The labour market continues to follow the trend of low unemployment and high wage growth, but that is expected to change sooner rather than later.
The latest labour market data release from Statistics New Zealand shows that the unemployment rate stayed at 3.4 percent in the March-2023 quarter. This is unexpected, as most commentators forecast a growth in unemployment. For instance, we expected that unemployment would be growing, similar to the OECD forecast that predicted the unemployment rate would be at 3.6 percent this quarter.
The labour market has been exceptionally stable from the September-2021 quarter to the March-2023 quarter.
The graph below depicts the unemployment rate, underutilisation rate, and labour force participation rate over the last four years. Between the September-2021 and the March-2023 quarters the unemployment rate has been fluctuating between 3.2 and 3.4 percent, and the underutilisation rate between 9 and 9.3 percent. The labour force participation rate has been following a trend of very slow growth over the same period, and it reached its historic high in the March-2023 quarter, at 72 percent.
Wages are still growing.
Despite the stability in the unemployment rate, and the other indicators above, the cost of labour and wages has continued to grow. In the March-2023 quarter the average hourly earnings, as measured in the quarterly employment survey (QES), grew 7.6 percent in relation to the same period in the previous year, while the adjusted Labour Cost Index (LCI) grew 4.3 percent.
The adjusted LCI is a proxy for wage inflation. It measures the costs incurred by businesses to “purchase” labour for a fixed position, and it also tracks the costs of job positions without accounting for changes in quality or promotions. The QES, on the other hand, is a survey that measures what income workers are taking home. It tracks workers, and accounts for changes in job positions.
The graph below shows that these two indicators have continued to grow sharply since the September-2021 quarter, following the growth of the Consumer Price Index (CPI) in the same period. However, the adjusted LCI and the average hourly earnings (QES) kept growing in the latest quarter, while the CPI fell 0.5 percentage points.
Sticky labour market.
The labour market has been sticky in the past few quarters, meaning that it has not been significantly responsive to factors such as the stabilisation following the decrease in the CPI. When this happens, economists expect to see a cool-down in the labour market in the form of growing unemployment and falling wages. This has not happened as yet.
Nonetheless, it is expected that the labour market peaked in the March-2023 quarter and a downturn is already happening that will be evident in the labour market data for the June-2023 quarter. For example, the OECD forecast that the unemployment rate will follow a growth path and peak at 4.7 percent in the September-2024 quarter, returning to pre-COVID-19 levels. Also, as we mentioned in a previous BERL article, we are already at pre-COVID-19 levels of net migration, which reached 52,000 in the year ended February 2023. This is expected to increase the supply of labour in New Zealand as many migrants will be seeking work.
Therefore, while the labour market has been sticky, it is very likely to have peaked already and so workers and businesses should prepare to deal in a labour market that is going to cool-down.