Labour’s Legacy? A review of inflationary Government policies

Article Summary

As countries across the world seek to tame inflation, several recent policies implemented by the New Zealand Government have increased costs for businesses, including the recurring increases to the minimum wage rate, increased sick leave entitlements, and a new public holiday.  Additionally, policies currently being considered by the Government, such as the Fair Pay Agreements Bill and the New Zealand Income Insurance Scheme, will further increase costs for businesses if implemented.
Whilst the exact impact of these policies on New Zealand’s inflation rate is up for debate, they have certainly created further inflationary pressures for businesses and consumers, and the policies being considered by the Government suggest that there is only more pressure to come.  Could this be Labour’s lasting legacy?
In the 12 months to June 2022, New Zealand’s consumer price index, a common measure of inflation, reached a 32-year high of 7.3 per cent. [1]
While much has been said about the inflationary impacts of COVID-19 pandemic, supply chain issues, and the ongoing conflict in Ukraine, domestic/non-tradeable inflation – being inflation caused by domestic demand and supply mechanics – reached 6.3 per cent for this same period, the highest since Statistics NZ started measuring domestic inflation in June 2000. [2]
Could recent Government policies have contributed to this domestic inflation? And could upcoming policies that are being considered by the Government create further inflationary pressures?
Recent Policy changes
Minimum wage increases
On 1 April 2019, the adult minimum wage rate was $17.70 gross per hour.  Now, it is $21.20 gross per hour.  This represents an increase of almost 20% over the last three years, during which time we have had a global pandemic, border closures, and Government-mandated lockdowns.
The Cabinet paper released in relation to the latest minimum wage increase included several statements of note, including: [3]

  • an acknowledgement that minimum wage rate increases can increase inflation pressure, if employers pass on all or part of the increased labour costs through increased prices [4], and
  • MBIE’s estimate that increasing the minimum hourly wage rate from $20 to $21.25 (slightly more than what was actually implemented) would result in an annual economy-wide increase in wage costs of $389 million. [5]

Increased sick leave entitlements
On 24 July 2021, the Holidays Act 2003 was amended to double the minimum sick leave entitlements, from 5 days per year to 10 days per year.  In its Regulatory Impact Statement, MBIE estimated that this increase in the minimum sick leave entitlements would result in a marginal cost increase for employers of approximately $958 million per year. [6]
New public holiday for Matariki
On 8 April 2022, the Government enacted the Te Kāhui o Matariki Public Holiday Act 2021, which creates a new, 13th statutory public holiday to recognise Matariki, with the first observance on 24 June 2022.
In its Regulatory Impact Statement for this policy, MBIE estimated that the new public holiday would create additional labour costs for employers (excluding penal rates to ordinary wages) of between $379 – $417 million per year. [7]
Labour/skills shortages
In addition to the specific policies detailed above, a consequence of the Government’s response to the COVID-19 pandemic and its border closures has been the notable shortage in labour resources in New Zealand, with many employers struggling to fill vacancies.
On 10 March 2022, Sense Partners released a report, commissioned by BusinessNZ, into the labour market conditions for businesses in New Zealand.  This report identified that: [8]

  • the domestic labour market is constraining New Zealand businesses. 
  • because labour market conditions take around 1.5 years to flow through to generalised labour cost inflation, the researchers expect to see sustained acceleration in wages from mid-2022.  The report also noted that wage inflation is a lagging indicator of labour shortages. 

Following the release of this report, wage inflation for the 12 months ending June 2022 came in at 3.4%, being the largest increase in the wage inflation measure since late 2008 and up from 3% for the 12 months ended March 2022. [9]

How much have these policies contributed to New Zealand’s domestic inflation rate?  Whilst the exact figure is up for debate, it is clear that these policies have increased inflationary pressures for businesses and consumers.
Proposed Policy changes

In addition to these existing policies, there are several policies being considered by the Government which could create further costs for employers and additional inflationary pressures for the economy.

Fair Pay Agreements

The Fair Pay Agreements Bill (“the FPA Bill”) has passed its first reading, and is currently before the Select Committee.  Public consultation on the FPA Bill closed on 19 May 2022.
Fair Pay Agreements (“FPAs”) set industry-wide minimum terms and conditions of employment, which are likely to be over and above the minimum statutory entitlements.  An FPA would cover all employees and employers within the stated industry or occupation, regardless of whether the employee or employer were involved in the FPA bargaining process or whether they want to be bound by the FPA.  For more details on the FPA Bill, see our article here.
In its Regulatory Impact Statement regarding the FPA Bill, MBIE noted that there are “significant downsides” with the Government’s proposed framework, and that the framework is not well targeted and may create “significant labour market inflexibility and costs” when used in sectors/industries that do not have a demonstrable labour market issue. [10]
MBIE also noted that the proposed FPA process could cost covered employers between $150 – $600 million per year in increased labour costs. [11]
New Zealand Income Insurance Scheme
The Government, in consultation with BusinessNZ and the New Zealand Council of Trade Unions, has developed the New Zealand Income Insurance Scheme (“Scheme”).  Broadly speaking, the Scheme proposes that employers and employees each contribute 1.39% of the employee’s gross earnings to the Scheme, and that in return employees will receive:

  • at least four weeks’ notice of redundancy
  • an additional four weeks’ pay, at 80% of their normal earnings (referred to as a ‘bridging payment’), and
  • up to six months’ pay, at up to 80% of their normal earnings (subject to a cap). There is the possibility that this could be extended beyond six months.  

Employee levies would be collected by IRD as an additional deduction in PAYE returns.  Public consultation on the Scheme closed on 26 April 2022. 
The Scheme would result in a compulsory levy for both employers and employees, creating additional costs for employers and/or reducing take-home pay for employees.  In its Discussion Document regarding the Scheme, MBIE noted that the initial levy of 2.77%, to be split evenly between employers and employees, would amount to a total annual cost of $3.54 billion. [12]
With inflation continuing to put pressure on businesses and erode consumer purchasing power, it is fair to ask – is now the right time to be implementing these new policies?
Going forward
As we have seen, there are several Government policies over the last few years which have created additional costs for employers. These policies have undoubtedly contributed to the rising domestic inflation levels as these costs are passed on to consumers.  Further, some of the policies currently being considered by the Government will create further costs for employers and additional inflationary pressures.
If you have any questions regarding these policies (existing or proposed), or about employment law generally, you can contact our team at Edwards Law on 0800 339 002.

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