What is New Zealand’s NAIRU?

New Zealand’s unemployment rate has fallen 4.0% and with positive growth forecasts it will no doubt fall further. This low rate has meant that labour bargaining power has increased and the Labour Cost Index has risen to 2.2% and private sector average hourly earnings were up an annual 4.5%.

In the June quarter this year the participation rate was at 70.5%  one of the highest in the world – this shows how fully employed the NZ economy is. Many other countries have achieved falls in their unemployment rates, after the initial shock of COVID19, but only as swathes of people gave up looking for a job. So how tight is the labour market? The RBNZ judged an unemployment rate of around 4.5% as being consistent with the notion of maximum sustainable employment without causing a rise in inflation. Economists refer to this as the NAIRU (non-accelerating inflation rate of unemployment), the rate of unemployment at which inflation remains constant.

The lack of workers from overseas has impacted these figures and a relaxing of border restrictions might ease labour constraints. However it can work the other way with labour leaving New Zealand and therefore a net loss of people. But at the moment the falling unemployment figures are very problematic and inflationary and the Reserve Bank Reserve Bank’s Monetary Policy Committee need to think about when and how it returns New Zealand to a more neutral interest rate – neither expansionary nor contractionary. The current OCR (interest rates) rate is 0.25% but the RBNZ has estimated that the neutral rate is between 1.5% and 4.5% which seems to suggest that it is still very expansionary. Therefore with unemployment set to fall and further inflationary pressure should see the RBNZ increase the OCR.

Source: BNZ Economy Watch – 4th August 2021

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