The Labour Market Remains As Tight As A Drum, And Wages Are Rising Rapidly
The labour market remains too tight, according to the latest labour market report. To meet labour constraints workers are putting in more hours and firms are hiring from a broader set of people. The unemployment rate was unchanged at the near record low of 3.3%. The underutilisation rate, a broader measure of tightness, dropped further to 9%, near the all-time low. And the participation rate surprisingly jumped to a new high 71.7%. The fact that such a large rise in the participation rate failed to move the unemployment rate means firms are taking anyone they can get. Growth in the working age population continues to be hobbled by a current net migration outflow and is adding to capacity constraints.
Employment jumped a surprisingly robust 1.3% in the third quarter. At 1.5% up on a year ago, annual employment was down from the recent peak of 4%. Jobs growth was particularly pronounced in the younger age groups, with the employment rate for 15-19 year olds hitting the highest level since 2007.
The labour market is as tight as a drum. And wages are rising swiftly. The difficulty in finding the right staff, at a reasonable cost, is the biggest constraint for many Kiwi businesses.
Average hourly earnings from the QES hit 7.4%, the highest in the measure’s history going back to the late 80s. Workers are in demand, and they have demands. Workers have the current inflation rate of 7.2% in the back of their minds. And wages are being propelled higher by workers trying to cover the cost-of-living crisis. The private sector labour cost index (LCI), a measure of pure wage growth, came in at 3.9% in the third quarter, up from the 3.4% of Q2. Moreover, the latest reading is also a record high reading of wage inflation since the LCI was introduced in the mid-1990s. Wage inflation is forecast to break above 4% and peak around 4.5% by the middle of next year.
Looking ahead to next year, we see net migration starting to add to the labour force, at the same time a slowing economy saps firms demand for workers. With the economic outlook darkening for 2023 this means the unemployment rate should lift back toward the long-run average of around 4.5%.
But for now, there was little in today’s report to dissuade the RBNZ from delivering an outsized 75bp rate hike on November 23rd. The labour market remains uncomfortably tight despite drawing more workers in. Firms continue to struggle to source workers and consequently wages are rising fast. Risks to inflation remain elevated for now.