Bosses need to 'bite the bullet' and lift wages

In the March quarter, inflation was 1 per cent. / File photo

Employers will eventually need to "bite the bullet" and start paying more to their staff following the higher than expected inflation, BNZ chief economist Tony Alexander says.

Inflation in the year ended March was 2.2 per cent, according to Statistics New Zealand's Consumer Price Index, the official measure of inflation.

In the March quarter, inflation was 1 per cent.

Both the annual and quarterly inflation figures were well above estimates by the Reserve Bank and economists.

Alexander said employers having to pay more to their staff might be especially so in response to the change in migration rules announced last week by Immigration Minister Michael Woodhouse.

The Government had not estimated to what extent the rule tightening would lead to fewer work visas being issued.

However, Alexander said the impact could be limited - noticeable but not making a big enough dent in the recent net migration gain of 71,333 to produce altered forecasts for important things like wages restraint from extra people "sloshing around'', pressures on infrastructure and pressures on the housing market.

Economists, when forecasting inflation, also liked to consider things such as recent or
expected changes in the exchange rate and commodity prices.

"We can't forecast either as we have all proven is the case for our most substantial export - dairying. And for the New Zealand dollar, things can be hit and miss. Have either done any big movements which will feed through into inflation?'"

The New Zealand Institute of Economic Research's Quarterly Survey of Business Opinion showed a net 41 per cent of non-rural employers were finding it hard to get skilled labour.

That was above the 10-year average of 18 per cent, and along with late last year, was the highest reading since the end of 2007 when the unemployment rate was 3.3% rather than the current 5.2 per cent.

Alexander said that suggested employers could not find the people they were really
prepared to have working on their premises, even with a lot of people still looking for work.

For those people concerned about the 139,000 people officially classified as unemployed in the March quarter, the message was a stronger pace of growth in the New Zealand economy was probably not going to deliver jobs for those people.
Instead, the focus needed to be on improving what they had to offer to employers.

"A tight labour market tells us wages growth will pick up. But this has been the case for some time and we have all be incorrect in forecasting sustained higher inflation since 2010 on the basis of this traditional relationship.''