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Economists see June quarter labour market figures portraying an increasingly tight jobs market and with upward pressure on wages

Business
Economists see June quarter labour market figures portraying an increasingly tight jobs market and with upward pressure on wages

It's usually all about the jobs - but this time it's going to be a lot about the money, namely what sort of pay rises people are getting.

Statistics New Zealand releases its suite of labour market figures for the June quarter on Wednesday (August 4) and economists are expecting these will show our jobs market is continuing to heat up.

Unemployment, which moved down to 4.7% in the March quarter, from 4.9% is expected to fall again - perhaps to about 4.4%.

But on this occasion, it's wage increases that might be of even more vital interest - as an more-and-more squeezed jobs market sees workers pushing for higher pay.

Signs of an increasingly full jobs market and of inflationary wage pressures, would give the Reserve Bank another firm push towards needing to increase the Official Cash Rate from the current emergency low setting of 0.25% when it has its next review on August 18.

These labour figures this week, followed by the RBNZ's own survey of inflation expectations on August 12 will be the last big pieces of the jigsaw puzzle for the central bank to assemble as it ruminates on its decision. Remember, the other biggie recently was the super hot 3.3% inflation figure for June.

 ANZ economist Finn Robinson and chief economist Sharon Zollner think that labour costs "accelerated sharply" in the June quarter, up 1.0% quarter-on-quarter and 2.4% year-on-year.

"That would be the largest quarterly increase since 2009," they say.

'Strong wage pressure this year'

"It’s not clear how long the tight labour market will take to feed through into wages – people need to go through pay reviews or the hiring process before bigger pay cheques land in their bank account. But with the labour market so tight, we do think we’ll see very strong wage pressure this year, even if it takes a little longer to come through than we’ve forecast."

They think that overall employment increased 1.0% q/q (1.5% y/y) in the June quarter, which should see unemployment tick down from 4.7% in the first quarter to 4.4% - this despite their expectation that the labour force participation rate will recover further to 70.6% from 70.4% previously.

"It’s hard to see a scenario where the data doesn’t reaffirm that the OCR should to be hiked at that [August 18] meeting. Given the sheer strength in indicators of labour demand, any disappointing headline unemployment or employment numbers will likely stem from supply-side factors like reduced participation or continued matching issues. These factors would all act to push wages and prices higher, consistent with our view that August is odds-on as the date of OCR lift-off, barring a Covid outbreak in the meantime."

Westpac acting chief economist Michael Gordon is also expecting the unemployment rate to drop from 4.7% to 4.4%.

"That’s not quite back to pre-Covid levels, but is getting close to what we would have considered to be the non-inflationary minimum even during normal times."

'Hefty pay increases'

He says there have been "stories of hefty pay increases" being offered in some sectors – IT is the one that stands out – "but it’s unclear how significant this is at the economy-wide level. It also appears that some of the sweeteners being offered by employers are in non-wage guises, such as signing bonuses and additional leave".

"...We haven’t had any official data on wage growth since the March quarter, but the extent to which the stories of big pay increases have emerged in only the last couple of months is remarkable."


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He's expecting a 0.8% increase in wages for the quarter, following a 0.4% rise in the March quarter.

"That would be a marked shift in what is normally a slow-moving series – and the risks are probably to the upside. Our forecast would see annual wage growth lift from 1.7% to 2.2%, due to a weak reading in the June 2020 quarter (the Covid lockdown period) dropping out. The minimum wage was increased by 5.8% in April this year, which was a smaller increase than last year but probably affected a greater share of the workforce. We’ve previously estimated that this year’s minimum wage hike would add about 0.1% to annual wage inflation compared to last year."

Gordon doesn't expect anything in the labour market figures that will "stand in the way" of an OCR hike in August.

Key factors influence OCR hikes

ASB senior economist Jane Turner also expects the RBNZ to start lifting the OCR from August, but says the pace and magnitude of OCR hikes over the coming six months are likely to be influenced by four key factors.

"These are inflation expectations, the pass through of costs to consumers, labour market utilisation and wage growth. The Q2 CPI figures demonstrated firms are having little difficulty in passing on higher costs to end consumers. Inflation expectation figures from the RBNZ will be released around a week before the August Monetary Policy Statement and we anticipate a sizeable lift. The Q2 employment data released [this] week will provide insights on labour market utilisation and wage growth."

She expects wages rose 0.8% in the June quarter, bringing annual wage inflation up to 2.1%.

"In quarterly terms, this is a strong lift, particularly compared to rates of growth in the past 10 years," she says.

Given that inflation "tends to be a lagging variable", she expects to see wage inflation pressure to continue to build over the coming year, with wage inflation forecast to lift to 2.9% by the end of the year.

"The risks are skewed to wage growth being stronger than forecast."

