How tight is the New Zealand labour market?

The New Zealand unemployment rate of 3.2% doesn’t reflect how tight the labour market is – there were 93,000 people unemployed in the December quarter in seasonally adjusted terms. In setting the Official Cash Rate (OCR) the RBNZ consider the labour market and look at a number of indicators. The figure below shows the range of indicators and how they have been performing since 2000.

Yellow (inner) circle = worst outcome since 2000,
Orange (outer) circle = best outcome since 2000,
Dark blue = current outcomes,
Light blue = 2019 Q4, when the RBNZ saw employment as “at or slightly above” maximum sustainable employment.

Looking at the number of average hours worked the lockdown has seen employers reduce hours of work rather than laying off workers which puts them in a good position for when the country changes alert levels. With COVID restrictions easing unemployment could have further to fall (forecast 3%) and this can only serve to increase the wage negotiating power of the employee. As well as the fact that labour will be more scarce, the level of inflation is on the way up and employees will want to maintain their purchasing power. These factors will most likely lead to higher wages. While there is no shortage of downside risks on the demand side of things as interest rates rise (globally) and the housing market cools, there’s also no quick fix on the labour supply front. It’s also worth bearing in mind that the labour market tends to lag activity by quite some months.

Source: ANZ Bank New Zealand Weekly Data Wrap – 5th November 2021

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