Strong labour force growth underpins economic growth with low inflation
Rapid growth of the workforce, boosted by new migrants, women, and older workers, has helped create strong economic growth over the past four years without driving up inflation, the Reserve Bank says.
“Recent low out turns in consumer price inflation can be mostly explained by falls in commodity prices and the high New Zealand dollar, but the higher productive capacity of the economy from rapid growth in the labour force also explains some of the weakness in inflation,” Reserve Bank Deputy Governor Geoff Bascand said in a speech today at Otago University, in Dunedin.
The main drivers of the rapid growth in labour supply have been population and increased participation. “Over the past four years New Zealand’s population has grown by a quarter of a million people, with over half that number coming from net migration. The economy has expanded steadily since 2011 and created 180,000 extra jobs, but the unemployment rate has declined only modestly,” Mr Bascand said.
The largest recorded surge in migration in 100 years has contributed to housing and consumer demand and job growth, but without the inflation pressures that accompanied the previous wave. Because migrants increase overall spending in the economy and also increase the labour supply, the net effect on inflationary pressures can be ambiguous.
“Higher labour force participation by women and older workers, together with the characteristics of this particular migration cycle, go a long way to explaining why wage and non-tradables inflation pressures have proven less than expected,” he said. In this cycle, fewer families and more work visas are likely to have boosted migrant participation. Much of the current surge in migration is explained by weakness in the Australian and world economy that has made New Zealand a relatively more attractive place to live. Because our labour supply has increased at a time when businesses are facing lower world demand, it results in lower wage and inflationary pressures.
The labour market most directly influences consumer price inflation through wage outcomes and a key driver of wage growth is the balance of supply and demand in the labour market. Mr Bascand said Reserve Bank researchers have created a labour utilisation composite index that shows supply and demand in the labour market have broadly been in balance since early 2014, creating little upward pressure on wages.
“Stronger than expected labour supply, and greater than expected slack, has been a factor in our assessment that monetary policy should remain accommodative,” Mr Bascand said.
“In view of the close relationship between labour market dynamics and inflation pressures, we will continue to monitor a broad range of labour market indicators to help inform our monetary policy decisions” he said.
- Speech: Inflation pressures through the lens of the labour market
- Analytical Note: Developing a labour utilisation composite index for New Zealand
- Analytical Note: Why the drivers of migration matter for the labour market
- Analytical Note: The macroeconomic impact of the age composition of migration
- Discussion Paper: How wages are set: evidence from a large survey of firms
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