But cooling is expected from here, Kiwibank economists say
The latest labour market data has revealed strong job gains and chunky pay rises, but cooling is expected in the second half of 2023, according to Kiwibank economists.
Stats NZ data showed that the unemployment rate remained low at 3.4%, while the underutilisation rate slipped from 9.3% to 9%. Wage growth, meanwhile, picked up with a solid 1% (Labour Cost Index) gain on the previous quarter, and 4.3% lift over the year. Four in 10 employees that received a pay rise enjoyed a chunky increase of more than 5%.
Jarrod Kerr (pictured above left), chief economist, and Mary Jo Vergara (pictured above right), senior economist, said further wage gains are likely due to the cost-of-living crisis fuelling wage negotiations.
“Everyone knows the inflation rate is running around 7%, and grocery receipts are printing much higher. We have seen a pick-up in ‘churn,’ with workers jumping ship for more pay, as clear evidence of the pressures that exist on both sides, from employers and employees. The lift in wage growth is the fastest we’ve seen in the history of the Stats NZ data dating back to the early 1990s. And it’s still running well short of actual inflation.”
Employment grew 0.8% over the quarter, to be up 2.5% over the year – quite a big lift in the run rate from 1.6% year over year last quarter.
“The solid gains in employment are a result of increased labour supply, mostly migrants, meeting already pent-up demand,” the economists said. “The migration-fuelled boost to labour supply is helping to resolve the staffing issues that have long-plagued firms in this COVID era. It’s good news, for now.”
Labour force participation grew to a newly printed high of 72%, up from (an upwardly revised) 71.8%, as an increasing number of migrants come to our shores to very actively participate in the labour market.
“Migrants are a fountain of youth, and employment. And they dampen wage pressure,” the economists said.
Kerr and Vergara noted that the labour data is not only old, for the March quarter, but also lags economic activity.
“In a downturn, firms tend to cut hours rather than headcount, as they hold onto workers for as long as they can,” they said. “And the downturn has well and truly begun. Sentiment has shifted a lot over the last six months. And we’re hearing more and more anecdotes of firms downsizing their workforce. This is a big shift from the desperation to find staff of last year.”
The Kiwibank economists predicted the looming RBNZ-engineered recession to cause a lift in unemployment over the second half of this year, and into 2024.
“If the recession is shallow, as forecast, then we should see a lift in unemployment to 5-5.5% in 2024. If the recession deepens, then there is a significant risk we see a sharper spike in unemployed,” they said.
Job hiring gathers speed
Employment growth posted a 0.8% gain over the quarter and a 2.5% lift over the year, a decent acceleration from the previous 1.6% print.
“And it looks like women dominated the job gains over the quarter, accounting for over two-thirds of the rise in employment,” the economists said. “In fact, the female employment rate hit a new series high at 65.2% (series beginning 1986). For men, the employment rate too is sitting at a series high of almost 74%.
Kerr and Vergara said firms continued to show an appetite for labour despite emerging signs of domestic demand slowing. NZIER’s latest QSBO showed that the search for labour is no longer the primary constraint for businesses, as the labour supply is getting the much-needed boost from the strong inflow of migrants.
“The working age population is 0.5% bigger than last quarter, and 1.3% bigger than this time last year,” they said. “Both rates are the highest recorded since 2020. An uptick in employment growth in part reflects the return of work-ready migrants to fill vacancies.”
Wage growth yet to peak
The private sector labour cost index, a measure of pure wage growth, hit 4.5% over the year – the highest reading in the LCI’s history going back to the early 1990s. Over the quarter, wages climbed 0.9%, a similar brisk pace as previous outturns.
“Wage inflation still falls short of consumer price inflation (6.7%), suggesting further weakening in real wage growth,” the Kiwibank economists said. “However, workers have adjusted to the current high inflation environment by working longer hours and shifting to higher paying jobs to boost incomes.
“People are working longer hours and shifting roles to boost incomes. Average ordinary time hourly earnings from the QES for instance lifted further to be 7.6% up on a year earlier. Overtime looked to have been well used in Q4, a 10.4% jump in average overtime was seen.”
The labour market set to slow down
The Kiwibank economists said that with the economic outlook dimming, the labour market is tipped to slow this year, in order for the Reserve Bank to bring inflation back to its target.
“Weakening expected activity and profitability questions how much gas labour demand has left in the tank,” Kerr and Vergara said. “However, given the labour market tends to lag the broader economy, we are not expecting meaningful signs of a weakening labour market until the middle of the year.
“The unemployment rate is expected to lift from the middle of this year on its way to a 5-5.5% peak in 2024. Wage growth has yet to peak in the current cycle – but will soon. We are forecasting a peak in wage growth of around 5% in the first half of 2023 before easing as the strength of the labour market wanes.”
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