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Employment, participation rate fell in 3Q

Employment, participation rate and the unemployment rate fell in 3Q

According to Statistics New Zealand's 3Q labour force survey, labour market conditions tightened last quarter. The unemployment rate dropped to a new record low 3.5% (the lowest print in the survey's 20-year history), with the number of people unemployed (down 2.5%q/q) falling at a greater rate than the size of the labour force (down 0.4%q/q). The number of people employed unexpectedly fell 7,000 (-0.3%q/q) over the quarter, and the total labour force lost 9,000 people. The decrease in the labour force participation rate was solely due to the labour force contracting, as the working age population grew (up 0.2%).

The largest fall in employment over the quarter came from the construction industry, which supports the weakness seen in the property market and horrible weather over the quarter. Not surprisingly, the largest gain over the quarter came from the agriculture, forestry and fishing sector. The surge in soft commodity prices, especially dairy, should see employment in the sector continue to grow. Of the ten aggregated industries, only four recorded falls in employment (construction, business and financial services, education, and other services).

The survey reported a large drop in the female participation rate, which fell 0.9%pts to 61.2%; the male participation rate was unchanged at 75.7%. Although this is only one quarterly number, the uptick in the number of permanent departures overseas may be having an impact. More Kiwis are heading overseas (especially to Australia) in search of better job opportunities. The gravitational pull of strong employment growth and attractive job offers in Australia and the United Kingdom has seen the number of permanent departures increase. While only one of many factors, the increased departures of working age Kiwis will be adding to the pressures building in New Zealand's already tight labour market.

According to Statistics New Zealand, the number underemployed (those employed part-time who would like to work more hours) fell to 78,100 (15.7%), down from 17.5% in 2Q, and 15.1% in 3Q 2006.

Today's tight labour market report follows on from a slightly stronger than expected rise in the labour cost index on Monday of 0.9%q/q for 3Q, which kept the annual rate of wage inflation above 3%. The RBNZ will view the tightness in the labour market and uptick in wages growth as continued threats to their inflation trajectory. The tight labour market, commodity price boom, and the government's conflicting fiscal policy will all contribute to the RBNZ's concerns on inflation. JPMorgan believes that the RBNZ's assertive tightening to 8.25%, however, will be enough to satisfy their 1-3%oya inflation mandate, and the bar to raising the official cash rate further remains high. A rate cut in the near term is highly unlikely. JPMorgan believes the RBNZ will keep the OCR unchanged for the foreseeable future.

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