She too expects employment lifted 1% in the past quarter - driving the unemployment rate lower to 4.4% (from 4.7%).

"Given high level indicators, such as employment intentions, the risks to employment growth are skewed to the upside. We expect much of this additional employment was met by pulling additional labour into the work force – and we expect to see a lift in the labour market participation rate to 70.7% from 70.4% of the working age population."

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72 Comments

Decent wage growth is wishful thinking, its never happened in NZ for decades. It may happen in one or two sectors but the majority of workers will be even worse off now than before the pandemic. If you factor in the recent house price increases, its never going to catch up.

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Yes. 3% will be seen as dangerously inflationary. Meanwhile, elsewhere on Interest, bank economists are using 3% wage growth as a baseline assumption under which it would take 30+ years for income/housing ratios to return to sanity.

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There is only one way for a return to sanity and that wont be pretty... the everything bubble burst!

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In the last decade the minimum wage has gone from $13.50 to $20, almost 50% increase.

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The income for self employed has been extraordinary.

It is just that much of income has been hidden away to avoid taxes.

A self-employed can earn up to an equivalent of 250k salary job a year.

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Sure they can, but only selling drugs.

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What planet are you on ? Avoidance will catch up with you eventually.

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There's a difference between tax avoidance and tax evasion.

People should never engage socialist tax accountants for their accounting needs.

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Yep,

Tax avoidance = pay tax plus monetary penalties.

Tax evasion = pay tax plus monetary penalties and go to jail.

Good accountants stay clear of both.

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Avoidance is having your company pay you and your wife $180k each to avoid the top tax bracket. No penalty involved.

Evasion is having your company only declare $180,000 of income when it really made $360,000. Jail.

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Thats a really common one here, put the wife on the payroll but she basically never shows up to work. Huge Tax saving straight away.

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Just remember to ask IRD for permission first, I am sure you knew that was a requirement (everyone's doing it apparently):

https://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1513750…

https://www.legislation.govt.nz/act/public/2004/0035/latest/DLM263557.h…

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Employing your spouse would automatically make the wage payments that you make to them for services. Even if your spouse has phenomenally poor productivity current labour regulations may make firing said spouse extremely challenging, making it easier for the company to keep said spouse on payroll whilst simply not issuing them any pay rises (This in itself may constitute constructive dismissal). It is not like tax brackets change particularly frequently :)

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If the income is derived through the provision of the husband's personal services it will be tax avoidance. See https://en.wikipedia.org/wiki/Penny_and_Hooper_case

Reconstruction would tax full $360k to husband who would also pay a 100% tax shortfall penalty for taking an abusive tax position.

IRD will be picking these types of arrangements up fairly easily with its new tax system.

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Give the wife a contract and a role as a director or some such and discuss the future direction of the company with her every so often. It is actually phenomenally difficult for the IRD to prove that the pay was for the husband’s personal services. You could even put a note in the wife’s file indicating that the company has been trying to fire her due to her low productivity for years but been unable to find just cause that would satisfy current labour regulations.

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Avoidance is paying 99% of your profits to a company that you definitely do not own in Ireland for the use of their patents and deducting that as an expense here. No penalties involved.

Evasion is not filing your tax return here. Jail.

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Easy meat:

https://www.taxtechnical.ird.govt.nz/en/case-summaries/2019/commissione…

If the company in Ireland is one you claim not to own, but you really do see:

https://www.munrobenge.co.nz/taxpayers-fail-to-overturn-convictions-for…

A former EY partner thought he was sneaky sneaky, must have felt silly sitting in his jail cell for 3 years.

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Mr Watson was undone by his need for the companies to owe him the money. Had a trust of which Mr. Watson was neither a trustee nor a beneficiary owned the company instead the outcome would likely have been quite different.

Mr Watson also was in effect simply trying to move money around. What I have suggested is essentially starting a company in Ireland which develops a patent / business system that you absolutely require and so licence from them for a fee equivalent to 99% of your local income. This model is more akin to Microsoft, Google, Apple, MasterCard & Visa’s current arrangements.

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"... stories of big pay increases have emerged in only the last couple of months is remarkable."

I guess people expect policies to be based on stories.

Reacting to inflation prematurely caused by a K-shaped recovery and supply chain blips you risk destroying the rest on the wrong side of that 'K'.

The country's economy is not just an IT industry.

The real risk is the longer term downside.

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Good luck. This can only happen if the biggest housing bubble in the world doesn't pop.
But of course as this is so unimaginable it will not happen.

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Another major worldwide economic event right now will result in multiple civil wars. Make no mistake we are on the edge of oblivion. Governments now have no other choice but to throw money at the problem to keep the calm. Unfortunately there are now problems evolving that money on its own cannot fix so for now its just pay, pray and delay.

