Too much of a good thing
Published in Insights, The New Zealand Initiative’s newsletter, 6 May 2022
Successful economies have low unemployment.
However, these are no ordinary times, and New Zealand’s ultra-low unemployment rate of 3.2% should worry everyone.
But let’s start with the positives. There are so many jobs available in New Zealand, anyone looking will have no problem finding one.
It is not a statistical fluke, either. With more than 2.8 million people in paid work, employment in New Zealand has reached an all-time high.
If the labour market is so good, what could possibly go wrong?
Because the labour market is tight, wage pressure is building in many industries. When companies cannot find workers, they will outbid one another. Low unemployment thus drives inflation. Increases in interest rates will follow.
Inflation, meanwhile, also affects employment, in another way. Wages are sticky, meaning they do not rise as fast as inflation, at least at first. Existing employees suffer a real wage cut when their wage increases lag inflation.
The flip side is that it is cheaper to hire staff, at least temporarily. Companies will continue to hire more workers until wages catch up with price increases.
Perhaps this is the harbinger of the dreaded price-wage spiral: Rising inflation temporarily boosts jobs. Then, the higher wages that come with low unemployment drive inflation even higher, leading to an even tighter labour market, and around it goes.
In the short run, such a scenario may appear good for the labour market. But sugar rushes do not last forever. When the short-term stimulus is exhausted, inflation and crippling interest rates will be all that is left.
This is almost a textbook case of stagflation. It is what much of the world went through in the 1970s.
But this time it is going to be even worse for New Zealand. Not only do we see early signs of stagflation, but Kiwis are also forecast to be leaving their country in droves.
There are many reasons Kiwis might want to leave New Zealand. Wages are higher in Australia and elsewhere. New Zealand has insane house prices, and the cost-of-living crisis is real. Leaving the country after two years behind Covid walls is appealing too.
With our border remaining difficult to cross for would-be migrants, we cannot simply plug the gaps in our labour market with migrants. For a start, Immigration New Zealand is way behind on processing visa applications.
The mass exodus of Kiwis to better lives abroad will exacerbate the problems for those left behind.
Do not let low unemployment fool you into thinking everything is fine. It might well be the opposite.