Article written by David Burton, Principal at Mahony Horner Lawyers.  Contact David here 

The business world and workers have been rocked by the latest annual inflation statistics, which hit a 30-year high of 5.9 per cent in the December quarter.

The pinch on consumers is no secret, with the costs of housing, food and petrol pushing some families to the limits of their finances. Interest rates are set to soar.

Inflation has made planning difficult for businesses too. There are reports that those in the construction industry are refusing to provide quotes because they cannot anticipate how much costs will rise in the near future.

All bad news. But we have not seen yet how much inflation might destabilise the labour market and the public service.

Each year, a host of different collective agreements come up for negotiation. The topics for negotiation are predictable, but pay rates are almost certain to be top of the agenda.

Unions typically aim to secure a pay rise commensurate to at least inflation, but it is not unusual to seek more where pay rates are perceived as falling behind other comparable labour markets.

Businesses, unsurprisingly, seek to minimise their costs, including labour costs. This said, it is not unusual for businesses to enter negotiations with the intention of offering pay rises. In competitive labour markets, businesses are aware that pay rises may be necessary to retain sufficient and skilled staff.

This year, inflation is bound to create a gulf between the expectations of employers and employees.

Unions may well keep their bottom line fixed to inflation rates. The inflation rate is not academic for them, and they will be aware that living costs have stretched their members’ budgets to the limits.

To take an extreme example, Porirua has a median weekly rent of $700 a week. Jasmine Taankink, from Housing Action Porirua, has observed that a “for a minimum-wage worker, that’s their whole pay or more”. She said that as result, some families were moving to Levin.

Living on the breadline like this is a strain on anyone, and union organisers regularly get first-hand accounts of this strain. Come time for collective bargaining, those union organisers will have deep feelings about negotiating pay rises. They will not want their members to fall backwards.

But the current issue is not a straightforward matter for businesses to solve. A rise of 5.9 per cent in wages is a sharp adjustment for the budgets of many businesses and organisations.

Businesses will also be contending with rises to their other operating costs. Businesses will seek to negotiate and reduce expenses wherever the opportunity presents itself. Minimising wage growth may be a target for some businesses.

In the current circumstances, employers may attempt to offset labour-cost rises by offering other employment benefits, such as more training or flexible working arrangements. However, with inflation at its current high rate, it seems unlikely this will meet the inflation pressures on workers’ budgets.

Compounding the issue of inflation for businesses is the announcement that the official unemployment rate has sunk to 3.2 per cent — the lowest level since comparable records began in 1986.

In the private sector, labour shortages may mean employers could struggle to replace employees that decide to leave to get better pay. This may limit the extent to which businesses are prepared to risk losing employees by offering low pay rises.

Showdowns are particularly likely in the public service. In April 2020, in response to the budget blowout associated with Covid-19 support payments, the Public Service Commission issued guidelines limiting the extent the public service could offer pay rises to the employees.

In May 2021, the Government announced these pay restraints would need to be exercised by the public service “for the next three years”.

Under these guidelines, moderate pay rises are only permitted for workers on less than $60,000. Pay bands cannot be adjusted for those on salaries higher than this, although employees may still move higher within their pay bands. The only exception to the shift on pay bands is to address pay-equity issues, however this is likely to be only of benefit to workers on low or moderate pay.

The tight labour market and the rise of inflation may mean that even higher-paid workers are unwilling to stomach absorbing the costs of inflation.

One option for workers is to choose new employment if they are not being paid enough. However, many public servants are highly specialised and may struggle to shift into the private sector to get around the pay guidance.

This leaves those public servants with only one tool left in their belts: strikes.

Employers and employees are facing difficult negotiations ahead. Both parties are clearly facing their own pressures.

In this bargaining environment, it is important to acknowledge these pressures and keep an open mind in trying to resolve those pressures at the negotiating table.