New Zealand Wage Inflation Post-crisis

Nominal wage and consumer price inflation have been subdued in New Zealand post crisis, particularly since 2012. This paper discusses a number of candidate explanations for these muted nominal wage inflation outcomes. The most notable explanations include: a gradual absorption of spare capacity amongst New Zealand's major trading partners; sharp declines in oil and export commodity prices in 2014/15; a significant rise in labour supply, and less inflationary pressure stemming from migration; and a change in price setting behaviour, with inflation expectations becoming more adaptive. This paper also summarises early work using micro-data that offer further insights into the drivers of low nominal wage inflation. A slow rate of job-to-job transitions helps explain some of the weakness in nominal wage inflation. In contrast, preliminary analysis suggests changes in labour market monopsony power of firms do not look to be a significant driver of low wage inflation in New Zealand.