Normally, strong economic growth starts to generate much stronger wage inflation after a year or two because the supply of labour is not enough to keep up with demand.

Economics 101 tells us prices or wages start to rise when demand outstrips supply.

New Zealand is certainly getting the economic growth.

The Reserve Bank last week forecast GDP growth of 3.4 per cent over the next two years. The Government regularly points to record booms in tourism and construction in Auckland, along with plenty of job growth, and that's all true.


So where is the wages growth?

Quarterly Employment Survey and Labour Cost Index surveys for the June quarter showed wage growth slowing despite an acceleration in economic growth.

The QES showed annual wage inflation slowing to 2.1 per cent from 2.8 per cent a year earlier and the LCI showed the annual inflation rate falling to a six-year low of 1.5 per cent.

Why isn't all this economic and job growth turning into wage growth?

Reserve Bank Governor Graeme Wheeler is tasked with under-standing how supply and demand affects wages and prices in the economy and last week he pointed at migration, in particular the 160,000 people who have arrived in New Zealand since 2013 and increased the size of the workforce by 4 per cent.

"That has added some downward pressure on wage outcomes in terms of the expansion in the labour supply," Wheeler said. "Clearly it has added quite a lot of pressure into the housing market as well."

Wheeler was particularly interested in the quality of the migration surge, and he's not the only one. Treasury warned the Government in December it was concerned low-skilled migration was dragging on productivity and wages and may frustrate the Government's push to move beneficiaries into work because lower-end jobs were being scooped up by migrants.

Immigration Minister Michael Woodhouse and Finance Minister Bill English said this week they had seen no evidence the surge in low-skilled migration was suppressing wages - but there are plenty of signs in the statistics.


This week's Household Labour Force figures showed unemployment fell just 1000 to 131,000 despite a 58,000 increase in the number of jobs in the June quarter.

Statistics New Zealand also reported 342,000 New Zealanders, or 12.7 per cent of the workforce, were "under-utilised" - an internationally accepted standard for measuring the number out of work - want more work or are not looking for work but would take it if it was available.

Treasury warned the Government in December it was concerned low-skilled migration was dragging on productivity and wages.

Overall wage inflation has been weak and falling in the past year, but even areas where job growth has been fastest have seen wages fall or stagnate. In the retail sector, average total hourly earnings growth fell to 3.4 per cent in the year to June from 4.6 per cent the previous year and wage growth in accommodation and food services fell to 4 per cent from 4.9 per cent.

Agricultural wages growth fell to 1.5 per cent in the June quarter from 1.7 per and wages for labourers fell to 1.9 per cent from 2.1 per cent.

Why not leave the market to work by letting the stronger demand exceed the local supply and lift wages?

Immigration New Zealand awarded 209,461 work visas in the year to June 30 - up 23.5 per cent from two years ago.

The top 20 occupations for those visas show just four were in higher-skilled occupations. If those work visas weren't awarded, the market would start to generate heat and increase wages at the low end.

That would encourage people to move within the economy, to new regions or into new occupations.

It would also encourage employers to find ways to make existing workers more productive to match those wages, including by improving training and management and investing in new technology. In the long run, an economy gets wealthier by improving productivity.

Woodhouse, however, is reluctant to unleash the market.

"If you completely remove the international labour market and have a pure supply and demand model, I think in the short term that could be quite damaging," he said this week.

For whom? Employers? Workers?

It wouldn't damage the Government in the short or long terms. The best way for an economy to grow is for the market to allow wages to grow.

Allowing a flood of low-skilled migrants is frustrating that market mechanism with the short-term aim of keeping wages low for employers. It does nothing to develop the economy and the society in the long term.

Top 20 work visa jobs

(Year to June 30, 2016)

• Tour guide
• Chef
• Dairy cattle farmer
• Retail manager (general)
• Cafe or restaurant manager
• Carpenter
• Retail supervisor
• Student
• Aged or disabled carer
• Deck hand
• Dairy cattle farm worker
• Software engineer*
• University lecturer*
• Cook
• Registered nurse (aged care)
• ICT support technicians*
• Developer programmer*
• Entertainer or variety artist
• Office manager
• Waiter

* "higher-skilled" category