KEY POINTS:
A rise in the unemployment rate to 3.9 per cent will keep the Reserve Bank in easing mode, economists say, despite an unexpectedly sharp rebound in employment in the June quarter as the labour force grew.
Statistics New Zealand's household labour force survey recorded a rise of 27,000 or 1.2 per cent in the number of people employed, almost entirely reversing the shock drop of 28,000 in the March quarter.
But although the number of people employed is back where it was at the start of the year, the labour force and the number unemployed have both grown in the interval, by 11,000 and 13,000 respectively. At 89,000, the number of people unemployed is at a four-year high.
That has pushed the unemployment rate up to 3.9 per cent from 3.7 per cent in March and a low of 3.4 per cent last December.
The apparent paradox that employment and unemployment both rose during the quarter is explained by the fact that the participation rate - the proportion of the working age population either working or actively seeking work (which you have to be to count as statistically unemployed) - also jumped.
It rose to a near record high of 68.6 per cent from 67.7 per cent in March, entirely reversing the March quarter's fall.
"The tight labour market is slackening, which will provide the Reserve Bank with more confidence that wage inflation will not accelerate," ASB chief economist Nick Tuffley said.
Although employment had proven more resilient than expected, the anecdotal evidence and what firms were reporting in business surveys indicated employers were now cautious about hiring and were reducing payrolls through attrition, he said.
"The Reserve Bank is banking on employees and price-setters losing some pricing power, in order for spiking inflation not to feed through to accelerating wage and price growth.
"It is giving all and sundry the benefit of the doubt that a wage/price spiral will not develop."
Tuffley expects that benefit of the doubt to continue.
"From the way [Governor] Alan Bollard is talking they are prepared to overlook a reasonable amount in the short term."
Westpac chief economist Brendan O'Donovan said that in the midst of doom-and-gloom recession talk the jump in employment was a welcome piece of news.
"But New Zealand is in recession and the labour market will feel the pinch. We are forecasting a net decline in employment over the remainder of 2008 and no growth for 2009," he said.
"Unemployment will increase, although the peak will be lower than in previous cycles at 4.5 to 5 per cent.
"That's because the participation rate will fall, in line with the economic cycle, the ageing population will create labour shortages and some of the urban unemployed might decamp to Australia rather than languish without a job in New Zealand."
Even though on a head count basis June's rebound in employment almost matched March's decline, a lot of the new jobs were part-time.
More than 90 per cent of the jobs lost in the March quarter were full-time, but only two-thirds of the new jobs in the June quarter were.
The survey asks people how many hours they usually work a week. Averaged over the March and June quarters, hours worked rose 0.3 per cent.
"Although this is relatively muted, the fact that the economy contracted 0.3 per cent during the March quarter and is expected to have performed even worse in the June quarter suggests productivity performance has been poor over the first half of this year," said ANZ National Bank chief economist Cameron Bagrie.
Deutsche Bank chief economist Darren Gibbs said the strong cyclical downturn in labour productivity would add to the cost pressures on the business sector and drive more job losses over the next 12 months.
Volatile time
* Employment bounced back in the June quarter after March's shock fall. The economy gained 26,000 jobs.
* But the discouraged worker effect, where people withdraw from the labour force, also unwound.
* The net effect was a rise in the unemployment rate to 3.9 per cent, its highest since March 2006.
