By BRIAN FALLOW
WELLINGTON - WestpacTrust economists expect the unemployment rate to drop as low as 5.1 per cent by 2002.
It is 6.3 per cent now, and reached its previous low of 5.9 per cent three years ago.
WestpacTrust chief economist Bevan Graham said this would boost wages and help underpin the demand side of the economy.
But he warned that a tight labour market could also put the brakes on the economy.
Labour shortages could leave firms struggling to meet demand, and wage inflation could compel the Reserve Bank to slow the whole economy through higher interest rates.
Businesses were already finding it harder to obtain both skilled and unskilled labour, said Mr Graham.
New Zealand went into the last business cycle with a high level of unemployment - 11 per cent in 1993 - and the workforce was enlarged in the mid-1990s by net immigration of about 20,000 a year until the Government tightened the rules in 1996.
In the latest cycle, unemployment peaked at 7.7 per cent in late 1998, and the country is losing about 8000 working-age people a year.
Immigration policy has been relaxed recently, but Mr Graham does not expect the flow to reverse quickly.
"At best, we are forecasting a net inflow of around 10,000 migrants in the year to March 2003."
A more likely source of extra workers is those who are classified as not in the workforce - neither employed nor actively seeking work.
Employers' Federation chief executive Anne Knowles said yesterday's increase in the minimum wage would cost jobs - 2500 by the Labour Department's estimate.
"Employers must set wage levels that take into account the productivity of their workers," she said.
"If employers are forced to pay a rate higher than justified by productivity, they will have to cut back on the number of jobs or go out of business."
Mr Graham said lower unemployment tended to be followed 18 months later by higher wages.
"We expect wages growth will peak at 4 per cent in May 2001," he said.
But unless that wage growth was offset by increased productivity, it would push up prices, adding to the inflationary pressures the Reserve Bank would have to resist.
New Zealand's productivity record was poor, Mr Graham said. Gross domestic product per worker had increased just 0.4 per cent a year on average since 1990, less than a tenth the figures recently recorded by the United States.
Bank sees mixed blessings in jobs boom
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