Reserve Bank deputy governor Geoff Bascand said in a speech in Dunedin yesterday rapid growth of the workforce, boosted by new migrants, women and older workers, had helped create strong economic growth over the past four years, without driving up inflation.
Recent low consumer price inflation could be mostly explained by falls in commodity prices and the New Zealand dollar.
The higher productive capacity of the economy from rapid growth also explained some of the weakness in inflation, he said at the University of Otago.
The main drivers of the rapid growth in labour supply had been population and increased participation.
"Over the past four years, New Zealand's population has grown by a quarter of a million people, with over half that number coming from net migration.''
The economy had expanded steadily since 2011 and created 180,000 extra jobs but the unemployment rate had declined only modestly, Mr Bascand said.
The largest recorded surge in migration in 100 years had contributed to housing and consumer demand and job growth but without the inflation pressures accompanying the previous wave.
Because migrants increased overall spending in the economy, and also increased the labour supply, the net effect on inflationary pressures could be ambiguous, he said.
"Higher labour force participation by women and older workers, together with the characteristics of this particular migration cycle, go a long way to explaining why wage and non-tradeable inflation pressures have proven less than expected.''
In the current cycle, fewer families and more work visas were likely to have boosted migrant participation.
Much of the current surge of migration was explained by weakness in the Australian and world economies, making New Zealand a relatively more attractive place to live, Mr Bascand said.
"Because our labour supply has increased at a time when businesses are facing lower world demand, it results in lower wage and inflation pressure.''
ASB senior economist Jane Turner said it was interesting to note Mr Bascand identified large flows from non-participation into employment, flows that were much higher than those witnessed in other countries.
About two-thirds of the newly employed were non-participants in the previous quarter.
From the Reserve Bank's perspective, the new labour index would provide a helpful summary to inform decisions on monetary policy settings.
The index closely matched the output gap and made it ideal for understanding the relative slack in the labour market and its contribution to inflation pressures, she said.
But from a market perspective, it might add to the complexity of interpreting the labour market data quickly after its release and, importantly, predicting how the Reserve Bank would react.
"For example, we were recently surprised the Reserve Bank did not treat the most recent unemployment result as rogue.''
However, if the Reserve Bank was putting more weight on the labour index, the unemployment rate results and forecasts might become less important for policy decisions, Ms Turner said.
It appeared the Reserve Bank expected other researchers would be able to replicate its model and the Reserve Bank retained the view it remained transparent from a policy perspective.
At a glance
• The Reserve Bank has a new labour market indicator that places less weight on the unemployment rate.
• Labour market pressures have been weaker than the Reserve Bank expected.
• Markets feel the new index may add to the complexity of interpreting labour market data and predicting how the Reserve Bank will react.
• OCR still expected to be cut to 1.75% this year.