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Careful Carlos - people might starting labeling you a DGM with posts as positive as this.

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And when it does, the narrative will be about how this surprised everyone, everything looked stable. All will be confused that their calculations were so wrong. who would have guessed

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All those outfits complaining about staff shortages don't have a staffing problem. They have a low pay problem.

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Expat returns home, internationally experienced IT worker, could only score 2 job interviews in 10 months in NZ. Gave up on NZ, now head of digital services at University of New South Wales.

https://businessdesk.co.nz/article/economy/missing-a-trick-why-globally-experienced-kiwis-struggle-on-return

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If he change his name to a more locally sounding one, he'll probably get more interviews.

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Nonsense. The IT industry is full of immigrants from all backgrounds.

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???

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Most people don't want to bring in higher-caliber people than themselves.

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Most people don't want to bring in higher-caliber people than themselves.

This is true. Proof of international experience / success can be seen as a threat. Works in different ways too. For ex, the cushy roles for ex-diplomats in market entry into foreign markets are best handled with 'real world' experience of actually doing the work. Not cutting ribbons or having a title with the world 'international' but sitting at a desk in Auckland or Wellington.

Also, expats have to understand that the trade off for working abroad for too long is that they may be unemployable in NZ. Or they have to think out of the box.

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We all have opinions of course as do I. I am an employer of IT staff, I manage an IT Team, I have worked extensively overseas in IT. When people return from overseas with their experience they expect that experience to be useful and it very, very rarely is.

We do not need most of the experience they have as they are operating at a scale and therefore with overheads that are not repeatable here outside of our biggest organisations.

If they want the big job, go to where they are, don't whine about them not being where they are not. Or alternatively if their skills are so incredible and valuable, start a business here and lead the way.

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When people return from overseas with their experience they expect that experience to be useful and it very, very rarely is.

Yes and no. I have a colleague who's incredibly gifted in IT and worked with one of the world's preeminent automotive brands on large-scale implementation of an IT framework. He ended up back in NZ and worked on the IT development of the Super City in Auckland. Almost had a nervous breakdown because of the incompetence on display by the "management." My mate had the experience to see through all the BS. That experience is invaluable but it was overlooked.

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Yes that sounds like exactly the case I am making, they had experience of a massive enterprise at global scale then came to work for a City Council and expected the same environment...

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Well, no not really. New Zealand can be very immature in it's outlook, and backwards as well.

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lol, so well argued.

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Yes that sounds like exactly the case I am making, they had experience of a massive enterprise at global scale then came to work for a City Council and expected the same environment...

So you think incompetence is OK because the scale of things in NZ is smaller?

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So you think avoiding the embarrassment of basically making my point for me can be hidden by a weak strawman argument?

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Indeed, when I came back from overseas with a tonne of experience, it took another internationally experienced person to hire me. Even recruiters basically wouldn't put me forward, the idiocy in the industry is rampant. It's a mixture of being parochial, tall poppy syndrome, conservativism, an idiotic view of "what worked there could never work here", lazyness (I couldn't possibly have to ring another country for a reference), fear/racism and others.

Have heard exactly the same from multiple immigrants, it's truly batty how we constantly like to shoot ourselves in the foot.

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There's also a deeply-embedded colonial thinking that Asian experience is inferior to NZ work experience; never mind the fact that the economies of India and China are more sophisticated in their business operations.

This outdated mindset is also why NZ fails to attract top talent from Asia and all we get are economic refugees who don't mind employers undermining their work experience in return for PR.

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It's not a deeply embedded colonial thinking (well at least not always). It's the reality.
We've tried. We hired people who claimed to have 10+ years experience in India (along with a degree from an Indian university). They turned out to be terrible, despite acing the interview. I guess our interview process sucks... We've had three Indian employees with senior roles in their CV in the past five years - and we got rid of each of them within a year. Not even junior level when it comes to actually solving tasks. Is this racism? Colonialism? Or just a streak of bad luck?

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It's not racism if this is your honest experience but mine is quite different, that does not make you wrong or me right but it does mean it is not certain. I have had a mixed experience with Indian IT staff, just as I have with other races.

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He's a senior manager working in IT, not an IT worker. He's not as employable as a developer, BA, or network admin because there are probably only 100 roles in the country at his level. Any of the roles I listed would have been snapped up in no time.

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We would all be so much better off even on lower wages if houses were a half to a third the price and there was plenty of them. The house situation is destroying our economy. And the consequences in future are going to be worse, so much worse.

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Yep.
Only an industrial scale government house building program would start to make a dent, however the government are clearly not up for that despite idolizing Michael Joseph Savage who clearly was.
More phoney idolisation

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Immigration falls, pay goes up. Who would have thought?

