Continued oil shock means NZ wages will continue to track under inflation, say experts
Tuesday, 14 July 2026
Last week the OECD said real wages in New Zealand were the worst for any member nation in the past five years, and thanks to the war in the Middle East reigniting, that dubious honour looks less likely than ever to reverse, say experts.
Economics shop NZIER has already cut wage growth expectations for the remainder of 2026 as the labour market weakens and unemployment expectations rise ‒ the BNZ, for example, is picking unemployment could reach as high as 5.9% by the end of the year. Now analysis undertaken by NZIER, based on data provided by corporate remuneration consultancy Strategic Pay and featured in NZIER's June Quarterly Predictions, explains more about why that’s the case.
Generally, in a crisis situation like an oil shock, temporary cost pressures for employers and employees lead to pay tracking up with inflation as measured by the CPI, or Consumers Price Index.
But in the current situation, where an oil shock looks set to drag on, different factors come into play, said Strategic Pay managing director and co-owner Cathy Hendry.
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“There’s an expectation that if inflation goes up, wages should match,” Hendry told The Post. “However, they're actually different measures. And this time, there are different conditions in the labour market than in previous inflationary situations.
“So we reached out to NZIER and said ‘what do you think is going to happen this time in terms of this fuel shock?’, because we didn’t believe that necessarily we were going to see the same matching [of wages to the CPI] … a lot of it depends on labour market conditions, and what we’re seeing is still quite high unemployment, still relative ease in finding both skilled and unskilled labour.”
That assumption turned out to be true.
Even with inflation sitting at 3.1%, and expected to track as high as 3.3% to 3.5% by the end of 2026, “it’s unlikely we're going to see wages match that”, Hendry said.
Christina Leung, the deputy chief executive of NZIER, agreed, saying the recent reignition of war in the Middle East was pushing up the cost of living, and being able to ask for higher wages to compensate for that was harder given the degree of slack in the labour market, particularly for the unskilled, who were easier to find.
There was also the matter of business confidence, which has improved from historic lows. The NZIER’s Quarterly Survey of Business Opinion out today showed a net 12% of firms expect the economy to improve over the next 12 months, up from just 1% in the first quarter. Yet labour is a lagging indicator. Firms cut numbers in the June quarter, and were indicating to reduce headcount again in the next quarter.
“What we are seeing is a fragile recovery in business confidence taking shape, but overall there is still a lot of caution there amongst firms when it comes to hiring and investment,” Leung said. “And with this renewed conflict between the US and Iran in recent weeks, it does threaten the fragile recovery in the NZ economy.”
Data points
Taken together, the data does little to suggest a counter to the OECD finding last week that New Zealand's real wages sit 6.4% below 2021 levels, an outlier across the OECD, while roughly two thirds of the organisation’s member countries saw real wages climb 3.6% in the same period.
Meanwhile, inflation marches on. The Treasury’s last central economic forecast assumed imported oil price shocks would eventually ease, although they would cause inflation to peak at 4% before falling. It seems less and less likely the figure will fall below 2% from mid-2027 onward, as predicted.
With many employers themselves grappling with high costs, Hendry said there were increasing conversations about how to retain employees that did not necessarily involve pay rises.
More sick leave, flexible working, e-bike and public transport discounts, and access to wellness services were among some of the most popular options.
“Employers are asking what levers they can push now to ease the cost of living, rather than matching salaries,” she said. “Some organisations are reducing the number of our number of days they expect people to come into the office, others are considering supporting schemes around public transport … even down to offering financial budgeting advice.
“The reality is salary movements can't chase every crisis … and of course these costs are impacting all parts of the business - so it’s a challenge.”