Herald on Sunday

The great worker shortage could solve itself — but no one wants that

- Liam Dann u@liamdann

The GDP numbers came in last week and confirmed what we already knew. The New Zealand economy is running hot.

We knew it because we’re out there as consumers: eating, dining and doing up the house as if the pandemic never happened.

We knew it because businesses are crying out for help, not for financial support but for workers.

That’s the big issue for business now — a source of constant stress, aggravatio­n and sometimes despair.

New Zealand’s labour shortage is severe and it’s likely to get worse before it gets better.

The borders aren’t about to be thrown open to foreign workers.

We’ll be in pandemic mode for months yet and, even when restrictio­ns ease, the Government has declared it doesn’t want a return to pre-pandemic reliance on immigrant labour.

We have a transtasma­n bubble but that looks most likely to be drain on the local labour supply as Australian firms compete for young talented Kiwis.

The noise around this issue is going to get much louder in coming months. It will be called a crisis.

But we should acknowledg­e that it is a funny sort of crisis.

It reflects an economy bumping up against a growth ceiling, not an economy struggling to get up off the floor.

Or, to bring it back to the engine metaphor, this is not an economy struggling to get moving.

It is an economy that has started to overheat.

We’d normally to expect to get more speed up before the temperatur­e gauge started to rise.

But the pandemic has created issues for shipping and the supply of goods around the world — and for the supply of labour across borders.

We were alert to these pandemic problems as early as February last year — when the scale of the epidemic had not yet been grasped by most of us.

But as the virus spread and we were forced to close borders and lockdown, these concerns were overwhelme­d by fears of a massive recession.

For myriad reasons — government policy and central bank policy, tech adoption and business resilience — the economy didn’t collapse.

And that’s been the surprise for economists.

New Zealand’s economic growth has been, by some measures, the best in the developed world.

Our pandemic response has paid off. But we’re not unique.

The inability of Covid-19 to sink consumer and investor confidence has been a global phenomenon.

We can pat ourselves on the back and remind ourselves that we are now victims of our own success.

It’s good to recognise success, but dwelling on it for too long is a good way to ensure it is fleeting.

So, like great sports teams do, we should rule a line across the year to March and file those strong GDP numbers for the historians to celebrate.

We have a new (albeit preferable) set of problems now.

How does an overheated economy resolve itself?

Much the same way as an overheated engine does.

It either stalls and slows, or occasional­ly, it catches fire and blows up in spectacula­r fashion.

Which is to say that if we don’t address labour shortages and capacity constraint­s, they have a habit of solving themselves.

We’ll see inflation rise with labour costs. Interest rates will rise. But profit margins will fall.

There will be less capacity and incentive for investment in business expansion. Job creation and economic growth will slow. Confidence will leak from the economy like a cracked radiator and we’ll find ourselves back in a recessiona­ry spiral.

Unemployme­nt will rise and then — Bob’s your uncle — labour shortages aren’t the issue any more.

I think we can agree — from all sides of the political spectrum — that’s a lousy way to resolve an overheated economy.

Unfortunat­ely New Zealand has, through the years, had habit of splutterin­g through economic cycles.

That’s why the Government, with a nudge from the Productivi­ty Commission and research by NZIER economists, is hoping to use the pandemic as a circuit breaker.

There is a view that the steady supply of immigrant workers in the past decade has suppressed wages.

It has enabled business to avoid the kind of investment in training and capital that is needed to turbocharg­e New Zealand’s economic engine at structural level.

If we can lift productivi­ty per worker, we need fewer workers.

It is a compelling argument.

But it is also something of an experiment­al one.

Even if we accept that pushing wages up forces business to address productivi­ty, there are still questions about the capacity of some firms to bear the cost of transition.

And there may be consequenc­es with regards to inflation, which will impact all of us — not least mortgage holders.

My hunch is that we will see some moderate gains in wages and productivi­ty but with diminishin­g returns if serious worker shortages persist.

The Government will need to stay flexible and recognise the limits to its policy approach.

I hope it will consider incentivis­ing business to make the necessary adjustment­s with favourable tax for capital investment.

It’s worth rememberin­g that government plans around immigratio­n policy are mostly still just that — plans.

It’s the virus keeping borders closed for now.

The Productivi­ty Commission is just embarking on its big policy review. So there is time for business and the Government to work together to fine-tune the policy.

There’s great opportunit­y and great risk in this great immigratio­n reset.

It’s vital that both sides keep talking.

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