Roger J Kerr believes employers will be confident enough in the economy to put through 'significant' wage increases for employees this year, therefore stoking higher general inflation

By Roger J Kerr

The economic debate as to when and how fast short-term interest rates will increase over the next 24 months from current levels below 2.00% is fundamentally a question of “will wages finally increase and those cost increases for business firms will be passed through into higher selling prices?”

The resultant higher inflation track will force the RBNZ to lift interest rates at some point.

Employment data last week confirmed just how tight the labour market has become and the first law of economics does state that when demand exceeds supply prices go up.

Quite rightly, the RBNZ stated last week that wage increases over recent years have been below average due to very low historical inflation.

Household costs have not been increasing to motivate workers to demand a wage increase from their employer.

However, in early 2018 I observe important prices for households such as rents are now moving higher; therefore, that previous benign environment for wage demands is changing.

The RBNZ are themselves forecasting annual wage inflation to increase sharply from 1.5% to above 2.5% over the next two years.

Everyone continues to forecast immigration numbers to decrease and if this occurs, the additional supply of labour that has kept wage increases flat over recent years will significantly reduce.

The labour market supply and demand equation that dictates price (wages) is now changing with less supply and demand still very strong.

Business firms will be forced to pay up with some decent wage increases to retain and attract the skilled workforce they need to maintain and grow output.

Business firms will only seek to recoup increased employment costs with increases in their selling prices if they believe they will not lose sales as a result. That comes down to their belief of how strong the general economy will be.

Right now business folk seem to be very uncertain about how much government policy changes around the labour market (minimum wage, 90-day trial period abolishment) will affect their financial performance and this uncertainty is reflected in the weak business confidence surveys. The forward picture therefore on the likely timing and level of wage increases for employers is very clouded indeed.

My view is that the economy (with high export commodity prices) will remain robust this year and employers will see that their workers have not had any decent wages increase for a number of years and will therefore be confident to put through significant wage increases.

The result will be wage inflation feeding through into higher general inflation.

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Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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40 Comments

"...and employers will see that their workers have not had any decent wages increase for a number of years and will therefore be confident to put through significant wage increases."
Yeah right.
Some companies who have paid men more than women (not sure what companies these might be: never seen this at all myself) will not want to give men any wage rises at all.

So you have access to every payroll department in NZ? Wage rises will happen...and if some women get paid a top up to equal men for the same role well good for them, sounds about right to me.

..quite simple to observe. Take a look at fire service and Police. Male dominated requiring no skills or qualifications so sign up. Compare that to a nurse...3 years study to pay for plus ongoing study (also to pay for - not funded). Nurse are run off their feet, firemen go to work and sleep. Female dominated nursing a distant third in pay and conditions.

Yes but females who make it into the service are paid the same..or am I mistaken? Same as police force, Doctors, Pilots...

Women are paid the same as men in the ag industry too.

I don't think you got that, the question is why does a female dominated industry pay less than what could be considered a similar or side by side industry, even though it is vital and has much responsibility attached to it. That is the question.
I would use the old care giving analogy, they probably were receiving about the same, maybe even less than someone employed mowing lawns, which job would you consider more skilled?

You are making the case for pay inequality based on cross industry comparison.
Desperate, much?

The disparity is largely down to the less 'agressive' (call it what you like) nature of the female with respect to negotiatiion. Basically they a too kind.

Jordan Peteron (gone viral in Canada) has some controversial research on why the gap, also very interesting on why the lack of femal ceo's. It's basically a women issue..their fault...not solveable by legislation. Watch and enjoy........he's 'unique' for want of a better word!

https://www.youtube.com/watch?v=aMcjxSThD54

Jordan Peterson doesn't argue that the gap is largely due to aggressiveness.
He attributes the unexplanable element pay difference is largely due to that fact (like 5-10% of the variance of the pay 'gap').

Police and fireman have higher life harming risks than nurses hence the slightly higher pay. Police in particular might die on the job whereas nurses don't.

Yes, by why do you think that is "desperate"

Because you are effectively arguing for equality of outcome by suggesting that.
You are essentially advocating the disregard for the laws of economics - be they classical Marshallian or game theory - in order for people need to be remunerated some arbitrary level of income.

