Wage pressure is taking off

While wage inflation and CPI do not directly correlate, the massive jump in cost of living, coupled with low unemployment, has resulted in the biggest change in salary movement at general staff level for over 10 years.
By Cathy Hendry.

It is clear that New Zealand has entered into a new era of rapid change, where the ongoing pandemic with its many variants, and rapidly changing economic conditions are becoming the new normal. Leaders have likely never experienced this level of change and the need to respond quickly to such constantly changing conditions. It could be that this will be the new normal for some time.

Strategic Pay has recently published our latest salary movements and projections and as part of this analysis we have reflected on how quickly things have changed in a relatively short period of time.

Salary data will always lag slightly, which is why we consider both actual market movement and forecasts of future movements when providing advice.

Since the GFC, we have seen a return to fairly stable salary movement year-on-year. However, this time last year we witnessed the impacts of the March 2020 lockdown flowing into our salary surveys.

Twelve months ago, market movement was very modest, with little to no movement across all levels of roles. Many sectors were still struggling to adjust to the pandemic operating conditions and most employees were happy to still have jobs, resulting in low wage pressure.

In the middle of last year, we started seeing evidence of severe skill shortages, and market projections started creeping back up again.

Then inflation started to kick in and, while wage inflation and CPI do not directly correlate, the massive jump in cost of living, coupled with low unemployment, has resulted in the biggest change in salary movement at our general staff level for over 10 years.

So, instead of the small gradual increases that remuneration trends have followed in the past, we are now in a position where salaries and salary movements have not only rebounded but have also increased against those of the past.

Movements at the lowest level of our database are very high across all industries and sectors this year, with movements ranging from five percent to eight percent and with some industries, such as construction, seeing movements of up to 15 percent.

In terms of projected salary movements for the next 12 months, these are again the highest we have seen in a long time.

Private sector organisations are projecting five percent overall increases, with the public sector and not for profit forecasting 2.5 percent and three percent respectively.

Organisations experiencing this increased wage pressure will probably need to respond to the higher wage costs by increasing prices which, in turn, will further increase inflation.

Experience from previous periods of high inflation and low unemployment suggests wage movement will continue to increase and stay elevated for some time after inflation drops or unemployment rises.

Post GFC, salary movements remained elevated for a full 24 months before they returned to previous levels. However, given how quickly we have seen a turnaround, it is possible this new stage of rapid change will also result in the wage market responding more quickly.

Clearly the days of salary budgets of around two percent are behind us and are likely to be for some time. In this environment and for roles at any level, the key message for employers to take on board is to ensure that salary increases are targeted at rewarding and retaining key staff, remembering that in a tight talent market retention of your key staff is a better option than any attempt to recruit for specific skills.   

Cathy Hendry is the Managing Director at Strategic Pay.

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