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Lured by New Zealand’s economic boom, immigrants hold wage inflation down

Posted on November 15, 2014
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(Reuters) – New Zealand’s robust economy is soaking up jobs at its fastest rate in more than five years even as immigration soars, keeping a lid on wages and relieving pressure on the central bank to raise interest rates.

Official data on Wednesday showed the country’s unemployment rate fell to 5.4 percent in the third quarter, its lowest level since the first quarter of 2009, while annual wage growth was contained at 1.9 percent.

That enviable milestone is a side effect of an economy, which grew at a decade-high rate of 3.9 percent in the second quarter, humming on all cylinders led by a booming housing market and growing global demand for dairy products – the country’s biggest export earner.

The growth has helped create jobs in the South Pacific island nation, pulling down the unemployment rate from a 14-year high of 7.2 percent in 2012.

While this would normally be a recipe for higher inflation, rising immigration has added to buoyant labor supply, keeping the participation rate hovering near a record of around 70 percent, one of the highest levels among OECD countries.

As a flood of returning New Zealand expatriates boosts annual immigration to record highs, a widening pool of workers has enabled employers to stave off wage increases, helping to lower overall annual inflation to 1.0 percent in the third quarter.

That is well below the central bank’s 2.0 percent target, and most economists believe inflation pressures will remain subdued in coming months. That will allow the Reserve Bank of New Zealand (RBNZ) to keep official interest rates on hold at 3.5 percent until at least the second half of 2015.

“Migration helps both demand in the economy, which at times can increase prices, but it’s also been an important contributor to the supply side of the economy,” said Satish Ranchhod, senior economist at Westpac in Auckland.

“It has increased our potential to grow without significant increases in costs, and that has meant that interest rates can stay on hold for a bit longer than people have expected.”

Overall price pressures have been subdued, as an annual rise in housing-related inflation has been offset by only minimal rises in most consumer price categories. A high New Zealand dollar has also helped dampen price pressures from imports.

Like the majority of forecasters, Westpac expects the RBNZ to deliver its next rate rise in September 2015.

New Zealand has enjoyed a relatively low unemployment rate since 2000. It hovered below 4 percent in 2004-2008, in part because the small island’s growing economy has a working-age population of only 3.5 million.

The wave of immigration has provided a large pool of workers for infrastructure projects in the Canterbury region, which is under reconstruction following earthquakes in 2010 and 2011.

Job recruiters and job site operators say that New Zealanders returning from overseas, a dwindling flow of “Kiwis” leaving to work in Australia, and an influx of skilled migrants from Asia and beyond are being snapped up by firms focused on expansion after recovering from the global financial crisis.

But they added that, as much as the domestic labor pool has grown, employers are still struggling to find skilled workers at home to fill new positions, prompting more companies to look overseas to recruit.

As a buoyant economy prompts more workers to seek better paying jobs, job recruiters said that employers struggling to fill positions were starting to relent to demands for higher wages.

“It’s fantastic that we’re seeing more and more people return home because it’s making it slightly easier to secure talent,” said Pete Macauley, regional director of professional job recruiter Michael Page in New Zealand.

“But it’s still not keeping up with the volume of vacancies in the market,” he said, adding that wage pressures would likely pick up as employers start to offer higher salaries.

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