State of the economy: Unemployment up as job growth stalls

Further evidence that the economy has started the downhill phase of its cycle came yesterday with the news that employment growth stalled in the first three months of the year.

While the economy has created 68,000 new jobs over the year ended March 31, only 1000 of them were in the March quarter.

Since the supply of workers continued to grow, that meant the unemployment rate rose from a world-beating 3.6 per cent three months ago to 3.9 per cent. While the number of unemployed people grew 6000 to 83,000 in the March quarter, it is still down 4000 on a year ago.

By any standards, it is still a strong labour market. The unemployment rate is the third lowest on record in New Zealand and the second lowest among developed countries.

Three out of four New Zealanders aged between 15 and 64 work, a higher proportion than in Australia, Britain or the United States and significantly higher than most European countries.

Employers report chronic shortages of labour, especially skilled labour. Inevitably this is reflected in rising wages and salaries.

Wage increases are getting bigger: 33 per cent of pay rates increased by 3 per cent or more over the past year, up from 31 per cent in the December year.

Of the wage rates that increased during the March quarter, the average rise was 4.2 per cent. Firms paid out 7.2 per cent more in wages and salaries in the March quarter than they did in the same period last year. About half of that was the result of more jobs; the rest higher wages.

One consequence is that someone on the average wage of just under $800 a week or $41,300 a year now falls into what until 2000 was the top tax bracket.

But there is no sign that Finance Minister Michael Cullen is about to raise the $38,000 threshold at which the 33c in the dollar rate kicks in.

He has also set his face against across the board cuts in income tax rates, describing them yesterday as "likely to be merely stimulatory", thereby stoking inflation.

Doesn't the strong labour market make life easy for a Finance Minister writing a Budget?

Yes and no. It boosts the Government's tax revenue but, because it is the country's largest employer, it also increases its costs.

In the nine months to March 31, the combined effect of more jobs, higher wages and tax bracket creep was to push PAYE revenue up 7.1 per cent on the same period of the previous year. The GST take grew at a similar brisk clip.

Throw in a 19 per cent rise in company tax and the total tax revenue, three-quarters of the way through the Government's financial year was 6.8 per cent up on a year earlier.

But there's a catch?

As the paymaster of the public service, Dr Cullen has a double problem.

The number of people on the public payroll has risen - 12 per cent over the past five years. And wage inflation is stronger in the public than the private sector.

The Treasury warned the Government in January that it faced a bigger wages bill by $750 million to $1 billion a year "in the core public service, health and education sectors alone", gobbling between a third and a half of what's likely to be available for new spending.