A Closer Look at the Labour Market
Data Flash (New Zealand)
The past week has seen the release of a full suite of New Zealand labour market data for Q1. In this article, we review the state of the New Zealand labour market.
We also contrast trends in New Zealand with those in Australia, where a substantial weakening in the labour market is the prime reason why we expect the RBA to ease a further 75bps during the current cycle. The differences help to explain the RBNZ's greater reluctance to take its cash rate lower.
Employment unchanged in Q1
Following cumulative growth of 2.4% during the second half of 2000, Household Labour Force Survey (HLFS) employment was steady in Q1, more-or-less in line with market expectations (the market had expected growth of 0.1% qoq). The strongest growth occurred in the manufacturing sector (up 3.7% qoq) but this was offset by a fall in the business and financial services sector (partially reversing very strong growth in Q4). Importantly, full-time employment grew 0.8% qoq to be 3.2% higher than a year earlier. Thus, on a full-time equivalent basis (where three part-timers equal one full-timer), the level of labour input increased 0.3% qoq.
The broad employment trends evident in the HLFS were substantiated by the Quarterly Employment Survey (QES). On a QES basis, total employment fell 0.2% qoq but was 3.1% higher than a year earlier. Differences between the HLFS and QES results can be explained largely by differences in:
sample frame: the HLFS is a survey of households whereas the QES is a sample of businesses; and
coverage: the HLFS covers the entire labour market whereas the QES excludes certain industries (notably agriculture) and business types (for example, working proprietors in firms with two or less full-time equivalent employees).
Hours worked suggests solid GDP growth
In recent times measures of hours worked (especially on a HLFS basis) have been extremely volatile, reducing their usefulness as a predictor of GDP. That said, the 2.8% qoq growth in hours worked during Q1, which is consistent in direction, if not magnitude, with a rise in full-time equivalent employment, does not appear to be at odds with our preliminary estimate of 0.8% qoq GDP growth in Q1. The QES measure of hours paid declined slightly, providing a dissenting voice. This could simply reflect the usual volatility, the fact that the QES measure fails to pick up any increase in non-paid overtime worked by salaried employees, or the difference in survey coverage discussed above.
Forward employment indicators still robust
Looking ahead, indicators provide scant evidence of any significant weakness in labour demand. The ANZ job ad series declined in April following three consecutive increases. However, with April affected by Easter and the ANZAC day public holiday, data for that month needs to be treated with caution. In any case, the series remains at a historically high level consistent with net job creation (perhaps helped by repeat advertising due to skill shortages). Similarly, employment indicators from both the NBNZ and QSBO business surveys remain consistent with positive levels of employment growth. Given our expectations of only modest employment growth going forward, it would be a surprise if these indicators did not moderate somewhat over coming months.
Labour productivity growth remains weak
The strong employment growth recorded over H2 2000, coupled with below-trend growth in output, has led to a decline in productivity growth over the past year. Over the past 10 years, labour productivity has grown at an average annual rate of around 1% yoy (the exact rate depends on the measure of labour input chosen).
Abstracting from cyclical factors, the evidence in favour of a significant step in trend labour productivity compared with the past ten years is less than compelling. On the one hand, capital investment has been quite strong over the past year and this should raise labour productivity growth, at least temporarily. On the other hand, as skill shortages intensify, it seems probable that the marginal labour productivity of new employees will deteriorate, leading to a decline in average productivity.
Labour productivity growth of 1 to 1.5% per year, combined with labour force growth of 1%, suggests that New Zealand's current rate of potential GDP growth is unlikely to be much higher than 2.5% yoy.
Unemployment rate falls further
The unemployment rate fell to 5.4% in Q1, the lowest level seen Q2 1988. Long-term unemployment has also continued to fall, suggesting that the so-called natural or structural rate of unemployment may also be falling. However, the continued rise in skill shortage indicators leaves little doubt that labour market conditions continue to tighten.
Wage growth headed higher
Further evidence of the lagged impact of tightening labour market conditions was evident in this week's wage outcomes. After seasonal adjustment, the QES private sector ordinary time wage rate rose 1.1% qoq in Q1 - up from 0.8%qoq in Q4 - and was 3.1% higher than a year earlier (some 0.6pps higher than market expectations).
We expect the annual rate of wage inflation to approach 4% over the coming year. Given New Zealand's poor productivity performance, this suggests annual unit labour cost growth of 2.5% - above that consistent with the midpoint of the RBNZ's 0 to 3% inflation target.
NZ labour market compares favourably
Labour market trends are attracting increasing focus both in the US and Australia, with our respective economics teams concerned that ongoing weakness in the labour market might undermine consumer confidence, thus delaying the economic recovery. Indeed, the prospect of continued labour market weakness is perhaps the key factor that is likely to trigger additional easing by the Fed and the RBA. In this regard, it is interesting to contrast labour market trends in Australia with those in New Zealand. As the charts below illustrate, at least at present, labour market trends in New Zealand remain much more robust, thus helping to explain the RBNZ's reluctance to ease rates aggressively.
Darren Gibbs Senior Economist (64) 9 351 1376