Oh no I am not. I am arguing that work that has been traditionally seen as "female" has been undervalued since forever for no good reason. In the cases I quoted, I believe the care giver is far more qualified than the lawn mower and should, in reality be earning much more.

"undervalued"
On the basis of what?

"I believe the care giver is far more qualified than the lawn mower and should, in reality be earning much more."

Again. Refer my last comment.
The world doesn't work by some arbitrary assignment of what is fair by PocketAces' agenda.
In the case of markets it works by some fundamental laws.

I'm all for equality of opportunity, but equality of outcome is a fundamentally crazy notion.

True, people are paid according to their performance in their role and how much they get in that role is relative to other different roles that all contributes to society. Gender pay inequality is myth because you will never find the company sacking all their male staff and replacing them with lesser paid female staff. The only replacing I see in nz is immigrants over locals and that is real because employers can and do get away with paying immigrants less.

I got it, but see change happening as wont go on for ever. Just look at the aged care historic pay increase.
Also "fire service and Police. Male dominated requiring no skills or qualifications so sign up. " Have you tried to sign up to these services before? I know a female who tried repeatedly (young, fit, well educated and was failed on....maths??

I offen find it is sexism towards men in armed force services that is real. Why would anyone think it is okay to lower the physical standards for female to join say the army when the army know that you need to pass X standard to fulfil minimum role??? And let's not forget that people can and will die in armed forces and as a unit why would I want to entrust my life to someone less physically capable and only got in because the standard was made lower for her?

ha ha ...'well educated' and she failed police entry quals on maths! .....ummmmmmmmmmm no.

Interesting comparison. Never thought that one through like that before myself. Coincidentally talking to a friend the other day about dealing with all walks of life in hospitals too. She had death threats from patched partners of patients during treatments. Dealt with junkies in various states. Needing to meet many different cultural expectations and language barriers.

I am starting to understand how health sector is being swamped by aging population, obesity epidemic and diversifying and fragmenting social makeup.

biggest issues are mental health and obesity. The reason, they are not solved by a two day visit. Some of our mental health patients have had dozens of ops. 5 hour operation, next day sit up, pull out the stitches and walk around the ward with your guts hanging out. (back in next day for another 5 hours) or the guy that swallows fish hooks to get back in. Or the chronic pain sufferer (all head related ) who has had dozens of surgeries to try and fiind the pain.

Obesity leads to ongoing costly treatment.

Add in all the elderly frm 3rd worlds who have never been treated for anything and we have an explosion of demand.

Will higher wages merely result in higher rents or even higher house prices?

Prices always seem to be set at the maximum ppl are willing/ able to pay . So depends on whether there is the ability to extract an increase or not. Certainly most of the small increase I got this year has been mostly absorbed in food, transport, insurance and rates increases. If a power increase is forced on me as well I wont really be any better off at all in fact probably worse.

Agreed I find it often that my pay rises is less to all the rises of my expenses. I would gladly trade no pay rise and everything/costs stays the same. At least if zero inflation were to happen I would be saving some real money over long time.

OMG, which planet do you live on?

"90-day trial period abolishment" actually I quite agree with a 90 day trail its certainly worked for my brother many years ago and just worked again last for my eldest as his first job, its now permanent.

So the rational for getting rid of it is? its abused in some way?

Abolishing the 90 trial makes as much sense as abolishing Charter Schools. Both are giving opportunities to young people.

Perhaps this Govt is afraid of troubled young people succeeding?

Neither are being fully abolished. Trial periods are fine, but there must be checks to ensure that rogues are not exploiting it and as for charter schools, the big issue there that I see, is the profit bit of it. I believe it leaves the door open for the corporatization of our education system, as has happened in ECE. Most of them started out as small enterprises, you'd be struggling to find any now, they've pretty much been all hoovered up. I find it pretty icky to think that education could end up in these hands where the primary aim is to make a return to shareholders. That is not education. They can remain as schools of special interest, alternative education is great, but I, for one, want to see us rid of the profit side of it. Please note, this is how it is in England with these schools.
As for teachers, no issue with specialists in front of classrooms for older kids in career or special interest type classes, but they must be registered to help make sure we don't end up with paedophiles in front of pupils and I do not think they are suited to younger pupils.

