According to the latest data, unemployment has fallen to a historically low rate. While workers are not struggling to find employment, they are experiencing real wage loss due to high inflation, which may not be sustainable for much longer.
The data referenced in this article was sourced from the Household Labour Force Survey, released by Statistics New Zealand (Stats NZ) since 1986. The survey is a useful tool to understand the labour market because it also accounts for underutilisation, which is when the worker is counted as employed but is not offered as many hours of work as they wished.
The graph below depicts the unemployment and underutilisation rate compared with the same quarter in the previous year. The unemployment rate has been falling since the September 2020 quarter, when it was 5.3 percent, to 3.2 percent in the December 2021 quarter.
The latest unemployment rate is the lowest since Stats NZ started to record this data.
In addition to the low unemployment rate, the underutilisation rate fell from 13.2 percent in the September 2020 quarter to 9.2 percent in the September 2021 quarter. There was no change to the underutilisation rate in the December 2021 quarter.
Since the move to the new COVID-19 Protection Framework, demand for goods and services has been growing, increasing the demand for labour, which, in turn, reduces unemployment.
Furthermore, with the borders being closed for new migrants since 2020, the total number of active members in the workforce (labour force participation rate) has not grown enough to accompany the demand for labour, contributing to a growing pressure on the demand for labour.
Even though wages have been steadily rising, high inflation has contributed to a fall in real wages.
While news stories in the media generally focus on the unemployment rate, another component of the labour market data reveals a potentially major issue.
The second graph shows the relationship between the Labour Cost Index (LCI) and the Consumer Price Index (CPI). The LCI can be understood as average wages, and the CPI as inflation. The graph shows that although wages growth surpassed inflation for most quarters starting in December 2011, the situation changed significantly after March 2021. Although wages have been steadily rising since the economic recovery from the COVID shock, they are now falling behind inflation, meaning that workers are suffering a reduction in the real value of their wages.
With this gap between wages and inflation growing, workers are more likely to be feeling growing job dissatisfaction, and because unemployment is at a historically low rate, they have a greater ability to take action, as they have more bargaining power. This situation could result in workers moving between jobs more often in search of higher wages to keep up with inflation. In the coming months, we could see a movement similar to the Great Resignation in the United States, where a tight job market led to unprecedented rates of resignations last year.
Workers in highly unionised sectors are likely to organise strikes, demanding higher wages to match the inflation rate.
The situation is problematic for employers because they could experience a productivity loss from workers moving between jobs, as new workers take some time to adapt to their new roles. This would lead to employers incurring higher training costs. Moreover, industries in sectors that are unionised may suffer a blow to their production if they experience long and far-reaching strikes. Small businesses may suffer greater losses, as they often have tighter profit margins. The productivity loss and rising wages could make certain small businesses unprofitable, leaving them vulnerable to closure. On the other hand, workers are the ones losing the most in the current environment, their savings are losing value to inflation, and rising living costs are decreasing their ability to save.
Finally, the current situation is new, as in the past, wages have been usually slightly above inflation. However, there is now a contradiction between low unemployment and real wage loss, which could create winners and losers. In the coming months, we can expect to see growing tensions between workers and employers, as both try to mitigate their losses in this inflationary economy.