Labour shortages are hitting businesses hard and pushing wage bills up, but the Reserve Bank believes unemployment will rise to 4 percent again, so it remains reluctant to tighten monetary policy any faster
When Yuong Ha started at the Reserve Bank 25 years ago, he says some of the Bank’s younger staff weren’t even born.
Now he is finishing up his final months as chief economist, and speaks candidly to Newsroom about how he is looking forward to stepping away from helping manage a rollercoaster economy.
The 47-year-old is a founding member of the bank’s monetary policy committee, which last week acknowledged the continuing threat of Covid by nudging up interest rates only marginally – by 0.25 percent, or 25 basis points.
“You can’t please everyone all the time, given the nature of our blunt tools … Covid and the recovery, the last three years in this role felt like being on fast-forward the whole time.”
Yuong Ha, Reserve Bank
The subsequent arrival of Omicron has reinforced the bank’s caution about the economy and the employment market, he says. “The people who were making the case that we should go 50 points were pointing to the upside inflation outlook, the strong employment outlook,” he says. “And we were saying, well, yes, but you know, interest rates have already also moved.”
Ha acknowledges there have been three big changes to the playing field since the committee finalised last week’s report: loosening up MIQ restrictions, details of the traffic light system, and the emergence of Omicron.
“We are transitioning into an environment where people are getting used to living with Covid. Vaccination rates are up. So Omicron, I think, is part of that balance of risk assessment. We just don’t know how households and firms will behave in this new traffic light system.”
He says the MIQ changes might worsen the labour shortages in the next six months or so, before overseas workers are able to return.
“It probably makes it easy for Kiwis to leave, because it’s easier for them to come back. That might accentuate some of the labour shortages we’re facing in the near term.”
One of the constant challenges is the bank’s vexed target of “maximum sustainable employment” – a target the bank says New Zealand is now exceeding. In other words, there are too few people unemployed, creating a labour shortage and driving up wages.
This has been confronting since the Fourth Labour Government first encouraged higher unemployment with the intention of driving down wages and supporting business growth.
“It’s really hard to find good butchers. It’s not just me – I know everyone is affected by Covid, but I just scraped through our lockdowns and now it’s looking bleak.”
– Doug Jarvis, Tauranga butcher
Now, with overseas workers excluded by closed borders, employers are struggling to recruit.
One Tauranga butcher says he expects to have to close one of his stores, because he can’t staff them.
“We in New Zealand rely on foreign workers, like immigrants from the UK, Australia, and South Africa, to fill our specific areas of shop butchers,” Doug Jarvis tells SunLive. “My problem is I’m losing butchers and am unable to replace them.”
“It’s really hard to find good butchers, meat professionals, or anyone from the meat industry. I can’t even get any from Auckland because of strict movement controls.
“I’m at my wits’ end with worry because I still have to pay rent, outgoings, electricity and everything else that comes with owning a business.”
Jarvis is after two apprentice butchers, two qualified butchers and two butcher managers. “It’s not just me – I know everyone is affected by Covid, but I just scraped through our lockdowns and now it’s looking bleak.”
“We are a good employer and you put all these ads out and there are no takers. Where are they all?”
– Annie Jackson, Clutha Vets
Down-country, Otago and Southland face a critical shortage of vets that is getting worse by the month.
Clutha Vets co-manager Annie Jackson says their practice in South Otago employed experienced vets from oversea, but two had recently returned home, leaving a staff shortage.
“We have no fat in our system,” she tells the Otago Daily Times.
Extensive advertising for experienced vets in New Zealand and abroad got no response. “We are a good employer and you put all these ads out and there are no takers. Where are they all?”
In August, the Reserve Bank had projected unemployment would drop to 3.9 percent; instead it dropped to 3.4 percent.
The Bank is now projecting unemployment rates will pick up to 4 percent again, though Young Ha admits the data keeps surprising them.
