It's pretty easy to take conflicting views of the labour market at the moment.
On the one hand, unemployment is set to be hitting new lows of around 3% when the figures are released by Statistics New Zealand on Wednesday.
But on the other hand the sheer strength of the labour market and the shortages of staff are providing the evidence of an overheating economy and helping to fuel our mounting inflation (6.9% annual rate as at the end of March).
Also released as part of the suite of labour market figures on Wednesday will be information about wage rises.
This arguably will be more significant than whatever the unemployment figure comes in at because obviously if there are signs that pay rates are starting to take off (and to date the rises have been relatively muted) then this will feed back into future inflation. So it matters.
While the labour market is therefore the source of some anxiety - it's also strangely providing some much needed comfort at the moment for the Reserve Bank is it seeks to rein in inflation.
The RBNZ of course is trying to take the heat out of inflation by hiking the Official Cash Rate, which it did aggressively by 50 basis points to 1.5% last month. A rising OCR means rising mortgage rates - and boy are they rising.
Obviously the big concern about rising mortgage rates and payments is what happens if homeowners lose their jobs. So, a full labour market as we have at the moment does provide the RBNZ with some comfort that it can hike interest rates to tackle inflation without large numbers of people (hopefully) getting into distress meeting their mortgage payments.
Inevitably it would appear that higher mortgage payments will start to take some heat out of spending in the economy and that will likely see the labour market start to lose some steam eventually. But the market's likely to remain very tight in the near term.
What are the economists saying then?
ASB senior economist Mark Smith is picking the unemployment rate to drop to 3% at the end of the March quarter from 3.2% as of December and he's picking annual private sector wage cost growth to pick up to 3.1% from 2.8% previously. That would be the highest rate of wage growth since the Global Financial Crisis in 2008.
[I would just note that Stats NZ's labour cost index - which the economists refer to - measures the cost of a given unit of labour - not the pay rates individual workers are receiving as such.]
"Upward pressure on wage inflation has been steadily building and we expect this to continue," Smith said.
"The Labour Cost Index (private sector ordinary time) should increase by 0.7% qoq, lifting annual wage growth to 3.1%, the highest since 2008. We also expect the distributional measures to show a broadening in wage pressures. Risks are skewed towards wage inflation picking up in 2022 given tight labour market conditions and elevated headline inflation.
"However, real wages for most workers will go backwards in 2022, dampening household purchasing power and contributing to the weaker pace of household spending we expect to emerge in 2022."
In summing up his views, Smith says the March quarter labour figures will show the economy has remained above its maximum sustainable level of employment, with the risk that the labour market tightens further over 2022.
"This and the risk of high inflation persisting support the prompt removal of monetary stimulus. We expect a 50bp OCR hike in May, with a steady pace of 25bp hikes thereafter and a 3.25% OCR peak early next year.
"The outlook is uncertain, but we expect labour market conditions to soften, paving the way for eventual OCR cuts. We have pencilled in cuts from 2024."
ANZ economists are picking 3.1% unemployment and 3% annual private sector wage cost growth.
ANZ Economist Finn Robinson and senior economist Miles Workman say wage inflation has thus far failed to keep up with the rapidly rising cost of living.
"But with labour market tightness so widespread, we do expect wage growth to accelerate sharply over 2022.
"...The tight labour market is likely to be a significant source of domestic inflation pressure over 2022, as firms increasingly bid up wages to attract and retain talent. For the RBNZ, that means they need to continue on with aggressive interest rate hikes (including a 50bp hike in May) in order to bring surging domestic inflation pressures to heel."
Robinson and Workman say the strong labour market that they are forecasting "is really important for the RBNZ to be able to engineer a soft landing for our overheated economy".
"Higher interest rates and the surging cost of living will certainly stretch many Kiwi households. But so long as wage growth picks up and unemployment stays low, we should get through it.
"However, one side effect of the tight labour market is, inconveniently, more inflation pressure. As we noted recently, wage growth is largely being driven by the surging cost of living and the balance of power shifting towards workers.
