Unemployment set to rise - but by how much? And why the answer may shock you

There are more job applicants than a year ago. Photo / 123rf

Labour market data due on Wednesday will show the unemployment rate rose in the first quarter of the year, economists say.

This will come as no surprise for those who have been following the grim headlines announcing thousands of job losses over the past few months.

But what may be more surprising is that the rise is expected to be modest - from the current level of 4 per cent to around 4.2 or 4.3 per cent.

While this would be the highest unemployment rate the country has experienced for three years, it would still be historically low.

The average unemployment rate since Stats NZ started compiling it in 1986 has been 5.5 per cent - roughly in line with where economists expect it to peak in this economic cycle.

Even more counter-intuitive - in a recessionary economy - is that the employment rate (people in work) is expected to rise.

Westpac senior economist Michael Gordon described the shifting labour market conditions as “a slow leak rather than a dramatic change”.

Westpac is forecasting 4.2 per cent unemployment - in line with the Reserve Bank’s (RBNZ) expectations.

“Employment is tracking ahead of what the Reserve Bank expected in its February Monetary Policy Statement, but so is the migration-led growth in the workforce,” Gordon said.

“We think these two factors will balance each other out. Our wage growth forecast is a bit lower, though the difference is trivial. The upshot is that we’re not expecting next week’s report to offer much to shift the RBNZ’s thinking.”

“The figures - aptly released on International Workers’ Day on May 1 - whilst potentially noisy and prone to historical revision are expected to show an easing in labour market conditions,” said ASB senior economist Mark Smith.

Mark Smith, senior economist at ASB Bank. Photo / Supplied

“In spite of the sharp drop-off in job advertising and gloomy headlines, we expect overall employment to increase [across the quarter], but this is more reflective of the lags in the system than a resurgence in labour demand. Growth in the labour supply is expected to continue to outstrip the demand for workers, with the unemployment rate set to hit its highest level since mid-2021.”

With demand for labour expected to remain weak over 2024, the unemployment rate was still on track to move above 5 per cent by the end of this year, he said.

ASB is picking labour cost growth to cool “as the balance of power increasingly tilts towards employers, and as living cost increases slow”.

“The Labour Cost Index [private sector ordinary time] should increase by 0.8 per cent [for the quarter], with annual labour cost growth cooling to 3.8 per cent, the lowest since mid-2022, but still the ninth consecutive quarter above 3 per cent,” Smith said.

ANZ is picking an unemployment rate of 4.2 per cent despite a continued rise in employment.

“We expect the labour market shifted further into disinflationary territory,” said economist Henry Russell.

“However, despite the weakness evident in economic activity over the past year, employment growth has held up longer than anticipated,” Russell said.

But while that reflected the continuation of the catch-up in employment levels following the period of intense labour shortages, forward-looking indicators of labour demand suggested the expansion in employment was near its end, he said.

“We expect to see employment growth more than offset by a sizeable expansion in the working-age population. The significant increase in competition in the labour market is likely to see fringe workers, who were pulled in at the height of tightness in the labour market, continue to exit.”

ANZ also sees the data as likely falling in line with RBNZ expectations and offering few clues to the timing of potential Official Cash Rate cuts (or hikes).

“All up, we don’t expect the labour market data to materially change the monetary policy outlook,” Russell said. “The labour market is evolving broadly as the RBNZ expects, with forward indicators suggesting the labour market will deteriorate further from here.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.

If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz... or leave a message in the comments section. He’ll try to answer in Inside Economics, a new column published every Wednesday.