Labour Market Pressure

I suspect that we are going to see increasing pressure in the labour market in New Zealand. Despite Covid and the worldwide economic shutdown, the unemployment rate here has remained low. According to Stats NZ, 3.4 percent in the September 2012 quarter, which is low by international standards.

Despite the shutdown of the tourism businesses, and many related industries, such as accommodation, restaurants and cafes, transport, demand for labour is strong. Businesses are having difficulty getting staff to fill vacancies. Some industries are calling for the government to increase migration flows so that they can employ staff. One reason is that Covid restrictions in place, net migration has gone negative, with more people leaving than coming in.

Over the last couple of decades, successive New Zealand governments have allowed significant inflows of migrants. For the past decade, annual net migration to New Zealand was more than 50,000 in most years. It had peaked at over 100,000 in 2013. It was at similar levels during the first few years of the 2000s.

These high levels of migration had two consequences. The first was pressure to build enough houses and the infrastructure needed to support the large numbers of people arriving in New Zealand. Hundreds of new school classrooms have had to be constructed, and hospital capacity has felt the pressure. The housebuilding industry has boomed, and house prices have risen rapidly.

The other impact of migration is in the labour market. If there are large numbers of migrants willing to work for the minimum wage, employers have no incentive to pay their lower-paid staff more, because they can easily replace them with migrants on the minimum wage.

This external source of labour supply has now come to an end. The demand for labour will put pressure on wages. This is probably the best thing that could have happened for people in low paid jobs. They will have more choice, and should be able to negotiate better pay.

I suspect that we will begin hearing pressure on the government from industries that employ cheap labour for it to bring in more migrants, so that they can get the staff they need without having to pay high wages. The agriculture sector and the restaurant and café industry are already complaining that they cannot get staff (mainly because they have paid low wages for unsocial work hours).

I hope the government will resist these calls. It would be a mistake to go back to the policy of bringing in large numbers of relatively unskilled migrants so that we continue to be a low wage economy. The only ones who benefit from that policy are stingy employers, but they don’t have the right to cheap labour so they can earn greater profits.

In a competitive economy, not every business that is established will be economically viable. Some good business ideas will fail because their production costs, including wages and salaries, are greater than their sales revenue. Forcing wages down to make these uneconomic businesses viable is not a sensible economic policy.

In a free market, the solution to shortages is not a government mandate. Instead, prices should adjust until supply equals demand. This same applies to the labour market. Businesses that cannot obtain the staff that they need should pay more. If they raise their pay offer sufficiently, they will usually obtain the staff they need.

If businesses are not viable at prevailing wage rates (not those that applied last year when pushed down by cheap migrant labour), the business owner should be thinking twice about what they are doing. If they cannot pay their employees a reasonable wage rate, they are not contributing much to the New Zealand economy.

There are not a fixed number of jobs in any economy. An economist recently said that New Zealand has a shortage of about 2000 skilled an unskilled people, but that is the wrong way of looking at it. The real problem is that there are 500 odd businesses trying to operate even though they are not viable given the resources currently available.

Employees like a situation where there are more job seekers than jobs, but a situation where there are more jobs tham job seekers is more beneficial at this time when a lift in wages is needed by poor working families. 

See Employers and Wages.