I dont see they are the same thing. Certianly for charter schools there seems to be considerable question around how well they are doing compared to the "norm". The Q is then why is the "normal" system unable to deal with "troubled" young ppl.

Thank god this government seems to be turning off the 70-80 Thousand yearly immigration tap. That was almost nuts. Great for the rapid growth in house prices. Hardly a social policy.

There has been NO new policy put in place by the new government to reduce immigration

they haven't done anything TD. the exodus has started on its own accord.

I wonder what the profit margins are for many employers? healthy? no I dont think so. Certainly talking to
(the very, I admit) few employers businesses I know they are still saying turnover is way down on 5 years ago and they have been squeezed and squeezed by increases in rates etc at the same time so profits suck.

Then we seem to see Westpac also saying business confidence is in the doldrums.....

The thing about inflation even if it eventually rises its ugly head its easy enough to strangle it but kill the economy by raising rates too early is very easy to do and hard to reverse.

The thing about inflation even if it eventually rises its ugly head its easy enough to strangle it but kill the economy by raising rates too early is very easy to do and hard to reverse.

So, reliance on extended expensive debt funded citizen consumption is a sound business policy with a future? I think not

In terms of "business" that is exactly how things have been run and continues to be run for at least 30 years. ie "business" doesnt care where the money comes from just as long as it gets its $s today.

In terms of Govn, much the same.

So inflation on the cards? in the piece you linked to it looks minor at best for the USA, differs to NZ? I really dont see most employers "happily" handing over $s especially if as I suspect many have been squeezed hard for 5~10years now.

I really dont see most employers "happily" handing over $s especially if as I suspect many have been squeezed hard for 5~10years now.

I agree, but low income earners servicing consumption debt inevitably purchase less on a compounding basis over time. Hence, SMEs will close or be absorbed by larger competitors.

So, reliance on extended expensive debt funded citizen consumption is a sound business policy with a future? I think not

I'm with you on this on this, but according to most, it's working. Only time will tell.

BTW, I don't think NZ will be seeing income growth, except in areas where it can be decreed by law, such as the public sector. Despite this unheralded expansion of "money", it appears that the hoi polloi have got the rough end of the stick when that is translated into the price of their labor.

Hi Steven -
i operate healthcare businesses - with various MOH ACC DHB corrections contracts - turnover is well up over the last few years - as despite perception , the previous government did invest in significantly more services, including many innovative projects some the first of their kind in both NZ and globally.

Margins were squeezed on the older contracts - as CPI increases in no way kept pace with real costs - bu o the newer contracts the margins were actually a little better - although the demands for measurable outcomes and outputs were also higher

The better performing organisations - all welcomed the move to outputs and outcome based contracts - where you are paid partly on actual outcomes as opposed to a flat fee for a service.

Despite knowing that the new government will undoubtedly throw a significant amount of extra money into the above industries, our confidence in slightly lower not higher - as firstly change is always uncertain and business does not generally like uncertainty - and new contracts and ideas need proper lead in and consultation to work. Also the changes in employment relations - such as the 90 day legislation, together with a fear that wage growth will significantly outstrip increases in contract value - and the homecare settlement is a very clear example of where this has happened - and there are three more 5%+ rises built in to that legislation starting n June this year - are concerning in such a tight labour market. If you also add in the fact that the industry as a whole is very dependent on immigration - dr's nurses. other health professionals - and that there is not a huge surplus of NZ's in those professions - or currently unemployed who are either qualified or able to qualify for these roles - then you can see why even successful businesses are concerned.

the DHB's are also concerned - as so far the new government has not engaged with them in any meaningful way about what their issues are - or to offer any certainty going forward.

If large organisations are this concerned - i hate to think what the under 10 employee companies are feeling - so we will have to wait and see

cheers

Roger has been calling rates and inflation higher since the GFC ! . I suppose if you say something long enough you will be right ..pity all his clients though who have fixed loans for the last 9 years and seen cash rate fall ..and the same for investors going short waiting for the higher rates .... talking about the boy crying wolf ,..this is crying wolf pack !!

I would be very surprised to see wage price inflation caused by employers being "confident in the economy". Quite the contrary. I see businesses contracting, and general business failure.

Or automating - robots and apps don't join unions, take tea or loo breaks, or go on strike.

Great sales opportunities here.....although, as with most things in life, YMMV.