Slowing job market should please Bollard

Allan Bollard

The labour market weakened in the last three months of 2005 but remains extremely tight.

The unemployment rate, at 3.6 per cent, was down slightly from a revised 3.7 per cent in September, is as low as it has ever been and is the lowest in the developed world.

But employment growth faltered. The number of people employed fell 0.1 per cent, reflecting 9000 fewer full-time employees (a drop of 0.6 per cent) offset by 7000 more part-timers (a rise of 2.2 per cent).

Hours worked were down 1.5 per cent for the quarter to be unchanged on December 2004.

The number of people employed grew 1.4 per cent or 32,000 last year, a marked slowdown from 2004's 4.4 per cent employment growth (86,000 people).

The growth was concentrated in the services sectors, while manufacturing employment shrank.

But what has kept unemployment low is the fact that the labour supply also grew more slowly last year as the net flow of immigrants dwindled. The working age population, everyone over 15, grew by 40,000 last year, down from 44,000 the year before and the weakest annual growth since 2001.

The proportion of the working age population either employed or actively seeking work and available to work - the participation rate - eased back for the record level in September. But at 67.8 per cent, it is still the second-highest on record.

The number of unemployed fell 1.9 per cent over the quarter to 78,000.

The drop in full-time employment and rise in part-time employment, combined with the rise in under-employment - part-timers who say they want to work more hours - suggest the economic slowdown is being felt among people working less overtime and shorter hours, rather than a contraction in headcount.

"The unemployment rate has troughed and capacity pressures have peaked. Consequently, the Reserve Bank has been given another reason to breathe a sigh of relief that monetary conditions are about right," said Bank of New Zealand head of research Stephen Toplis.

But he said capacity constraints had not eased enough for the bank to contemplate an easing in the near term.

Not did yesterday's figures provide much solace for companies trying to keep the lid on rising wage inflation.

"While employment growth is definitely slumping, it will take some time before the easing in skill shortages will alleviate wage pressure."

Toplis expects wage growth to remain above 5 per cent for at least the next 12 months.

Putting the September and December quarters together, employment grew at an average 4.5 per cent over the second half of last year.

But even if it slows to a "miserly" 0.1 per cent to 0.2 per cent a quarter through this year and next year, that would only push the unemployment rate up to 3.9 per cent by the end of this year and 4.3 per cent by the end of 2007. Toplis said that would still be below the 5 per cent rate at which the Reserve Bank had indicated it thought unemployment would no longer be putting upward pressure on inflation.

ASB Bank economist Daniel Wills said the persistently low unemployment rate was particularly significant in the context of a still high level of labour force participation.

"Not only are there still relatively few people actively looking for work, there remain few people potentially available to work."

That suggested the pressure on pay rates shown in Wednesday's wages data would persist at least in the near term.

HSBC chief economist John Edwards said the labour market data provided unmistakable evidence of an economic slowdown, which Reserve Bank Governor Alan Bollard had said he needed to see.

"There is no doubt the labour market is cooling. That is a reflection of the weakness of domestic demand and exports and presages further weakness in retail sales, home building and house prices."