This opinion piece was first published in Stuff on 25 September 2022.

The labour market’s tightness over the last 18 months has become increasingly pervasive across all industries and regions. The record-low unemployment rate in the first half of 2022 highlights the difficulties that all businesses have experienced trying to find new staff or retain existing workers. In general, employees have been in a strong bargaining position for higher wages, particularly in the context of the rising cost of living and increasing mortgage rates. It’s little surprise that wage inflation is now the fastest it’s been since the 1980s, at 6.4%pa.

The unemployment rate is unlikely to stay as low as it currently is, near 3%, over the next couple of years. Rising interest rates, both domestically and internationally, are taking some of the heat out of the economy. Businesses will feel less compulsion to try and find additional workers as growth in demand slows and we’re not moving at a breakneck speed.

A quick survey of forecasters shows that, by the end of 2024, the unemployment rate is expected to be somewhere between 4% and 5%, which is still low compared to previous slowdowns in the economy. So even with economic growth softening, there will only be a limited amount of slack in the labour market in two years’ time.

Predictions of a persistently tight labour market are not new. Forecasters have been warning for several years that slowing growth in the number of working-age people, due to demographic trends such as the aging population, could constrain medium-term economic growth.

Nevertheless, the disruptions caused by COVID-19 and the border closures since 2020 have provided an accelerated glimpse of how some of the issues associated with a permanently tighter labour market might play out. Industries that have traditionally been reliant on workers from overseas have found themselves the most short-staffed, contributing to significant cost increases (construction, for example) or concerns about levels of service (aged care and nursing, for example).

COVID-19 restrictions have also left tourism and hospitality businesses facing a curious mix of reduced demand and a constrained labour supply.

If worker shortages are going to persist across the economy, it is likely these shortages will be most critical for lower-paid roles. Our analysis (see Chart 1) shows that average wages for most industries are either above or within 11% of the economy-wide average. However, retail trade and accommodation and food services stick out like a sore thumb, with average wages in both industries about 25% below the average.

Businesses in these industries should be extremely concerned about their ability to attract workers over the medium term. A walk through any shopping or restaurant area shows that most businesses are advertising for staff, but that situation is unlikely to improve markedly. Apart from the part-time and flexible nature of some retail and hospitality jobs, why would people choose those roles over higher-paying alternatives?

The current state of the hospitality industry appears to be unsustainable. COVID-19 has already led to some consolidation in the industry, with businesses closing due to restrictions on spending, a lack of tourism-related revenue, and widespread cost pressures. Yet the industry is still being squeezed between the apparent need for higher wages to attract staff and the reluctance of diners to pay more for their meal.

The solution is not necessarily straightforward. Continued consolidation could result in a permanent reduction in the number of restaurants and cafes, with the survivors commanding a higher price and being able to pay their staff more. Dining out would therefore become more of a luxury than it already is.

An alternative is the adoption of increased technology. Ordering from your table via a QR code is becoming more commonplace, providing efficiency gains for the business as well as decreasing the number of wait staff required. The retail industry is further advanced down this technological path, with online shopping and self-service checkouts providing clear examples of how staff numbers have been reduced throughout the last 10-15 years.

More immediately, how does the hospitality industry navigate the upcoming summer? There are high hopes that even a partial rebound in visitor arrivals over coming months will cushion the effects of slowing domestic demand on overall economic growth. We estimate that even a recovery in tourism earnings of just half the drop experienced since COVID-19 struck would add 1.2% to GDP over the next year.

But a lack of available workers could prevent tourism from achieving even this degree of recovery. Queenstown’s restaurants and hotels are already highly stretched by a lack of available staff, despite New Zealand’s peak international tourism season being between November and March, not between June and September. Don’t tell anyone thinking of visiting New Zealand over summer, but we might only be able to accommodate them if they cook their own meals and make their own beds.