“The conversations we’ve had with employers and businesses around the country have told us the demand for labour is going to keep continuing to be very strong, recognising skill shortages, and ability to hold on to good staff.”
– Yuong Ha
“The unemployment rate is probably at its lowest level in over 10 years,” he says. “We don’t think that’s where it will naturally sit; it will drift up higher over time. As the borders reopen, the labour supply will start growing as migration patterns return to normal. And that will slightly outstrip employment growth.”
The bank projects private sector wage inflation to accelerate from 2.5 percent in the September 2021 quarter, to peak at 3.6 percent at the end of 2022.
“The conversations we’ve had with employers and businesses around the country have told us the demand for labour is going to continue to be very strong, recognising skill shortages, and companies’ ability to hold on to good staff,” Ha says. “So the natural consequence of that should come through in wage growth. We’re not surprised by it – we think it’s just typical market demand and supply factors balancing out.”
He says the effects of Omicron could go two ways: on the one hand, it will exacerbate supply shortages so wages will go up. On the other, if may be the tipping point for some businesses that persuades them to shut up shop, thereby reducing demand for workers.
Finance Minister Grant Robertson has widened the Reserve Bank’s remit, which now targets 1 to 3 percent inflation and maximum sustainable employment. In support of those targets, it’s required to protect the stability of the financial system, and have an eye to the Government’s policy of more sustainable house prices – including by dampening investor demand for existing housing stock.
“Adrian says what he thinks and you know exactly where he stands. And he’s prepared to embrace that wider mandate that central banking can play, and then bring it to life through our day-to-day operations as a reserve bank.”
– Yuong Ha
Essentially, Robertson invited the bank to the policymakers’ table, and the bank’s leadership has stepped right in. Governor Adrian Orr has debated policy by polite but forthright exchange of letters with the minister.
Ha says: “It’s been fantastic to see the evolution of the bank under Adrian’s leadership. It’s reinvigorating the institution but doing it through a very challenging time.
“Adrian says what he thinks and you know exactly where he stands. And he’s prepared to embrace that wider mandate that central banking can play, and then bring it to life through our day-to-day operations as a reserve bank.”
Last week, buried in the back of the 56-page November monetary policy statement, was a statement of the bank monetary policy committee’s appetite for risk. On most counts, that appetite is low. It has a low appetite for making decisions without thorough deliberation, a very low appetite for legal challenge, and no appetite at all for acting illegally.
But on reputational risk, this once-conservative institution says: “The MPC has moderate appetite for external criticism and challenge, and will respond as necessary to maintain its legal licence to operate.”
Further, the committee says it has high appetite to learn from its international peers and to design and test new or novel policies to respond to uncharted economic conditions.
Ha says: “I think we’ve got a low appetite for a lot of those risks, being conservative central bankers, but the exceptions are, we have to be open to critique and challenge of our decisions.”
He has welcomed the bank’s increasingly robust engagement in a wider range of policy debates: not just inflation rates, but also housing and employment.
“It has been different – I think it’s probably just the nature of society’s preferences changing over time. When I first joined the bank, inflation was topic one, two, and three. And now, it’s not just inflation, it’s employment, and then housing was topic du jour, and climate … As you step into these roles, it’s as much about accountability and explaining and contributing to the public discussion.”
In previous tightening cycles, when interest rates were rising, it would have been the farmers up in arms because of the exchange rate, Ha says. “And when we lowered interest rates, we upset people whose term deposits and incomes were being affected. And now it’s the first home buyers.
“It’s just part of the the important role we play that we will have an impact. You can’t please everyone all the time, given the nature of our blunt tools.”
He doesn’t feel bruised by the combative political arena. “It’s more being bruised by the pace and uncertainty we face in this economic environment. You know, Covid and the recovery, the last three years in this role felt like being on fast-forward the whole time.”
Ha will finish up after the February monetary policy statement. He is looking forward to spending more time with his children, he says, as he considers his next his next move. “No economics for at least a couple of years.”
