Thursday, May 9, 2013

Closing the employment gap

This week saw the release of the broad range of quarterly New Zealand labour market indicators for the March quarter.  The good news is the recent gap between the two employment growth series closed up somewhat.  Furthermore, it closed for the right reason: we saw a solid bounce back in employment growth in the Household Labour Force Survey (HLFS), the series that we believe has been understating the health of the labour market recently.  The not so good news was that wage data came in a tad softer than expected.

The gap between employment growth in the HLFS (as the name suggests, a survey of households) and the Quarterly Employment Survey (or QES, a survey of businesses) has roughly halved this quarter.   Employment growth in the QES stands at 1.8% for the year to March whereas the annual rate in the HLFS is now +0.4%, so the HLFS still has some work to do before I’m completely happy.

On the back of the growth in HLFS employment of +1.7% over the quarter the seasonally adjusted unemployment rate fell from a revised 6.8% in December (and 7.3% in September!!) to 6.2% in March.  In a further sign of improving labour market conditions, the participation rate rose 0.6 percentage points to 67.8%.

It has been our contention that while both employment series are based on surveys, and are therefore both wrong to some extent, it was the HLFS that was probably “more wrong” than the QES recently.  That contention was supported by a range of other indicators such as wage growth, growth in unit labour costs, consumer confidence and retail spending, business confidence and hiring intentions – none of which seemed to us to be indicative of a labour market that was going backwards.

However, wage growth did disappoint somewhat over the quarter.  The Labour Cost Index for private sector salary and wage rates rose +0.3% over the quarter for an annual increase of +1.8%.  This was below market expectations of a +0.5% increase and a Reserve Bank forecast of the annual rate of +2.1%.  This series adjusts for the quality of work done which makes it more akin to a measure of unit labour costs.  So while recent wage growth has told us the labour market is probably not as weak as the HLFS has been recently painting it, neither is it hugely robust.

The unadjusted LCI (a better measure of nominal wage growth) for the private sector came in at +0.7% for the quarter and +3.3% for the year.  That’s not bad, especially when you consider the annual rate of CPI inflation over the same period was +0.9%, indicating pretty solid real wage growth which is helping underpin consumer confidence and retail spending.

Looking ahead we expect further modest gains in employment, in line with modest economic growth.  Employment gains will likely remain strongest in the construction sector (at least in the QES survey) with higher than average wage gains in that sector as well, spilling over into other sectors as momentum continues to build.   We expect wage and unit labour cost  growth to move higher as we get closed to the end of the year.  Despite the lower than expected wage increase, I’m still happy with my forecast of a first tightening in monetary conditions at the end of this year.