year to the June 2019 quarter. Public sector wage rates have been driven by collective agreements for teachers, nurses, and police over the past year. With these three largest occupations excluded, public sector wages would have increased 1.8 percent annually.

*The labour cost index (LCI) measures changes in labour costs. These costs consist of base salary and ordinary-time wage rates, overtime wage rates, and non-wage labour-related costs. The index essentially covers all employees aged 15 years and over, in all occupations, and in all industries except domestic services.

Department of Statistics NZ
Westpac Quarterly Overview – November 2019