The New Zealand minimum wage is set to rise from $15.75 to $20.00 over the next three years.

The Labour and New Zealand First Parties outlined this goal in their Coalition Agreement, and the Labour Party highlighted its intention for a minimum wage rise to take effect from 01 April 2018 in its 100-day plan.

This policy could help turn around the stubbornly low wage growth we have experienced over the last few years. Despite high and broad based economic growth in New Zealand, and substantial growth in the number employed driving unemployment down to 4.6%, the growth in wages has been limited. In other words, there has been high demand for labour, but little increase in pay.

Source: Statistics New Zealand

There are a number of possible explanations for the breakdown of the relationship between the demand for labour and increasing wages over the last few years:

  • Higher net migration has increased the supply of labour, meaning employers have not experienced that scarcity of workers that drives them to increase wages in order to attract and retain employees.
  • The high New Zealand dollar has kept the price of imports low and this competition has prevented New Zealand businesses from increasing prices and therefore wages.
  • The reduction in union membership, as well as the Employment Relations Amendment Bill passed in 2014, has reduced the impact of collective bargaining on overall wage growth.
  • Employees are increasingly competing with technology and this pressure has reduced the value of labour.

A number of these factors are changing, which will help to drive wages higher more broadly. The government is planning to reduce high net migration, particularly around low skilled study visas which have likely been a source of lower paid workers. The New Zealand dollar has also fallen in the last few months, reducing the price competition from imports. Many of the companies we speak to also cite the availability of labour as one of their biggest constraints, and this scarcity may be nearing the point where wages begin rising anyway.

For the economy, rising wages could drive higher inflation and rising interest rates. We expect slowing economic growth, the introduction of an additional target based on employment for the Reserve Bank and prudent economic management, meaning interest rates will rise slowly, if at all.

For New Zealand’s listed companies, rising wages can be a significant cost to bear. It will impact some companies more than others. Wages are generally a greater proportion of costs for retailers, agricultural companies, manufacturing businesses and retirement villages. These companies also generally have a higher proportion of lower paid workers for whom wage rises should be the highest.

There are a number of ways these companies can protect their earnings. Firstly, they can increase prices. This will be easier for exporters given the fall in the New Zealand dollar, or companies with limited competition or differentiated products.

Secondly, businesses can invest in technology to reduce the need for labour. Fortunately, the reductions in net migration mean that large scale job losses are unlikely. Further, this investment will likely be incremental and long dated. But an unintended benefit of a higher minimum wage could be higher productivity. This means that for New Zealand investors, rising wages may put some short-term pressure on company earnings. But in the medium-term, it could help push higher productivity which will deliver higher earnings growth, which is the true long-term driver of share prices.