There was something for everyone in this week’s plethora of New Zealand labour market data. We saw growth in jobs, a rise in the participation rate, an unexpected rise in the unemployment rate and a tick up in private sector wages.
The best bit of news was the 0.4% increase in jobs over the quarter. That was the combined impact of a rise in part-time jobs (+13000), offset by a decline in full-time jobs (-3000). That mix takes the gloss off the result a bit, but we’re ok with it. Sometimes the first step towards a full-time job is a part-time job.
The rise in the unemployment rate from 6.4% in December to 6.7% in March was the result of participation in the labour force rising faster than employment. The participation rate is now at a near historical high of 68.8%. That fits with the modest improvement in consumer confidence recently: perhaps people who had previously given up looking for work are now looking again. That’s a positive development. From an inflation perspective, greater participation in the work force delays pressure on wages, especially if those folk (re)entering the labour market are skilled.
On the wages front we saw a 0.5% increase in the private-sector Labour Cost Index in the March quarter, taking the annual rate to 2.1%. That doesn’t sound like a number the Reserve Bank of New Zealand (RBNZ) will be losing any sleep over, but this particular index is better described as a measure of unit labour costs, and the trajectory is clearly upwards. Nominal wage growth is relatively stable at 3.5%, not robust by historical standards but neither is it a sign of a weak labour market. With inflation running at 1.6% over the same period, that’s a reasonable boost to real incomes.
So what are we and, perhaps more importantly, the RBNZ to make of all of this. Let’s go back a step for minute. Part of our post-GFC recovery story was that potential GDP would prove to be lower, and that structural unemployment would prove to be higher than they were pre-GFC. That means capacity constraints would get hit earlier in the cycle and that those pressures would emerge in the labour market first. That’s not just a New Zealand story: this phenomenon is playing out across the developed world.
My read of the results above is that the labour market is in better shape than a cursory glance at the unemployment rate would suggest. There is momentum, albeit non-robust, behind growth in both jobs and unit labour costs. We continue to believe that employment will grow in line with modest growth in the economy, and that the unemployment rate will trend lower.
When it comes to important concepts such as structural unemployment and potential GDP we (and the RBNZ) need to consider the data above in light of their “new normal” levels. From a monetary policy perspective, absolute levels of GDP growth and unemployment are less important than where they are relative to their new trend levels. Of course the problem is we, nor the RBNZ, know where those levels are! With regard to the labour market, measures of skills shortages will be important indicators to keep an eye on.
It seems to me there is nothing in the data above that should cause the RBNZ to shift from their bias to tighten, although the timing of when that tightening should start is still open to debate. At this point we still stick to our view of a first tightening in the OCR in December.