Widest wage and inflation gap on record

The world economy has been shaken by the Covid-19 pandemic, logistical and supply chain issues, and the war in Ukraine. New Zealand has been negatively impacted by all of these factors, as well as our prolonged border closures, high inflation, and pressure on our labour market. The latest unemployment data released from Stats NZ shows that the unemployment rate is at 3.3 percent as of the June 2022 quarter. While that means a slight growth from the 3.2 percent rate in the previous quarter, the current level of unemployment is extremely low, with employers struggling to fill vacancies.

Kiwis have started to leave the country again, but prospective migrant workers are struggling to enter the country. The most recent data from Stats NZ shows that there was significant negative net migration (-10,674) in the rolling year ended May 2022. This poses a challenge for our businesses, as they rely on positive net migration of around 50,000 to 65,000 per year to fill labour shortages.

Although more people are employed, the cost of living is putting significant pressure on households. This is fuelled by sky-high inflation cutting purchasing power. Although inflation and salary increases tend to move in the same direction, they are driven by different inputs. Inflation reflects the changes in the cost of a market basket of goods, such as petrol prices and groceries. Salaries are driven by changes in supply and demand for labour, labour participation rates, technology, and productivity. The analytical unadjusted Labour Cost Index (LCI) is a proxy of wage inflation. It tells us by how much the cost of labour has changed over a set period, while also accounting for changes in the quality of employment, as employees receiving promotions or moving to different roles affects this measure.

The analytical unadjusted LCI increased 5.1 percent in the year ended June 2022. This may seem like good news for workers, as it represents the biggest increase in the last 13 years. However, the Consumer Price Index (CPI), which is the most common measure of inflation, has grown 7.3 percent in the same period. This means that the net analytical unadjusted LCI growth, which measures the difference between the analytical unadjusted LCI growth and CPI growth, reached -2.2 percent in the same time period, representing the largest negative gap on record, as the graph below shows.

Finally, it is essential to attract and retain talented workers in New Zealand. That means looking after our workforce, including remunerating staff appropriately, as well as enabling easy entrance for migrants.