"Wage growth isn’t being driven by productivity growth – if anything that has been hindered by the impact of Covid disruption. And there are signs that much larger wage rises are on the way, with a significant uptick in the share of jobs receiving greater than 5% pay rises in the Q4 labour market data.
"Without a rise in productivity, firms can’t afford to keep putting wages up indefinitely without also putting up prices. So as wages rise over 2022, that’s also likely to generate a lot of domestic inflation pressure.
"This all means that even though we’re tentatively forecasting that Q1’s 6.9% CPI inflation print was the peak in inflation for New Zealand, the RBNZ still has a big job to do to bring domestic inflation pressures back in line.
"Without further aggressive interest rate hikes, including another 50bp hike in May, the tight labour market and rising inflation expectations could easily drive a self-reinforcing upwards spiral of domestic inflation," Robinson and Workman say.
Westpac acting chief economist Michael Gordon is picking a 3% unemployment rate and annual private sector labour cost growth of 3.1%.
"The labour market has been pushed into the background to some degree lately, with the surge in inflation dominating the headlines," he says.
"Yet it remains a crucial part of the story for inflation going forward, which is the real concern for monetary policy. A tight jobs market is the mechanism through which an initial, globally-driven price shock could translate into an ongoing series of domestic wage and price rises."
And he thinks the March quarter labour market figures will "show that such a dynamic is getting under way".
He says the figures as forecast "would present a modest upside surprise relative to the Reserve Bank’s February Monetary Policy Statement forecasts".
"The RBNZ assumed a flat outturn for unemployment in the March quarter, on the way to a gradual rise in from the second half of this year. That forecast reflects the idea that the economy is operating above maximum sustainable employment, and will need to ease back in order to keep inflation under control."
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39 Comments
The Fed - Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
All those who insist that higher inflation automatically produces higher wage demands producing a vicious cycle(inflation expectations) should read this.
Having done so, they should then produce the empirical evidence to support their assertion.
Having lived and been in business through the '87 crash and subsequent recovery, I can assure everybody that every year that my expenses go up 10-15%, I will be doing my best to ensure that my income rises by the same amount. As in fact I did during all the '80s, and since then. This Jeremy Rudd must be one of the few Fed employees not to have been caught insider trading using info provided by their Wall St mates. The Fed is totally in bed with Wall St, as shown by their actions in looking after them over the last few years of asset stripping the USA middle class. Rubbish like that which I have just read from him is straight out of the asset strippers' handbook. Historically, as mentioned above, if bosses don't raise wages to make up for inflation, workers just force them to.
Kiwi pay rates have been far too low for a long time, fueled by out of control immigration which has also put very heavy pressure on our housing and infrastructure costs. This has impoverished average Kiwis to the point that the only sensible option left to them is to leave NZ. This is going to get a hell of a lot worse in the next few years. The readily available cheap labor has also removed any motivation for business to increase productivity and our performance reflects this.
It is high time that the government closed the borders and allowed wage rates to rise, force employers to be far more productive and give our over stretched housing supply and infrastructure the space to catch up.
The businesses that cannot afford to pay decent wages or increase their productivity to do so, fail, as they should. The nation will adjust it's priorities and put decent wages where it sees a real need and return on the enterprise. A lot of unnecessary or inefficient enterprises will fail. E.G. a lot less hospitality outlets because their staff can do far better building houses, infrastructure or work on farms. Those hospitality businesses that remain will be very efficient and of a quality that people are prepared to pay extra. The adjustment would be painful but ultimately the country and our people will be far better off.
The issue I see is that the workforce doesn't adapt to change that fluidly. Just as laid off machine workers in their 50s won't migrate to being coders writing scripts for automated robots, service industry workers don't quickly become construction workers, if at all.
We've massively over-estimated need and value in some newer industries and forgotten some traditional manual work isn't going anywhere anytime soon. A retail worker can be cheaply replaced by a self service counter, but we are a far way off coming up with a viable plumber robot.
The generation coming through generally don't see manual work as a desirable option. I'm not sure if there's enough money you can throw at wages there to resolve that.
Chris-m that’s the plan.
