Labour market dynamics – is it time to exhale?

After years of a relatively tight labour market, the recent Quarterly Predictions by the New Zealand Institute of Economic Research (NZIER) highlighted the change occurring for New Zealand firms and the impact of strong migration inflows.

The independent research firms says, “ . . . there has been a remarkable turnaround in labour shortages over the past year. Net migration has recovered strongly with the reopening of international borders, as firms bring in workers from overseas”.

That development should bring a sigh of relief from New Zealand employers and businesses who have been navigating persistently tight labour markets for nearly 10 years. This included the phenomenally difficult Covid period when border restrictions turned off the tap of highly valuable migrant labour.

 In Boardroom in late 2022, I raised concerns about whether directors were sufficiently focused on the impact that wider labour market dynamics have on business and organisational performance, and on overall competitiveness. While the NZIER prediction indicates some relief, directors may not be totally off the hook.

Productivity is a measure of how efficiently a business – or, aggregated up, a national economy – turns inputs into outputs. When it comes to labour productivity there is strong evidence we excel at working harder, not smarter.

But as we face further economic and therefore fiscal headwinds, boards across the country are going to have to work harder and smarter. They will need to be smart in analysing the implications of labour market trends for decision-making in their own organisations.

This will include making capital investment decisions to drive efficiency, rewarding improvements in performance with higher wages, and being disciplined about whether to pass continued wage pressures through to customers while also facing competitive pressures. Navigating this will also depend on the quality of a firm’s relationship with its employees and other workers in the supply chain.

Despite some improvement in business confidence and improvements in the terms of trade, global economic headwinds are strong, and the Reserve Bank has warned we need to keep an eye on productivity growth as it has remained weak coming out of the pandemic.

I won’t be exhaling until we see definitive signs the labour market is softening (that is, unemployment rising). Only then will we be able to start to understand the implications this softening might have for wider monetary policy and macroeconomic policy settings.

The other group waiting to exhale is the Reserve Bank’s Monetary Policy Committee. The February 2024 Monetary Policy Statement from the committee also noted the role net migration has had in boosting supply capacity.

How this potential softening flows through to wage and salary expectations is also relevant. Recent data indicates wage growth has been declining at a rate lower than expected.

A recent speech by Governor Adrian Orr highlighted concerns that price expectations may be baked in across the economy. While no-one is talking about the theoretical wage spiral, we do see concerns across economists about a feedback loop where businesses try to pass on increasing costs to their customers, and customers then seek higher wages from their employers to offset the increased cost of living – and on it goes.

In his recent speech to the New Zealand Economic Forum, Orr set this out clearly, saying: “ . . . wage growth driven by excess demand in the economy – as opposed to wage growth driven by productivity gains – creates additional cost pressures for businesses and, in turn, upward pressure on consumer prices.”

Recent data released by Statistics New Zealand highlighted a disconnect between wage pressures being seen in the public and private sector. While average hourly earnings overall were up 6.9 per cent, public sector earnings were up 7.4 per cent – the largest increase since March 2006.

However, fiscal austerity and redundancy programmes coming out of Wellington are likely to put downward pressure on wage expectations. Given that the public service doesn’t exist in a hermetically sealed bubble in the labour market, and especially as 55 per cent of public servants live outside Wellington, this should also begin to flow through to the overall economy through an eventual softening of the labour market.

In this challenging context, what can directors do? It’s essential to stay informed about labour market trends, to understand the impact on your organisation, and to adapt strategies accordingly. Specifically:

• Seek regular updates from management on labour market-related issues, including how competitors are responding and employment relation dynamics in those sectors with high degrees of union penetration
• Manage remuneration and benefits proactively – work the full range of your levers in this area to ensure you are rewarding performance and productivity where you can

• Keep an eye on wage pressures in your sector and signs of wage growth slowing to ensure your remuneration and bargaining strategy is well informed by the current market, rather than operating off an outdated 2022/23 playbook
• Place discipline on your revenue and pricing decisions
• The Governor of the Reserve Bank is watching and directors should be too. 

Sarah Baddeley MInstD is a partner at leading management consultancy firm MartinJenkins. She leads the Auckland practice and has expertise in labour market-related issues.