Michael Gordon
Auckland, February 7, 2018
The New Zealand labour market tightened further in the December 2017 quarter, in line with our expectations.
The unemployment fell from 4.6% to 4.5%, a new nine-year low.
The number of people employed rose by 0.5%, and the participation rate fell only slightly from its all-time high in the September quarter.
Laggard in cycle
The rate of unemployment fell steadily but gradually over the course of 2017. The pace of growth in the wider economy slowed in that time, but the labour market tends to be a laggard in the economic cycle – the unemployment rate did not start consistently falling until 2013, several years after the recovery from the Global Financial Crisis began.
It may be that firms are still playing catch-up on staffing levels after the strong growth in activity in previous years.
We recommend focusing on the unemployment rate as the most reliable gauge of the labour market, as the details within the Household Labour Force Survey (HLFS) tend to be choppy.
The June quarter survey showed softness in employment growth and participation, followed by a surge in both measures in the September quarter.
The continued rise in employment in the December quarter suggests that the jump in the September quarter was largely a corrective move (though still overstating the strength of jobs growth to some degree).
Sectoral gains
Over the last year, the HLFS has recorded a 3.7% rise in the number of people employed, with some of the biggest gains seen in professional services and the public sector.
While the construction sector continues to draw in workers (up 5% in the last year), it is less of a standout than it used to be in terms of growth.
As unemployment has fallen, forecasters and policymakers have become increasingly concerned with the question of how much lower it can go before stoking the fires of inflation.
There is no way to clearly determine where that tipping point lies, but for what it is worth, an unemployment rate of 4.5% is within the range of what we would consider ‘neutral.’
In other words, we do not appear to have been in ‘tight’ territory at any point in the last nine years. That goes some way towards explaining the lack of any pickup in wage growth to date.
Cost Index rises
The Labour Cost Index (LCI) rose by 0.4% in the December quarter, in line with our expectation, but falling short of market expectations for a rise to 0.5%.
The LCI has been rising at the same quarterly pace for more than two years now, aside from a bump in the September quarter due to the pay equity settlement for healthcare workers.
The absence of wage inflation to date is less puzzling in real terms.
After adjusting for expected inflation, wage growth in recent years has been comparable with what we saw in the mid-2000s – the difference between then and now being that inflation expectations are much lower today.
But even this is not a completely satisfactory answer. Inflation, both actual and expected, has risen from its lows in the last year or so.
About wage growth
Yet, we have not seen a compensating rise in wage growth, even as the labour market has continued to tighten.
It is possible that the labour market is slacker than the standard measures imply.
The ‘underutilisation’ rate, a broader measure that includes underemployed workers and potential jobseekers, has not shown the same degree of improvement: it rose slightly to 12.1% in the December quarter, and has been broadly unchanged over the last year.
The Reserve Bank of New Zealand (RBNZ) would not have much time to absorb today’s results ahead of its Monetary Policy Statement tomorrow, but there is little in the details that is likely to surprise them.
The fall in the unemployment rate was in line with the projections in the November MPS.
While the lack of any pickup in wage growth may be disappointing, it is at least consistent with the RBNZ’s recent narrative about a low inflation environment.
In these circumstances, there is no urgency for the RBNZ to raise interest rates.
Financial markets are increasingly coming to this realisation: in recent weeks, pricing for the first OCR hike has been pushed out into the first quarter of 2019.
We maintain our view that the RBNZ will not be moving until late 2019.
Michael Gordon is Senior Economist at Westpac New Zealand.
(Picture and Chart Supplied)
