Faster wage growth from new labour law settings will stoke inflation, ASB economists say

Thursday 12th July 2018

Hikes to New Zealand's minimum wage and a move towards collective bargaining will accelerate the pace of pay rises over the next five years and spur inflation, ASB Bank economists say.

Economist Mark Smith and chief economist Nick Tuffley said in a note the planned increase in the minimum wage to $20 an hour by 2021 could add between 0.5 and 0.7 percentage points to annual wage inflation through to the middle of 2022 as the 13 percent of workers on the bottom pay rung or earning a little more shift up the pay scale. Adding the proposed industry-wide Fair Pay Agreements and easier settings for collective bargaining could push that extra annual wage gain closer to 1 percent as lower-paid sectors benefit from greater job protection.

In turn, that will probably drive up consumer prices without a corresponding increase in productivity, which Tuffley and Smith estimate could boost inflation by between 0.3 percent and 0.7 percent per year, and potentially lead to higher interest rates.

"Employees need to be realistic with their wage demands. Sizeable wage increases not matched by a corresponding improvement in productivity could likely place the viability of some firms under jeopardy," the ASB economists said. "We believe the economy-wide impact on employment is likely to be modest, particularly in the context of sizeable employment increases of late."

New Zealand's economy has grown at an annual pace of about 3 percent in recent years but per-capita growth has been non-existent. Government data today showed a 0.2 percent increase in food prices in June from a year earlier, which the government statistician said was due in part to higher minimum wages feeding through into takeaway prices.

Demand for higher wages has gained momentum with public sector workers taking to the streets in a push for better pay and conditions. New Zealand's nurses went on strike today for the first time in almost 30 years after rejecting a $520 million offer which the government has described as the best it can do.

Mark Johnson, senior dealer foreign exchange at OMF in Wellington, said traders don't expect to see inflationary pressures push up interest rates in the near term, with Reserve Bank governor Adrian Orr keeping the door open for a cut to the official cash rate as well as a hike. Still, the heightened level of industrial action from the likes of Inland Revenue, the Ministry of Business, Innovation and Employment, the nurses and potentially teachers will eventually flow through to the rest of the economy.

"These will have to create inflationary pressures at some stage as pay rises start to come through," Johnson said.

Economists are divided about the pace of inflation in the June quarter, with Westpac Banking Corp NZ economists today saying they predict a 0.6 percent increase in the consumers price index for an annual increase of 1.7 percent, while ANZ Bank New Zealand economists are picking a quarterly gain of 0.1 percent an annual increase of 1.2 percent.

Westpac economists point to higher fuel and food prices driving the increased pace of inflation, alongside a weaker currency driving up the cost of imported goods, whereas ANZ anticipates a slowing in the price of housing-related goods "after running hot for so long" and a seasonal decline in domestic airfares.

ANZ economists Miles Workman and Liz Kendall said the labour market remains close to full employment and recent indicators suggested more tightening may be limited.

"Just how much wage growth accelerates beyond the impact of higher minimum wages and government wage negotiations is a key uncertainty," they said. "On the other hand, a lift in inflation expectations, perhaps related to minimum wage increases and higher tradables inflation could lead to more sustained inflationary pressures than currently expected."

(BusinessDesk)

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