Last week’s labour force report saw our headline unemployment rate increase to 3.9 per cent, still very low by historic standards but the highest in more than two years.
We also saw a telling rise in the under-utilisation rate, which gives a broader measure of untapped capacity in the labour market.
This includes the likes of part-time workers looking for more hours, and it rose to 10.4 per cent, the highest since June 2021.
Importantly for the Reserve Bank, wage growth continued to fall. The private sector labour cost index increased by less than expected, which saw annual wage growth ease to 4.1 per cent, the lowest in 12 months.
It was a similar story in the US.
The October payrolls report was weaker than expected, with the number of jobs created during the month the second lowest since the end of 2020.
The US headline unemployment rate also increased to 3.9 per cent, the highest since early 2022.
As was the case here, wage growth was softer, too. Average hourly earnings rose less than expected and slowed to the lowest in more than two years on an annual basis.
Tight labour markets have been a key piece of the inflation puzzle in recent years, as businesses have needed to ratchet up wages to attract workers, as well as hang on to existing staff.
It sounds great in theory, but wage inflation begets broader price increases.
Firms increase selling prices to offset the higher wage costs they’re facing, and they can get away with this because their customers are benefiting from wage rises with the jobs market so strong.
The cost of living keeps rising, causing staff to demand further pay rises, and the dreaded wage-price spiral takes hold.
Because of this, an inconvenient truth is that higher unemployment is required for inflation to be brought under control.
The tricky part is that we want the labour market to soften just enough to take the edge off inflation but not so much that we end up in recession.
So far, so good, but this can be a difficult needle to thread.
When unemployment starts rising it tends to keep rising, and even modest increases have historically meant a downturn becomes hard to avoid.
There’s never been a time in the past 75 years where the US unemployment rate has risen 0.5 per cent without a recession occurring.
Encouragingly for us in New Zealand, strong migration has added to our pool of workers and contributed to easing labour market conditions.
This is a far more desirable reason for unemployment to rise than widespread job losses, so we’re lucky in this regard.
Central banks will be heartened by the progress they’re making, and there’s a good chance interest rates have peaked and will decline from here.
However, their next big decision will be when to start loosening policy settings, to ensure they don’t overdo it.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.
