NZ: Labour Market Conditions

Tue Oct 31 16:45:00 CDT 2017

Actual Previous
Employment Change (Q/Q) 2.2% -0.2%
Employment Change (Y/Y) 4.2% 3.1%
Unemployment Rate 4.6% 4.8%
LCI (Q/Q) 0.7% 0.4%
LCI (Y/Y) 1.9% 1.6%

New Zealand labour market statistics for the three months to September showed stronger growth in employment and a drop in the unemployment rate. Wage growth also picked up over this period, though officials note this was partly due to a government-mandated pay rise for workers in the health sector.

The number of employed persons grew by 2.2 percent (seasonally adjusted) on the quarter in the three months to September, rebounding strongly from a decline of 0.2 percent recorded in the three months to June and well below the consensus forecast of 0.7 percent. Employment rose 4.2 percent on the year, up from 3.1 percent in the three months to June.

Stronger employment growth in the three months to September has been accompanied by a decline in the unemployment rate from 4.8 percent the previous quarter to 4.6 percent. This decline in the unemployment rate comes despite an increase in the labour force participation rate from 70.0 percent to 71.1 percent. The unemployment rate has now fallen for three consecutive quarters and is at its lowest level since 2009.

New Zealand's labour cost index for the private sector rose by 0.7 percent in the three months to September, up from 0.4 percent in the three months to June. Year-on-year growth in this index increased from 1.5 percent to 1.9 percent, the fastest growth since 2012. This was largely due to pay rises for private-sector health-care workers, with officials estimating that thee year-on-year increase in the labour cost index would have been 1.6 percent if these pay increases had not taken place.

Although today's data shows solid improvement in the labour market, officials expect headline inflation will remain within the target range in coming quarters, suggesting they see little case for a change in policy settings in the near-term. The Reserve Bank of New Zealand's next policy meeting is scheduled to take place next week, with officials pledging at recent meetings to keep policy accommodative for "a considerable period".

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.