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Yeah but houses prices might fall and 'real wages' are the valuation of your rental going up - not income that is taxed via PAYE.

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If house prices start to moderate or fall, I reckon more supply could come on to the market immediately.
Speculators would have no option but to sell or rent out those tens of thousands of investment properties they've currently left empty for capital gains.

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I think you may be right, there is a bow-wave of supply coming our way, consents are at very high levels at the moment.

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Classic speculative minksy bubble.

And yes, you're correct.

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I want everybody to earn $40/hr and my milk to cost $1.

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Move to Switzerland. :-)

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Swiss min wage is over 30 NZ$. Their average hourly wage is 94 NZ$. Once NZ was the wealthiest country in the world per capita.

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The difference is that the Swiss economy has come a long way from being a small nation selling bulk cheese, fruits and milk to the world.

Unfortunately, can't say the same about our small, 'export-dependent' economy.

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NZ is in the top 10 wealth per capita so on that measure we're not doing too badly.

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dp

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London would be close. Google says Average pay is GBP 41k = NZD 39.40 per hour for 40 hrs
Tesco home brand milk 0.48p / litre NZ$0.96 ltr

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The price of housing is about the same also.

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Depends how you measure it, on price to income yes but on nominal prices we still have more to do.

What's interesting about the UK is the greater regional variation. In a northern city you might be able to buy a very reasonable house for under $200k (equivalent) whereas in London you'd be looking more at around $1.4m. In New Zealand house prices are more uniform, even in an isolated city like Christchurch prices are $570k. I think that's an effect of New Zealands more persistent and long-running housing shortages the even regional centres well away from the major centres of growth have been driven relentlessly upwards in price.

Same in Ireland as well, Dublin has a shortage and the rest of Ireland has far more moderate house prices.

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The UK also has better transport infrastructure. It's possible to work in the bigger cities and commute from a much cheaper area.

It's possible to commute from Lincolnshire to London by train (~170 km) in the time in the time it takes to get from Pukekohe to Auckland (~40km)!

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that was 20 yrs ago -- used to get mainline at grantham - 58 mins to kings cross -- Laptop battery only used to last the hour -- but now hamilton to auckland still takes closer to three hours than 2 !

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Absolute wage increases don't matter considering those earning median wages in NZ are now spending a greater proportion of their incomes on necessities such as rent, groceries, transport, utilities and PAYE, compared to 10 years ago.

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Why would RBNZ raise? RBNZ already indicated they where willing to "look through" inflation and it's only very slightly above their target rate for last quarter.

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Agreed. People keep talking about the ever-scarier mountain of mortgage debt as if it's a reason for the RBNZ to raise rates. It's the opposite- it's the reason we *can't* raise. Financial stability, remember? 10% inflation might have families unable to feed themselves, but it wouldn't threaten financial stability like rate raises, so it's very predictable what will happen in practice.

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Rates are going up you had better brace for impact.

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If you're right, I'll be relatively OK because I don't have a mortgage. In terms of 'getting ahead', a shock rate rise would probably benefit me if it crashed the housing market and made it possible to buy a house on a normal income (without rich parents). But I don't think it will happen, because property owners have an absolute political stranglehold on this country.

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another 18 months yet -- lots of 1-2 yr fixes when they expire the pain will start --

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If Orr does go for an increase this month, he will make the Bank look like the Grand Old Duke of York;

'He marched them up to the top of the hill and marched them down again'.

We are just one Delta case in the community away from a full lockdown. Looking beyond the very short-term, I believe global growth will continue to slow as it has been doing for decades despite globalisation. Part of the reason lies with the still underappreciated role of a declining EROI.

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Could free up a bunch of housing though.

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The sound of chickens coming home to roost here. After years of wage suppression through unrestricted immigration with governments compliant to demands from various sectors unable to get the “right type” of worker, the boot is suddenly on the other foot and employers’ whinging is ironic. Perhaps if NZ employers had taken a longer term view and provided proper training with good wages and conditions to ensure worker loyalty, such shortages in many industries could have been avoided. The unwillingness of employers to equitably share the benefits of productivity increases over the last decade or two means that they are suddenly having to budget for a greater employee share of their business income than they have been used to. Tough.

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productivity increases..... oh right. I'd wager the industries with the highest productivity gains in the last 20 years are the industries supplying monopolies or duopolies, that productivity has been born out of necessity or survival and in a monopoly duopoly environment whom is benefitting the most? I can assure you not the people or supply chain businesses employing the labour on the ground.

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Yes it's not Rocket Science is it?

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Clearly unemployment is not a problem, the real figure of unemployed is well over two hundred thousand.
14,000 immigrants to be brought in as kiwis on the benefit are not up to picking fruit.
Treat people like mushrooms and there's your labour voting base.

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