Liam Dann: Tight labour market points to more inflation ahead

Wages are rising, however, in the last four quarters wage inflation has been lower than consumer price inflation. Photo / 123RF

OPINION:

It didn't do headline writers any favours by hitting a record low as the market expected, but the March quarter unemployment rate - steady at 3.2 per cent - still points to ongoing tightness in the labour market and more inflation pressure ahead, economists say.

"Today's data confirmed that the labour market has continued to tighten and is extremely stretched," said ASB senior economist Mark Smith.

"The first quarter unemployment rate held steady at 3.2 per cent, around record lows for the post-1985 quarterly history of the Household Labour Force Survey."

Wage inflation looked set to strengthen over the course of this year, he said.

"The Kiwi labour market is as tight as it has ever been. Jobs are plentiful, unemployment is at a new record low, and wages are rising. There is no denying the strength of this report," said Kiwibank chief economist Jarrod Kerr.

But while a "red-hot labour market" might be great for those on the fringes of the market, labour shortages throw up other problems, Kerr said - "in this case primarily adding to decades high inflation".

Inflation is running at 6.9 per cent.

The private sector labour cost index (LCI) grew 0.7 per cent in the quarter to lift annual wage inflation above 3 per cent for the first time in 13 years, Kerr said.

ASB's Smith said he expected the annual LCI inflation rate to rise above 4 per cent by the end of the year.

In the year to the March 2022 quarter, average ordinary time hourly earnings increased to $36.18 - up 4.8 per cent.

Average weekly earnings (including overtime) for full-time equivalent employees in the March 2022 quarter also increased on an annual basis – up 5.7 per cent to $1406.12.

Even StatsNZ was careful to note that the highest wage growth since 2009 was no win for workers.

"Wage increases have typically exceeded consumer price increases over the past 10 years," said StatsNZ business prices delivery manager Bryan Downes.

"In the last four quarters, despite stronger wage growth, wage inflation has been lower than consumer price inflation."

Longer term the outlook remained highly uncertain, said Smith.

"New Zealand's allure as a good place to work and live will likely trigger an increase in immigration and see the return of net immigration inflows," he said.

The labour market is "red-hot" says Kiwibank chief economist Jarrod Kerr. Photo / Supplied

"However, this is unlikely to herald the return to the boom times for domestic demand and the housing market given stretched affordability and rising
living costs. If anything, we are likely to see a turning point in the labour market within the next 12-24 months, with the unemployment rate to move higher and wage inflation to cool given the increasing competition for jobs."

Softening labour market conditions would ease pressures on core inflation and pave the way for eventual OCR cuts, he said. ASB has pencilled in OCR cuts from 2024.

What is the StatsNZ official unemployment figure?

The StatsNZ unemployment number is based on responses to the Household Labour Force survey.

Every quarter StatsNZ surveys 15,000 households - catching data for more than 30,000 people - to get a representative sample of Kiwis' employment status.

It's the longest-running series StatsNZ does - dating back to 1986.

The methodology is regularly checked and adjusted against best practice so the figure can be benchmarked accurately across time and against other OECD countries.

To be classified as unemployed by StatsNZ a person must not have a paid job, must be available to start work and must have been actively seeking work in the past four weeks or be due to start a new job in the next four weeks.

Is it accurate?

The figure is as accurate as any statistic we collect and use to gauge economic progress.

It is considered very robust as a means of capturing the direction of travel for the labour market.

When we consider the sample size, bigger would always be better, says Smith.

But relative to political polls, which use samples as low as 1000 people, the HLS survey is solid.

There is a degree of subjectivity with regards to how unemployment is classified by StatsNZ.

However this is true of most economic statistics.

For example, StatsNZ has influence over inflation figures because it chooses which consumer goods are counted in the Consumer Price Index.

Economic growth is measured based on choices about which activities are counted towards Gross Domestic Product.

What's important is that the methodology remains consistent and free from political interference.

Why is it different to Jobseekers benefit numbers?

Jobseeker benefit numbers sometimes diverge from the official unemployment figure based on different definitions.

For example, StatsNZ will not classify someone as unemployed if they have part-time work, even though they may be on a benefit.

But, conversely, an issue with Jobseeker benefits is that you can unemployed and looking for work but if your partner earns a lot then don't you don't qualify for a benefit, so you don't get included in numbers.

The fact that benefit categories are subject to government policy whims makes them less reliable across time, and around the world.

However economists stress the importance of analysing totality of the labour force data rather than relying on just the headline figure.

How does the unemployment rate differ from the Jobseekers right now?

StatsNZ counts 94,000 Kiwis as unemployed. The latest comparable benefit figure is 100,000 (Jobseeker work ready).

"Right now the groups of people that are unemployed under HLF and those eligible for unemployment benefit are heading in the same direction," says Smith.

There is sometimes confusion around the broader Jobseeker benefit figure (180,000), which includes those who are sick and disabled after changes made by National in 2013.