How NZ wage growth stacks up against the world - International Monetary Fund verdict

Local wage growth has been adding to inflation pressure in the past year, the International Monetary Fund (IMF) says in a new report.

The tight labour market, historically high levels of labour force participation and historically low levels of unemployment have been putting upwards pressure on wages and fuelling expectations of future wage growth, the report says.

The Labour Cost Index shows 4.3 per cent annual growth to the end of the first quarter this year, and the Quarterly Employment Survey shows average hourly earnings rose 7.6 per cent across the same period.

That put New Zealand’s wage inflation in 2022 ahead of Australia, but broadly on par with other advanced nations, the report concluded.

The IMF notes when inflation first started picking up in the second half of 2021, it was “mostly driven by a spike in international food and energy prices and supply chain and shipping disruptions”.

“But pressures from food and commodity prices are easing, and although the supply chain disruptions are expected to persist for some time, there are signs that capacity is beginning to catch up with strong demand for goods,” it said.

“This is reflected in the decline in tradable inflation. However, non-tradable inflation has taken its place, keeping overall inflation high and sticky.”

When it came to wage inflation, New Zealand appeared to be in the middle of the pack compared to other advanced nations, the IMF found.

“Wage growth at the end of 2022 was generally higher in countries with tight labour markets, indicating an important role for domestic labour market conditions in explaining wage dynamics. But while both Australia and New Zealand had similar unemployment gaps at the end of 2022, wage pressures were higher in New Zealand.”

The IMF founda robust wage-unemployment relationship in New Zealand, which explained the role played by the tightness of the labour market in setting the pace for higher wages and, in turn, greater inflationary pressures, particularly amongst non-tradables.

Looking at trends across a range of countries, it found a greater share of collective bargaining and longer contract length is associated with wages being less sensitive to unemployment and inflation expectations.

“Given collective bargaining is more prevalent in Australia, this might explain higher wage pressures in New Zealand relative to Australia, despite similarly tight labour markets in both countries,” the IMF said.

“Going forward, as the Fair Pay Agreements come into effect and set collectively bargained minimum terms and conditions at the sectoral level, it could result in a weakening of the wage-employment relationship in New Zealand and lead to a less volatile but stickier wage growth.”

Using an industry-level database for hourly wages, the IMF found minimum wages (which have risen rapidly over the past decade) had a positive pass-through to overall wages, and could have pushed the entire distribution of wages higher.

The large increases in the minimum wage in the last 20 years had significantly closed the gap with the median wage in New Zealand and had changed the shape of the wage distribution, the IMF said.

However, the IMF noted while increases in the minimum wage can reduce overall inequality for low earners, they do not appear to address inequality between genders and ethnic groups.