The combination of a tight labour market and the cost of living crisis has pushed many into work, and resulted in strong wage inflation.
After three quarters of no employment growth, employment grew by 1.3 percent in the September 2022 quarter, reaching a new record high of 69.3 percent, the third highest in the OECD. Labour force participation also increased by a staggering 1.2 percent, jumping from 70.9 percent to 71.7 percent. But with unemployment already near a historical low and negative net migration, where has this growth come from?
Young people drive up participation and employment
The constrained labour market has drawn in people who were previously not in paid work. Just in the September 2022 quarter, the number of people not in the labour force fell by 29,000, the biggest quarterly fall in history. Much of the growth in employment has been driven by young people (15 to 19 year olds), who have entered the labour market in large numbers. This group saw the largest increase in employment (up 8.8 percent percent) and labour force participation (up 9.3 percent) in the September 2022 quarter. Data on filled jobs indicates that the retail and hospitality industries have absorbed the largest shares of young workers. What has driven this surge in young workers is not as clear, but with demand high and supply severely constrained employers in certain industries may be tapping into the teenage workforce. The sharp price increases for essentials such as food and fuel may also have contributed to young people entering the labour market early.
Given that both labour force participation and employment increased strongly, overall unemployment remained unchanged at 3.3 percent. Not all groups have benefitted equally from the stretched labour market. In the September 2022 quarter, unemployment increased for women (3.8 percent), Māori (6.8 percent) and Pacific People (6.4 percent).
Spare capacity is limited
Not only are more people now in work, but those who are employed are also working longer. Weekly paid hours were up by 2.1 percent compared to the June 2022 quarter, despite the COVID-related disruptions to work. Underutilisation, another measure of spare capacity, fell by 0.2 percentage points to nine percent during the September quarter. The number of potential jobseekers (those who are not actively seeking a job, but are available and want a job) fell strongly by 16.1 percent. The number of working-age people on jobseeker support is also gradually declining. In September 2022, 5.4 percent of the working-age population received jobseeker support. This was a fall from the 6.2 percent who received such support in the previous year. Despite the drop, the number of people on jobseeker support still remains higher than it was pre-COVID.
Demand for workers continues to stay robust. According to ANZ’s latest Business Outlook Survey, although businesses are pessimistic about profit expectations, employment intentions are still in the green (a net five percent of businesses surveyed expected to hire more people over the next 12 months). The Ministry of Business, Innovation and Employment’s (MBIE) data series on online job advertisements also points to moderate growth in job advertising during the September 2022 quarter (4.4 percent). Six of the nine industries surveyed saw a growth in online job advertisements. The healthcare, hospitality, and IT industries recorded falls in job advertisements over the quarter.
Average hourly wage growth surpasses inflation
Given the restricted supply and buoyant demand for workers, wage growth in the September quarter surpassed all expectations. There is now a real risk that prices start to feed off wages and vice versa. Wages make up a large share of firms’ operating costs, and when these costs rise faster than productivity firms increase prices to make up for lost margins. The annual increase in private sector hourly earnings, as measured in the quarterly employment survey (QES), of 8.5 percent (2.6 percent quarterly) was much higher than the 7.2 percent increase in the consumers price index (CPI). Average hourly earnings increased fastest for those in the information, media, and telecommunications (7.3 percent); electricity, gas, and waste services (4.4 percent); and construction (4.4 percent) industries.
The tight labour market, in combination with the rapidly rising cost of living, has provided workers with greater power to negotiate for higher pay. Data from the labour cost index (LCI) indicates that salaries and ordinary time wage rates increased for nearly two-thirds of all jobs over the past 12 months. These pay rises are also bigger than those workers would have received pre-COVID. Thirty-one percent of all jobs (the largest share ever) saw an increase in salaries and wages of over five percent over the year. The comparative share in September 2019 was just 15 percent.
The impact of the full reopening of the international border on the domestic labour market is not yet clear. Many work and long-term visa categories that have been closed are now accepting applications for the first time in years. However, New Zealand will be competing with other countries, for example, Australia and Canada, for high-skilled migrants. Moreover, new work visa categories, such as the accredited employer work visa, make it harder for migrants to enter New Zealand. This means that despite borders now being fully open, labour shortages in some industries may persist well into 2023.
The strong performance of the labour market, combined with persistently high core inflation, opens up room for larger OCR increases by the Reserve Bank later this month and early next year.