Drop in unemployment adds to pressure on OCR

The decline means the unemployment rate is back the rate last seen in the December 2019 quarter. In addition, the unemployment rate has retreated over the last three quarters from a recent peak of 5.3 percent in the September 2020 quarter.

The decline in unemployment numbers, the unemployment rate and the underutilisation numbers, were not a surprise to economists, given recent widely reported increases in job postings, and staff shortages across multiple industries. However, the size of the decline was surprising, with a small decline similar to that seen between December 2020 and March 2021 expected. Prior to the impact of the COVID-19 lockdown in 2020, the unemployment rate had been gradually declining from its prior peak of 6.7 percent in September 2012, to 4.0 percent in December 2019. Interestingly, the last time the unemployment rate managed to drop below 4.0 percent was in June 2008 when it hit 3.8 percent, and the lowest this century was 3.4 percent in December 2007.

Given the low unemployment rate currently, and combining it with the strong demand for staff and the limited ability to bring in workers from overseas, the question is: how low will New Zealand’s unemployment rate go?

The seasonally adjusted number of unemployed people fell by 30,800 in the June 2021 quarter, to 111,300. The decrease was split 17,500 for men and 13,300 for women, leaving both with around 55,500 unemployed. The employment rate was 67.5 percent in the June 2021 quarter, compared with 67.2 percent in the March 2021 quarter, and 67.1 percent in the December 2020 quarter.

Despite the June quarter’s drop in the unemployment rate, the number of people unemployed in June 2021, at 111,300, was similar to that seen in June 2020, and was still above the June 2019 mark of 109,000 people unemployed, as can be seen in the unemployment graph.

Overall, employment has increased since last year. Since the June 2020 quarter, the number of seasonally adjusted employed people has increased by 46,800 (1.7 percent increase). This annual growth is almost back to the average growth seen in the last two years pre-COVID, when employment averaged 54,500 quarterly increases. The number of people in work rose by 15,400 over the June 2021 quarter. This follows rises in the previous two quarters of the household labour force survey (HLFS), by 9,700 in the March 2021 quarter; and 40,500 in the December 2020 quarter.

Over the last two quarters, the decline in the unemployment rate, and growth in employment numbers, had been accompanied by a decline in the number of people not in the labour force. But this was not the case in the June 2021 quarter, with the number of people not in the labour force growing 23,000, following falls of 3,000 in March 2021, and 28,900 in December 2020. This shows that the fall in the unemployment rate in June 2021 was helped by an increase in the number of people not in the labour force.

The "underutilisation" rate, which measures whether people are working as many hours as they want to, fell to 10.5 per cent from 12.1 per cent in the March 2021 quarter. Like unemployment, underutilisation had been trending downwards prior to COVID-19. Although there has been a quarterly fall, the rate is still higher than in the last quarter prior to COVID-19, December 2019, when it was 10.1 percent. For men, the underutilisation rate fell to 8.3 percent, down from 10.0 percent, and for women, the underutilisation rate fell to 13.0 percent, down from 14.6 percent. This means there are 27,000 fewer underutilised men and 21,000 fewer underutilised women.

Underutilisation is a broad measure of spare capacity in New Zealand’s labour market. This decrease is a positive sign for potential employees looking to pick up work, as it reduces competition for jobs. However, for employers it reduces the talent pool available to fill vacant positions.

Additionally, people are more confident in their employment. This is a positive sign for the economy and household expenditure in particular. Feelings of job security have improved since the June 2020 quarter, with 83.5 percent of people in the June 2021 quarter saying there was almost no chance, or a low chance, that they would lose their job or business in the next 12 months, compared with 75.0 percent in the June 2020 quarter.

With the unemployment rate now back down to four percent and with the border restrictions limiting access to more workers, we will see increasing pressure on wages to increase across the entire economy, as there is now very limited numbers of people without a job able to enter the labour force. Wage pressure will come from increased competition between businesses for scarce workers. Businesses will be looking to retain workers, as well as, looking to attract more workers from other businesses or other sectors of the economy.

With the disruption to global supply chains already leading to price increases within New Zealand, higher wages for workers will potentially see prices increase further across the next few years. The effect of price increases, can already be seen in New Zealand with the Consumers Price Index (CPI) hitting 3.3 percent for the year, in June 2021. The expectation is price inflation measured by the CPI will continue to grow.

Continued strong inflation will put increased pressure on the Reserve Bank to undertake a series of increases to the official cash rate (OCR) to force increased mortgage and loan rates. This would reduce the demand for goods and services from households, as more income is used to pay the mortgage. The idea is that increasing the OCR and interest rates will act as a handbrake, slowing growth to a steadier rate that the economy can handle.

So, while low unemployment is good news for New Zealand, and a sign that we have strong growth in our economy, we face the risk that the outcome will be increasing costs of living, demands for higher wages, increasing interest rates to reduce the demand in the economy and potentially, slowing house price inflation.