NZ: Labour Market Conditions

November 1, 2016 04:45 CDT

Consensus Actual Previous Revised
Employment Change (Q/Q) 0.4% 1.4% 2.4%
Unemployment Rate 5.1% 4.9% 5.1% 5.0%
Employment Change (Y/Y) 6.2% 4.5%
LCI (Q/Q) 0.4%
LCI (Y/Y) 1.6%

New Zealand labour market statistics for the three months to September showed an increase in employment of 1.4 percent to 2,494,000 persons. This quarterly growth rate is down from the 2.4 percent recorded in the three months to June, but well above the consensus forecast of 0.4 percent. This fall in quarterly employment growth was driven largely by methodological changes introduced in the previous quarter to the collection of the statistics, including better identification of self-employed people. Other labour market measures indicated stronger labour market conditions in the three months to September.

The 2.4 percent increase in employment in the three months to June had been the largest increase in the series' history but was largely driven by changes in survey methodology designed to improve identification of self-employed workers. This was a one-off adjustment and officials believe it had the effect of including as employed many self-employed workers who had previously been classified as not in the labour force. This means that the fall in the quarterly growth rate in the three months to September does not necessarily indicate weaker conditions in the labour market.

This methodological change will also impact year-on-year growth rates for employment until the base effect drops out after twelve months. Year-on-year growth in the seasonally adjusted employment series was 6.2 percent in the three months to September, compared with 4.5 percent in the three months to June.

Other measures of labour market conditions showed improvement in the three months to September. The unemployment rate fell to 4.9 percent, down from 5.0 percent in the three months to June (revised from 5.1 percent) and below the consensus forecast of 5.1 percent. The participation rate also rose to a new record high of 70.1 percent, after the methodological change helped push this rate sharply higher to 69.7 percent in the three months to June.

New Zealand's labour cost index rose by 0.4 percent in the three months to September, unchanged from the rate recorded in the three months to June. Year-on-year growth in this index rose from 1.5 percent to 1.6 percent. This series has consistently grown at a steady rate over the last five years.

The Labour Cost Index (LCI) measures movements in base salary and ordinary time wage rates and overtime wage rates. The non-wage component measures cost changes including annual leave and statutory holidays; superannuation; ACC employer premiums; medical insurance; motor vehicles available for private use low interest loans. The LCI is a measure of the extent to which changes in businesses' input costs put pressure on the output prices they charge for goods and services.

As a measure of labour cost, the LCI helps the Reserve Bank of New Zealand measure inflation. The RBNZ, with an inflation target range of 1 percent to 3 percent uses this index in addition to other price indices to measure possible pressures in consumer prices.

RBNZ officials are always on the lookout for the prospects of inflationary pressures. Wage pressures tend to percolate when economic activity is booming and the demand for labor is rising rapidly. During economic downturns, wage pressures tend to be subdued because labor demand is down. By tracking labor costs, investors can gain a sense of whether businesses will feel the need to raise prices. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall.