Inflation vs jobs among hits on way
Politics, migration and schooling part of a list of issues New Zealand needs to tackle
Within a central bank war against inflation, there’s another key battle we don’t like to talk about. It’s jobs versus inflation. Of course, it’s not just jobs versus inflation. There are other battles. Profits and margins versus inflation. Growth and asset prices versus inflation. But deep structural changes are taking place in the labour market.
When you have too much money chasing too few goods, causing inflation, hits all round are on the way.
The hits
The economy is operating above maximum sustainable employment and the Reserve Bank of New Zealand says “pressure on available resources and increasing wage inflation are adding to domestic inflation”. This puts the labour market in the spotlight to tame inflation.
Unless we can unlock a supplyside miracle, getting inflation under control means hits to employment and higher unemployment.
No one wants to see the hardship people suffer when there’s higher unemployment but controlling inflation is not likely to be painless, and not just in the labour market.
The cost of living is New Zealand households’ biggest concern, according to the Ipsos issues monitor.
Containing inflation has already meant household wealth to the tune of $130 billion in six months has been destroyed. That is on the back of a rise in wealth of $670b in the preceding two years, though. Payback was due. When you eat like an elephant, don’t expect to pass wind like a mouse.
Mortgage pain and mortgagee sales are around the corner.
There’s $160b of mortgage debt to refinance in the coming year, more than half of that in the six months before the election.
The yield on bank mortgages is 3.8 per cent. Rates on offer are 6 per cent.
Next, construction, profits
The construction cycle will be next to turn. Then the profit cycle. Margins will be squeezed as buyers resist cost increases.
I’ll be watching producer price data from Statistics New Zealand to eye who’s seeing margins squeezed and who’s passing on costs. Supermarkets, I’m looking at you.
Some argue that firms should just wear it and make less money. The reality is that firms will take a hit but will also cut costs. It’s just a question of time before we move into that zone — and labour is a cost.
Rising wages will also see firms turn to capital investment over time.
The big picture
We should worry most about the inflation versus jobs trade-off, both economically and socially, but there are also broader labour market issues to think about.
First, we obviously need more workers and boosting supply is better than belting demand. We have a low unemployment rate, the third-highest employment rate in the Organisation for Economic Co-operation and Development, and the highest labour force participation rate NZ has ever seen, so we are pulling out all the stops from the supply side already.
It’s still not enough to meet demand, and this doesn’t bode well for what needs to happen to demand.
The latest household labour force survey saw a huge jump in the labour force participation rate for the 15-to19 years age group. There’s good and bad in that.
Is the cost-of-living crisis forcing teenagers into work? Is it adding to declining school attendance, with the latest figures nothing short of awful, reporting just 40 per cent of students regularly attending school? Or are higher wages enticing young people into the workforce?
The lever from the supply-side we need to pull harder is migration, but it’s a lever stuck in bureaucracy and ideology. However, we can take some encouragement from three successive monthly migration gains.
Second, workers shortages are not likely to be temporary. The population is ageing across the western world. We’re in a global competition for talent and once again the focus needs to be on getting our migration settings right.
NZ has a growing grey force (up 22,800) but the population aged 64 and below went down by 10,000 in the 12 months ended June.
Third, Covid and border closures exposed a legacy of underinvestment in people. Migration is something of a sticking-plaster solution that needs to be complemented by an education sector and skills training that meet the demands of the 21st century workplace.
The real worry here is the pipeline, as primary and secondary students transition into post-school training.
School attendance is now a national disgrace and needs called out. We need a much stronger call to arms and heads need to roll. Education is the key barometer of our future, and we’re failing fast.
Fourth, there is rebalancing going on in the labour market. Together, globalisation, technology and the reduced wage-bargaining power of unions saw employees’ (think labour’s) share of the economic pie drop over the 1980s and early 1990s and considerable scarring.
The ratio has been broadly the same for the past 20 years but is slightly rising of late. There’s huge pressure to lift this ratio. It’s about profits versus labour costs and there will be calls for more tax from corporations amid demands for lower income tax.
Those making money can expect more demands to mitigate the costof-living crisis. Rebalancing also involves revaluing roles in society — the pay of teachers, nurses, police officers. Why does a financial engineer get paid so much more than a normal engineer?
Fifth, the era of ruthless shareholder capitalism is being replaced by stakeholder capitalism, a fancy phrase for a shift from the short game to the long game.
This is about sustainable business practices, but people are at the centre of this shift. If the customer is looked after, good businesses make money.
The bottom line
Politics, inflation, and the labour market are on a collision course.
Migration is the lever we need to pull more aggressively for now. But we also need to address long-term trends, and I’d say schooling is the main one for the long term.