NZ First Impressions: Labour Market Update, June Quarter 2023

Employment growth was strong, but with a large number of new entrants to the labour force, unemployment still rose to 3.6%. Wage growth has remained strong, but fell short of market forecasts.

• Unemployment rate: 3.6% (prev: 3.4%, Westpac f/c: 3.5%)
• Employment change: +1.0% (prev: +1.1%, f/c: +0.8%)
• Labour costs (private, ordinary time): +1.1% (prev; 0.9%, f/c: 1.3%)
• Average hourly earnings (private, ordinary time): +1.9% (prey: 2.1%)

The June quarter labour market surveys pointed to very strong employment growth, but growth that was nonetheless insufficient to absorb new entrants into the labour force. Wage growth remained elevated, reflecting past tightness in the labour market, but now appears to have peaked.

In the details:

• Employment rose by a very strong 1.0% in the June quarter, following an upward revision to the March quarter. Today’s result was stronger than our above-market forecast.
• However, labour force growth was even stronger, with migrant inflows boosting the pool of available labour. That saw the labour force participation rate rising 0.4ppts to a new record high of 72.4% (also above forecast).
• As a result, the unemployment rate edged up 0.2ppts to 3.6% in the June quarter. That outcome was 0.1ppt above our forecast, and that of both the market and RBNZ.

While the unemployment rate has been creeping higher since last year, wage growth remains elevated. 

• The Labour Cost Index (LCI) rose 1.1% for the quarter, leaving the annual rate of increase steady at its previous cyclical high of 4.3%.
• The LCI for the private sector (ordinary time) also increased 1.1%, lowering annual growth by 0.2ppts to 4.3%. That result was slightly softer than we had forecast and also a notch below the RBNZ’s forecast.
• The unadjusted LCI – which better represents developments in take-home pay – increased 5.9% over the year, thus tracking broadly in line with CPI inflation.
• Average hourly earnings, as measured by the more volatile Quarterly Employment Survey, increased 6.9% over the year, while the annual rate of increase for private sector wages dropped back to 7.7% from 8.2% previously.

Take outs for the RBNZ

While employment growth was stronger than the RBNZ had expected, developments in both the unemployment rate and wages will likely leave the Bank comfortable with the broad story underpinning the projections in the May Monetary Policy Statement.

Looking ahead, the RBNZ is forecasting the unemployment rate to rise to 4.6% by the end of this year. While online job vacancies have eased in recent months, suggesting slower jobs growth ahead, the unemployment rate may yet rise slower than forecast by the RBNZ. Developments in the labour market will remain crucial to the outlook for interest rates.