KEY POINTS:
The Indian Premier League cricket auction in February attracted huge attention around the world. It was such a brutally honest way for cricket players to discover their true worth in the eyes of others.
Shane Warne was given a setdown - the highest bid for him was $450,000 while Brendon McCullum was the most highly valued of all the New Zealand players, going for US $700,000 ($875, 658) to the Kolkutta franchise.
"Brendon McCullum's price was determined by the demand for that talen tor experience," says Jason Walker, regional director of recruitment company Hays.
How people's salaries are set, put simply, is about supply and demand - what skills and qualifications are needed at a place in time.
"Salaries are based on the capability of the individual - what they can bring to an organisation," says Walker. In certain industries where there are shortages, the salaries are escalating well beyond the average salary rise in New Zealand which was 5 per cent last year.
Walker has just recruited a bio-fuel engineer for an engineering company in New Zealand and he is being paid handsomely for his unusual expertise.
The good news is it's a great time to enter or re-enter the job market as long as you have the relevant skills. The unemployment rate is at its lowest in recorded history at 3.4 per cent. In a competitive business environment, the ones who are getting ahead are those who can bring in proven benefits to the company, whether that's sales nous, skills or product knowledge, says Business New Zealand chief executive Phil O'Reilly.
For young people starting out and wanting to have a trailblazing career with plenty of rewards, his advice is to give it your all and continue to do as much training as possible.
"Go hard and treat every job like the one you are going to make the best. That success will stay with you the rest of your life," he says.
Before raising salaries most employers take into account:
1. Performance of their company and in particular the contribution that the employee's made to it.
2. The labour market - what do they HAVE to pay?
3. What effect it will have on inflation.
4. A combination of CPI movements and either organisational or individual performance remains the single most popular measure for determining salary increases, says recruitment specialist, Sheffield.
This year 19 per cent of organisations reported using this as the basis for salary increases, says Jarrod Moyle, the company's manager of reward practice.
Low New Zealand wages
New Zealanders are constantly bombarded with articles showing them how much more they could be earning overseas. In terms of our international competitiveness - we tend to work hard according to the OECD but we are not very productive in that time - says O'Reilly. Therefore employers can't afford to pay the equivalent wages and NZ lags behind most of the Western world in salaries.
Do wages have an effect on inflation?
Wage inflation is a definite concern of Reserve Bank governor, Alan Bollard. In his December 2007 monetary statement, Bollard said: "Ongoing tightness in the labour market has contributed to substantial growth in labour incomes in recent years as firms compete for scarce workers."
Annual growth in total weekly earnings has been running close to 7 per cent for approximately three years, according to the Quarterly Employment Survey. And while employment growth has slowed, wage inflation remains high.
The labour cost index (LCI) which tries to exclude wage changes attributed to productivity, recently accelerated.
Inflation
So why does Dr Bollard fret about inflation? Because he's the one charged with keeping it under control.
How? First a short introduction to inflation and what it means to the average person. Inflation is the term used to describe a rise of average prices through the economy. It means that money is losing its value: if inflation has increased this year on last year, it means that your dollar buys less today than it did last year.
Inflation generally occurs when an economy is buoyant because people can charge higher prices for the same goods or services. The underlying cause is usually that too much money is available to buy too few goods and services, or that demand in the economy is outrunning supply.
Inflation can be very damaging for a number of reasons. First, people may be left worse off if prices rise faster than their incomes. Second, inflation can reduce the value of an investment if the returns prove insufficient to compensate them for inflation. Third, since bouts of inflation often go hand in hand with an overheated economy, they can accentuate boom-bust cycles in the economy.
Sustained inflation also has longer term effects. If money is losing its value, businesses and investors are less likely to make long-term contracts. This discourages long-term investment in a country's productive capacity.
Measuring inflation
The Consumer Price Index gives a good idea of how price increases affect typical household spending and the change in money's buying power because of inflation. Statistics New Zealand measures the price of a selected 'basket' of goods ands ervices purchased by an 'average' New Zealand household, and records that price as an 'index number'.
When two CPI index numbers are compared the change in the total cost of the basket shows the size of the change in household spending for that time, often called the inflation rate.
Controlling inflation
One of the tools the Reserve Bank of New Zealand uses to keep inflation from getting too high is the Official Cash Rate. The OCR is the interest rate set by the Reserve Bank to meet a certain inflation target - to keep inflation, on average over the medium term, at between one and three per cent a year.
Thanks to New Zealand's buoyant economy and tight labour market, the rate of inflation has been steadily creeping up. Last year the Reserve Bank raised the OCR four times as it sought to control inflation.
The OCR influences the price of borrowing money in New Zealand and gives the Reserve Bank a way of influencing the level of economic activity and inflation.
How the OCR works
Most registered banks hold settlement accounts at the Reserve Bank, which are used to settle obligations with each other at the end of the day. For example, if you write out a cheque or make an EFTPOS payment, the money is paid by your bank to the bank of the recipient. Hundreds of thousands of such transactions are made every day.
The bank pays interest on settlement account balances, and charges interest on overnight borrowing, at rates related to the OCR. These rates are reviewed from time to time, as is the OCR.
The most crucial part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR. As a result, market interest rates are generally held around the Reserve Bank's OCR level.
The practical result, over time, is that when market interest rates increase, people are inclined to spend less on goods and services. This is because their savings get a higher rate of interest and there is an incentive to save; and conversely, people with mortgages and other loans may experience higher interest payments.
When people save more or spend less, there is less pressure on prices to rise, and therefore inflation pressures tend to reduce.
