Wednesday, August 7, 2013

NZ labour market data solid enough

The key element I was looking for in today’s June quarter Household Labour Force Survey (HLFS) data was some element of consolidation following the strong March quarter result.  In that sense I was pretty happy – employment rose 0.4% in the quarter following the large 1.7% increase in March.  And while the unemployment rate moved higher from 6.2% in March to 6.4% in June, a higher participation rate was the catalyst which is itself a sign of improving labour market conditions.

Regular readers will remember it was difficult to make sense of divergent employment data over 2012.  Employment growth between the HLFS, a survey of households, and the Quarterly Employment Survey, a survey of businesses, was contradictory.   In the March quarter, much of that gap closed with a hefty 1.7% increase in employment in the HLFS.  My concern today was that employment might give back some of the March quarter gain in June.  In fact employment put in a reasonably robust 0.4% gain, taking the annual rate of HLFS employment growth to 0.7% in June, up from 0.3% in the year to March.

A cursory glance at the unemployment rate suggests an element of the weakness in the data.  I take a different view.  Given the increase in employment over the quarter, the rise in the unemployment rate was driven by a blip higher in the participation rate.  I take that as another sign of improving labour market conditions.  A key challenge at this stage of the cycle is to encourage previously disenchanted folk who have previously dropped out of the labour market to opt back in.  That only happens when people think the chance of finding a job has improved.  That’s a good sign.

Wages were on the soft side.  The private sector ordinary time Labour Cost Index rose 0.4%.  This index is quality adjusted to make it more akin to a measure of unit labour costs.  The annual rate in that index has now dropped to 1.7%, a continuation of the downward trend of recent quarters.  The unadjusted index, an indicator of nominal wage growth, dropped back to an annual rate of 3.0% in June from 3.3% in March.  Of course with low inflation that indicates solid real wage growth. 

From the Reserve Bank's perspective what matters most is where the labour market and particilarly wage growth are heading.   In that respect we look to recent business confidence surveys and, more specifically, employment intentions which are generally positive.  That has us expecting continued employment growth which helps underpin our forecasts of stronger consumer spending in the period ahead and an eventual reversal of the downard trend in unit labour costs.