Look at the news that Simon Bridges is expected to become the CEO of the Auckland Chamber of Commerce.
Can someone explain to me what Simon will bring to the role other than politics…. Good for pushing a growth agenda though in conjunction with the EMA.
He will be an excellent CEO for the Auckland Chamber of Commerce. It is a political organisation, you might see that Simon has some experience in this area. He is also a lawyer, always handy when you need to negotiate with both commercial and government organisations.
In a global market the argument against immigration becomes a little more tenuous, because a lot of the newer jobs in the digital realm ultimately will have a far greater pool of potential competition than one that needs a physical person in NZ.
Also I'm not sure how much the economy is "failing". It seems like we've got a lot of export driven industries that are actually doing fairly well that are constrained by lack of labour.
If we turn off immigration for say, a decade, what happens to the size of our workforce, and is it likely our industry will be able to plug a deficit by investing in productivity?
If the cost of housing is already deemed too high, how much will building costs rise due to labour shortages?
"A lot of unnecessary or inefficient enterprises will fail"
Add to these a lot of industries supplying the monopolies and oligopolies that successive govt's have let flourish. The Govt cannot even control these and recognise the damage they are doing to the economy.
The never ending conundrum NZ finds itself in is that people need wage increases to survive and the nation needs higher wages/incomes to attract useful employable migrants, but the reserve bank does not want a 'wage/price spiral' which actually means it doesn't want want wages to rise.
So, it does things to stop that from occurring such as by increasing interest rates (more costly for citizens - reduces spending power) to deter businesses from raising prices (because citizens' cant afford to buy things due to paying more interest so aren't chasing as many goods to buy - reducing demand).
So, we get lots of immigrants escaping their own countries because of war, famine, -ve culture changes (sth Africa), anti Trump or anti-Biden (USA), anti Xi (China & Taiwan), anti population crush (India) etc whatever. Those immigrants, once obtaining citizenship, soon realise their mistake and leave for Australia because of better climate, higher wages, better conditions, cheaper houses_cars_groceries_dairy products, a better economy. closer to the rest of the world. Only negative is the Wallabies haha.
A percentage of the good workers who know their worth, will either succeed in being duly recompensed when they jump ship, or if life circumstances allow will go offshore. Some are going offshore without even leaving NZ.
It just compounds from there because the remaining workers are less able or less willing. And then the next tier of workers move on as the stress builds on them to carry the workload.
Productivity issue?
Re labour, since mid 21, from the coal face on active projects assorted labour rates have increased (approx): Reo placers +100%, Carpentry +30%, Plumber/HVAC/Electrical/Data/Security +0%, Stoppers/Painters/Tilers +15%.
Basically if trades can't smudge the increase into their materials (i.e. labour only), then the labour rate goes up.
Not sure if this is filtering to the workers or just to the owners...
In other government news - where the middle class continue to be squeezed.
Jacinda has stated that she wont rule out a wealth tax. Last week when this issue first arose - a number of interest commentators critiqued me for saying this policy would result in a National government as it would be deeply unpopular.
Tax changes are political poison in NZ and looking at the 400 odd comments on the NZ herald article - 95% of which are opposed to this type of tax - nothing is changing quickly in this arena.
https://www.nzherald.co.nz/nz/national-accuses-pm-jacinda-ardern-of-u-t…
Good commentary on the approach here.
https://www.stuff.co.nz/national/politics/300578031/the-ruleout-game-po…
I feel like part of the reason the 'rule out game' works so well in politics is because leaders expect to give wishy-washy answers that don't actually address the substance of the question and ruling something in or out leaves very little room for anything but a direct answer.
The Herald readership skews older, so those who received state-subsidised affordable housing, free education to get into the workforce, tax-free and government subsidised investment, and a universal welfare benefit above a certain age...and like to yell at others for being horrible socialists while taking their taxes. Those comments are unsurprising.
Jacinda has stated that she wont rule out...
I apologise for being forthright but this tactic (last section of video) is such tosh. I absolutely loathe announcements that tell voters nothing about policy.
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