KEY POINTS:
The unemployment rate is expected to jump when September quarter jobs data are released on Thursday, as the recession pushes more firms over the line from the desire to hoard labour to the need to cut costs.
Market economists' forecasts cluster around an unemployment rate of 4.3 per cent, up from 3.9 per cent in the June quarter. It would be the highest rate since December 2003.
Westpac economist Dominick Stephens said the seven-year run of strong employment growth had ended.
"So far most affected workers have found alternative employment, quit the labour force or emigrated. The rise in unemployment has been slow but steady."
The statisticians' readings of employment growth have been erratic this year, with a sharp fall in the March quarter followed by a swift rebound in June. Through the statistical noise, the signal has been clear enough, however: no net growth in jobs in the first half of the year.
And economists expect that to worsen, based on both anecdotal evidence and the regular surveys of business sentiment. The market consensus is a 0.6 per cent drop in employment in the September quarter.
The National Bank's monthly business outlook, released last Thursday, found a net 21 per cent of firms expect to have fewer staff in a year's time - the weakest result in the 20-year history of the survey. The long-term trend for hiring intentions is a net 3 per cent positive.
The bank's economists expect most of the job losses to be in domestically focused areas of the economy like construction, retailing and business and financial services, which have been the source of two-thirds of the employment growth over the past five years.
As for how far the unemployment rate could rise, forecasts vary, reflecting uncertainty about the length and severity of the global economic downturn, and about how far labour force participation will recede from its historic highs. To count as unemployed, people have to be actively seeking work.
Another variable difficult to forecast is what the global recession will do to net migration.
The double whammy in 2001 of the tech wreck and the September 11 attacks led to a surge in the number of returning expatriates and a decline in New Zealanders emigrating, which boosted both the supply of labour and the demand for housing.
The Bank of New Zealand expects the unemployment rate to climb towards 6 per cent next year. Westpac is more optimistic, with 5 per cent by the end of next year, but ANZ National Bank thinks at least 6 per cent.
Meanwhile, wages data out today will be scrutinised for signs wage inflation, which has been running hot, has peaked.
ANZ National Bank chief economist Cameron Bagrie said wages were typically one of the last things to turn in response to a weaker economy.
"But with the unemployment rate rising and skill shortages easing sharply, wages are unlikely to post the strong increase experienced over recent times."
The consensus expectation among market economists is for a quarterly rise of 0.8 per cent in the labour cost index, the same as in June, which would bring the annual rate down to 3.4 per cent from 3.5 per cent three months ago.
Bagrie noted that when Reserve Bank Governor Alan Bollard cut the official cash rate by an unprecedented 100 basis points on October 23, he also expressed concern about the stickiness of domestic inflation including, explicitly, wage inflation.
While Bollard foreshadowed further easing to come, it is conditional on "evidence of actual reductions in domestic cost pressures".
Bagrie said that as a key driver of medium-term inflation, the labour market would be watched closely to see if it provided the evidence the bank needed.
LEAN TIMES
* The unemployment rate is expected to jump to 4.3 per cent as recession bites.
* How much higher it goes depends on the severity of the global recession, how many people drop out of the labour force and net migration.
* The peak in wage inflation is seen as near if not already behind us.
