KEY POINTS:
The labour market held up better than expected in the September quarter but economists warn it is all downhill from here.
The unemployment rate rose to 4.2 per cent from 3.9 per cent in the June quarter. It has been below 4 per cent for more than four years.
But employment rose 3000 or 0.1 per cent in the quarter - surprising the market which had expected a 0.6 per cent fall.
The cumulative increase since the start of the year has been only 2000, however, or less than a 10th of 1 per cent.
With the working age population growing (7000 or 0.2 per cent in the September quarter) and the labour force participation rate back up at all-time high of 68.7 per cent, flat-lining employment has pushed the unemployment rate from a record low of 3.4 per cent at the start of the year to 4.2 per cent now.
"Employment needs to grow around 0.4 per cent a quarter just to absorb the number of people entering the labour force," BNZ head of research Stephen Toplis said.
"It's not, so the unemployment rate is rising relatively fast."
He expects the unemployment rate to hit 5.4 per cent by this time next year. Other forecasters see 6 per cent or even 7 per cent.
"Few believe it will reach the 7.6 per cent peak it did in the 1998 recession, let alone the 10.9 per cent peak of the 1991 downturn," Toplis said.
The main reason Toplis believes the unemployment rate will remain "reasonably well behaved" is the extent of the excess demand for labour at the peak of the cycle.
"For many businesses the softening so far has simply reduced this excess [demand] rather than leaving them over-staffed."
The market had expected a fall in the participation rate - the proportion of the working age population either employed or actively seeking work. But it rose to 68.7, equalling its all-time high.
ANZ National Bank chief economist Cameron Bagrie said he suspected that unlike previous turns in the labour market, when participation rates declined as workers grew discouraged, this time around it would hold up because higher cost of living pressures meant more people needed to look for work.
That is one of the reason he expects unemployment to keep rising to 6 per cent by 2010, if not more.
"This represents the next leg of weakness for the domestic economy. Remember, house prices were already falling and retail spending in retreat before the labour market turned."
While yesterday's data had shown the labour market to be not as weak as first thought, it would not stand in the way of a further aggressive easing by the Reserve Bank, Bagrie said.
"A rising unemployment rate will give the bank confidence that wage inflation will remain contained and that medium-term inflation pressures will eventually fall."
Deutsche Bank chief economist Darren Gibbs agrees and sees the unemployment rate hitting 7 per cent by late next year.
"Consequently we think a further 100 basis points of easing is justified on December 4."
ASB economist Jane Turner said the surprising resilience of the labour market reduced the urgency of large cuts in the official cash rate.
"However global sentiment and the second outsized move from the Reserve Bank of Australia have led the market to expect a large rate cut from the Reserve Bank of New Zealand in December. Differentials with Australia do play a part and so does market pricing. On that basis we see an increased risk of a 75 basis point cut.
"But today's data are a timely reminder there are still some economic positives in a market filled with bad news," she said.
Workforce
* Unemployment rose 6000 to 94,000 pushing the unemployment rate to 4.2 per cent from 3.9 per cent in June.
* Employment also rose, by 3000, but to a level only 2000 higher than at the start of the year.
* There is no sign yet of the "discouraged worker effect". Labour force participation is back at an all-time high.
