Surprise as official unemployment edges up to 3.3%

Wednesday, 3 August 2022

The official unemployment rate is based on a survey by Stats NZ. To count, people must have actively looked for work in the previous four weeks.

Official unemployment edged up to 3.3% in the three months to the end of June, confounding the expectations of most economists who had expected unemployment to drop to a new low.

Unemployment had previously been sitting at 3.2% in both the March and December quarters, which was its lowest level since comparable records began in 1986 and probably the lowest unemployment has been since at least the 1970s.

Infometrics principal economist Brad Olsen said the latest labour market figures were choppy, and analysts appeared to draw different conclusions over whether they made further large increases in interest rates more or less likely.

Stats NZ reported the labour “underutilisation” rate, which is a broader measure of underemployment, reflecting the proportion of people wanting to more work hours, moved in the opposite direction to the official unemployment rate.

It slipped to 9.2% in the three months to the end of June, from 9.3% in the March quarter.

* Can we trust the official unemployment number?

The total number of hours worked in the June quarter also pointed to a tighter labour market, rising by 0.5% to just under 108 million hours.

Stats NZ described the unemployment and underutilisation rates as being “relatively unchanged” from the previous quarter.

“Measures of spare labour market capacity have fallen over the year and remained low for several quarters, continuing to show a tight labour market,” senior manager Becky Collett said.

Salaries and wages, including overtime, as measured by Stats NZ’s labour cost index, rose 3.4% over the year, up from an annual rise of 3% in the year to the end of March but still well below the annual inflation rate of 7.3%.

Back in the May 2020 Budget, the Treasury was forecasting unemployment would now be 5.7%, instead it is 3.3%.

That measure is designed to adjust for the type and quality of the work people are doing, to reflect employers’ true labour costs.

So, for example, if people were paid more because they took a promotion, that would not be recorded as a cost rise in the index.

Stats NZ said average ordinary-time hourly earnings, as measured by its quarterly employment survey, which is a rawer measure of pay, rose at the annual rate of 6.4% in the June quarter.

The Reserve Bank forecast in May that the June quarter unemployment figure would come in at 3.1%.

But ANZ, the country’s largest bank, had been tipping it would slide to 2.8% while acknowledging a high degree of uncertainty.

ANZ – and ASB which had expected unemployment to drop to 3% – had both tipped that if the unemployment rate had come in much lower than they had forecast that could have put a 75 basis point rise in the official cash rate on the table when the Reserve Bank releases its next monetary policy statement on August 17.

But Capital Economics economist Marcel Thieliant said the fact unemployment had risen for the first time since mid-2020 suggested that the Reserve Bank’s hiking cycle was nearing its end.

The rise in the labour cost index could be partly attributed to the 6% rise in the minimum wage on April 1, Thieliant said.

First Union policy analyst Edwards Miller said there was no evidence of a “wage spiral” as workers were chasing inflation, not driving it.

“While we expect wage growth to creep higher throughout this year, the renewed slackening of the labour market should give the Reserve Bank some pause for thought as survey indicators suggest that inflation has already peaked.”

Thieliant said Capital Economics had “pencilled in” another 50bp hike on August 17 but forecast the Reserve Bank would probably revert to slower 25bp rate hikes thereafter.

Bank economists appeared to view the numbers through a slightly different lens.

ANZ said that while unemployment did increase, the “continued surge in wage inflation” was a serious concern for the Reserve Bank.

Westpac acting chief economist Michael Gordon agreed “strong wage inflation” was likely be the most significant part of the Stats NZ data as far as the central bank was concerned.

“The risk for the Reserve Bank is that wage pressures provide an avenue for the recent bout of price shocks to turn into sustained inflation over time,” he said.

ASB senior economist Mark Smith also focused on the rise in labour costs.

“Underlying details confirmed labour costs were on the way up, pointing to a wage-price spiral unfolding,” he said.

First Union policy analyst Edward Miller disputed that claim.

“Economists and media commentators will be busy trying to argue that this is evidence of a wage-price spiral, but the case has been poorly laid out,” he said.

Workers were “chasing inflation, not driving it”, Miller said.

“What we’re seeing here is a labour market correction. For the past three decades, labour productivity growth has almost doubled wage growth.

“The tight market is pushing employers a bit harder to attract and retain staff. That’s a good thing, and long overdue,” he said.