Why the labour market matters just as much as the oil shock right now
Saturday, 18 April 2026
Alexandra Turcu is an Economist at Kiwibank
ANALYSIS: It’s easy to get laser-(kiwi)-focused on supply shortages and price spikes. But arguably there are other influential factors shaping the Kiwi economy right now. None more so than the state of our labour market.
Here’s why the labour market matters and what it means for inflation and interest rates.
What’s “slack” in the labour market?
There’s been a lot of commentary lately about “slack” in the labour market and what it means for RBNZ’s inflation outlook. But what is it really, and how does it work?
When economists talk about the labour market, what we’re really measuring is the labour force. According to StatsNZ, the labour force includes people who are working, or who could be working. It’s made up of four categories:
Fully utilised workers: People who are working but either don’t want to work more hours or aren’t available to.
Underemployed workers: People who are working but want and are available to work more hours.
Potential labour force: People not working who either aren’t currently looking for work or aren’t available to start in the next four weeks.
Unemployed people: People not working but actively looking for work and available to start in the next four weeks.
The last three groups make up the underutilised workforce. That’s the “slack”.
When all three groups are combined, the underutilisation rate is 13%, a 13-year high. Kiwi underemployment is 5.2%, the highest level since records began in 2004. The unemployment rate is 5.4%, the highest in over a decade.
These are dire numbers. We have more people out of work than we have in over a decade. But the picture gets worse when we zoom in.
Underemployment isn’t about effort
Underemployed workers say they want more hours but just can’t seem to find them. It’s easy to assume that reflects a lack of effort, but the data shows otherwise.
Underemployed workers are only working one hour a week less than their fully utilised counterparts. The real difference? Income. Part-time underemployed workers earned around 28% less. Full-time underemployed workers earned around 33% less.
These stats challenge the idea that underemployment is about not working hard enough. Instead, many people are stuck in low-paying jobs with limited opportunities to earn more. Adding more of the same low-wage hours won’t solve that problem.
The economy would benefit from lifting skills so underemployed workers can move into better-paid roles. But that only works in a world where those jobs actually exist.
Why does this matter for mortgage rates?
How many higher-paid jobs are being created depends directly on business confidence. That confidence is shaped by inflation and expectations about economic stability. This is where mortgage rates and the Reserve Bank come into the picture.
When fuel costs rise, they increase the cost of moving goods and services around the country. Inflation rises, and pressure builds.
RBNZ’s job is to keep inflation low and stable, between 1%-3%, with the 2% mid-point being the sweet-spot. One way it does this is by lifting the OCR, which triggers a lift in interest rates and makes borrowing more expensive.
There are 1.4 million active home loans across around the motu as of June 2025 (NZBA). When interest rates rise, mortgage repayments rise. Mortgage holders are forced to spend more of their income servicing debt, leaving less to spend everything else. That reduces demand across the economy.
The current challenge
But what happens when demand is already weak, and prices are still rising?
That’s where the labour market matters most.
Imagine a Kiwi business owner facing (current) fuel cost spikes. Thanks to three back-to-back years of economic recession, margins are already thin. Passing on higher costs to already cash-strapped customers isn’t feasible either. They’re stuck between a rock and a hard place.
Now imagine workers, facing increased costs of getting to work, asking for a pay rise or more hours. In a tight labour market, these workers might have leverage. In today’s labour market, that leverage is missing and business funds are low too.
Our Kiwi business owner may look to that pool of underutilised Kiwi, desperately looking for an income (or a higher one). Chances are they will find some very brilliant and qualified people in that pool, people that are willing to work for a lot less than the pay rise their workers are asking for. That dynamic reduces wage pressure, even when prices rise.
This is why slack in the labour market matters. It helps explain why supply-driven price spikes don’t automatically translate into higher wages, sticky inflation and higher interest rates.
What the Reserve Bank is watching
This is also why the RBNZ’s focuses on medium-term inflation, not short-term.
Shocks driven by temporary price increases tend to fade if wages don’t rise alongside them. In an economy with weak demand and excess labour capacity, aggressively lifting interest rates risks doing more bad than good. It squeezes households and businesses harder, without addressing the source of the problem.
It’s one more reminder that when it comes to interest rates, the labour market often tells a quiet, but important, part of the story.