"What happened with the lockdown is participation [in the labour market] fell quite sharply. Now a spike higher in the participation rate....for Q4 could present some downside to our overall labour market pick via a higher than expected unemployment rate."
"If we do get a big catchup in participation [it could mean the] unemployment rate could look a lot worse at the headline level."
Workman said he expected the underutilisation rate, which is a measure of slack in the labour market, would remain at elevated levels of about 13 per cent for quite some time.
"We are still dealing with a significant economic shock, albeit that shock hasn't been as bad as all of our earlier forecasts. We've been getting these positive surprises which has been great but the absolute picture is still not a great one."
The bank expected wage growth to be weak at about 0.5 per cent because firms are likely to be hesitant about raising wages in light of prevailing uncertainty and other cost pressures.
However, the effect on different industries is likely to be uneven, as pockets of the economy were booming, such as construction while the likes of the tourism sector was still struggling with ongoing border closures, Workman said.
Kiwibank chief economist Jarrod Kerr said further deterioration was expected in the jobs market for the December quarter but it was not picking as much damage as previously expected with a forecast of 5.4 per cent.
"Our pick is below that of market consensus and the RBNZ's 5.6 per cent."
Kerr said already released monthly employment indications from StatsNZ showed a modest rise over the fourth quarter.
"As a result, we are forecasting a 0.2 per cent quarter-on-quarter rebound from September quarter's 0.8 per cent drop."
Kerr said employment growth was consistent with New Zealand's better than expected performance since coming out of lockdown.
"A raft of local data at the end of 2020 confirmed the resilience of the New Zealand economy."
But Kerr also doesn't believe a 5.4 per cent unemployment rate will be the peak in the current economic cycle.
"The unemployment rate is forecast to rise further at the start of 2021. There have been growing anecdotes of worsening trading conditions for tourist operators now that New Zealand's holiday peak is sadly behind us."
He is now expecting the unemployment rate to peak around 6 per cent - lower than the 6.5 per cent previously forecast.
"If realised, a 6 per cent peak unemployment rate would be a remarkable outcome from covid – a once in a century crisis. However, as we have seen in the last few weeks,
we are still susceptible to Covid, and an optimistic forecast remains fragile until vaccines have been rolled out."
Kerr said slack in the labour market caused by Covid had killed wage growth and it was likely to remain muted at the end of 2020.
Annual wage growth peaked at 2.4 per cent in the year to September 2019 but had fallen to 1.6 per cent by the September 2020 quarter.
"We believe this trend likely continued in the fourth quarter given the slack present in the
labour market. Our forecast is for a 0.4 per cent quarterly increase to see annual wage growth ease to 1.4 per cent."
StatsNZ will release the 2020 fourth quarter labour market numbers on Wednesday.
-additional reporting NZ Herald
