Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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PAY SLIPS & PINK SLIPS

The NZ First and Labour-led coalition Government has pledged to raise the minimum wage from NZ$15.75/hour to NZ$20.00/hour, by April 2021. This equates to four years of successive increases to the minimum of wage of 6% on average.

While workers employed at the minimum wage only represent a small fraction of the total workforce (~3%), it will create wage pressure at other low income wage rates. New Zealand has one of the highest minimum wages relative to average wages in the OECD, which suggests that our economy is relatively more exposed to lower wage earners.

  • Wage inflation: Wages along the pay scale may experience upwards pressure, particularly at lower levels where relativity risks are greatest.
  • Unemployment: Companies face a capital allocation decision between labour and technology. A rising labour cost could mean companies favour technology investment which may lead to a rise in unemployment.
  • Inflation: Disposable income of low income households will increase (given upwards pressure on the wage scale), pushing consumer spending in certain segments higher, placing some upwards pressure on the Consumer-Price-Index (CPI).
  • Corporate margin risk: Companies with limited to no pricing power will experience margin contraction in the absence of margin retention initiatives, while those who are able to pass on costs will contribute to wider price inflation.

Those industry sectors that are most exposed to lower wage labour, and therefore likely cost pressures, include retail, aged care, tourism, agriculture and early childhood.

  • Aged care: Whilst the sector has a high level of exposure, the incidence of cost from a rising minimum wage will likely fall on the Government, given funding requirements.
  • Agriculture: Exposure across the sector is quite varied, however companies with a larger manufacturing and harvesting base will be more at risk. The tight labour market and the transferrable nature of the skill base should exacerbate labour cost inflation risks.
  • Early child care: High concentration of employees earning at, or slightly above, the proposed 2021 minimum wage. However, given the nature of early child care labour and the more specialised skill base required, churn of labour into other sectors is less likely. This suggests the sector may experience less upwards wage pressure, whilst Government funding requirements should also help mitigate costs.
  • Retail: Majority of wage cost is at, or linked to, the minimum wage. In the absence of margin retention initiatives, we would expect cost pressure to lead to margin erosion. Particularly those selling commoditised products with little pricing power.
  • Tourism/Entertainment: The typically low skilled and often seasonal nature of labour needs in the tourism and entertainment sector means minimum wage exposures can be high.

Andy Bowley
Head of Research

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