Labour costs are likely to have risen at the fastest pace in more than a decade at the end of 2021 and are likely to accelerate further on expectations that unemployment has fallen to the lowest level since the early 1980s.
Although the pressure is good news for workers seeking pay increases, economists warn wage increases are still likely to be outstripped by inflation, and may only fuel cost of living increases, which are already at a 31 year high.
With the Reserve Bank under pressure to get inflation under control, one major bank said the odds were rising that the central bank may opt to hike the official cash rate (OCR) by 50 basis points at its first meeting of the year on February 23.
On Wednesday Statistics New Zealand will release its quarterly household labour force survey, which is expected to show the economy added more jobs in the final three months of the year, lowering the unemployment rate from the 3.4 per cent reported for the September 2021 quarter.
ANZ, New Zealand's largest bank, said that monthly figures released on Monday showed the New Zealand economy continued to create new jobs in December, the 13th consecutive increase.
While ANZ has forecast that the unemployment rate will drop to 3 per cent, if the workforce participation rate dropped from September's all-time high of 71.2 per cent, it was possible "unemployment could easily come in with a 2-handle".
Even a reading of 3 per cent would be the lowest level of unemployment reported since the household labour force survey was established by Statistics New Zealand in 1986.
Wage pressures are already increasing, with the labour cost index for private sector workers expected to have risen to 2.8 per cent, the fastest rate since 2008, when the economy fell into recession during the global financial crisis (GFC).
Pressure for pay increases is likely to have stepped up in recent weeks, as workers digest news that consumer inflation rose to 5.9 per cent in 2021, the biggest increase since 1990.
"As inflation beds in, we can't rule out a sudden shift in wage-setting behaviour that sees wage growth rise even faster than we expect. And if workers start switching jobs more as the labour market heats up, that opens the door for even bigger wage rises," economists at ANZ said last week.
While some economists said the consumer price index for the end of 2021 showed signs of inflation peaking, Infometrics principal economist Brad Olsen said the normal types of inflation associated with an extremely tight labour market had not come through, yet.
He expected wage setting to step up this year, with the closed border meaning employers could not look to bring in workers from overseas to fill vacancies.
"So far, the pressures you're seeing in the inflation numbers are not as much driven by the additional labour costs," Olsen said.
"It's been one of the odd things of the jobs market, that you've seen the labour market tighten in terms of jobs numbers come through, but you haven't seen wages hit those heady heights that they hit just before the GFC."
ASB senior economist Mark Smith said over 2022, wage pressures would spread across the economy, as employers competed hard for a limited pool of workers, with the workforce expanding at the slowest pace in 30 years due to border restrictions.
Nevertheless, ASB said wage increases would still be below consumer inflation, weakening the spending power of households. "High CPI inflation will also drive wages higher, although real wages for most workers will go backwards in 2022," Smith said.
Kiwibank said despite the strong labour market conditions, households are seeing their real incomes erode.
"Wage growth just isn't keeping up with the rapid rise in the cost of living. An over-stimulated economy faced with supply-chain disruption both at home and abroad is rapidly pushing up the prices of ordinary goods and services," Kiwibank said.
The risk of inflation rising further this year - Kiwibank said it believes the CPI probably rose "comfortably" above 6 per cent at the start of 2022 - is raising expectations that the Reserve Bank will be forced to aggressively hike interest rates in response.
"We now see the Reserve Bank hiking the cash rate at every meeting in 2022, taking the cash rate to 2.50 per cent by November, a full six months earlier than previously thought," Kiwibank said.
BNZ senior economist Craig Ebert said late last year that the Reserve Bank had forecast a rise in wage inflation, even though it expected unemployment to tick up slowly.
A further fall in unemployment, well below the rate at which it would be expected to generate inflation, was likely to mean the central bank would now be predicting "even stronger, for even longer, wage inflation" in its latest thinking.
While BNZ was not formally predicting the Reserve Bank would respond with a 50 basis point hike in the OCR in February, the case for such a move was strengthening.