Job rise beats predictions

By BRIAN FALLOW economics editor

Confirmation that the labour market remains drumskin-tight seems to have ended prospects of an interest rate cut by the Reserve Bank next Wednesday.

The household labour force survey records an unemployment rate of 5.2 per cent, down from 5.4 per cent in March and the lowest since June 1988.

Annual employment growth of 3.2 per cent is the strongest for five years.

Quarterly employment growth of 0.9 per cent was three times what the market was expecting.

Although the increase was mainly in part-time employment, it was accompanied by an increase in the participation rate and a further decline in long-term unemployment.

Two-thirds of the fall in unemployment over the past year has come from the ranks of those unemployed for six months or longer.

Deutsche Bank economist Darren Gibbs said this suggested that the structural rate of unemployment was likely to have fallen over the past year, moderating the potential inflationary impact of such a tight labour market.

"While the decline in long-term unemployment remains very encouraging and bodes well for New Zealand's longer-term economic health, it has not been sufficient to prevent an overall tightening of labour market conditions," he said.

"Moreover, it seems likely that the productivity of the previously long-term unemployed may be somewhat lower than the existing workforce, initially at least."

The survey records a 3.1 per cent increase in hours worked over the past year, but as economic output is unlikely to have expanded by much more than 2 per cent over the same period, that implies productivity went backwards.

HSBC economist Grant Fitzner said that when the jobs data was put alongside last week's lift in wage growth and Wednesday's solid retail sales, the economy was looking decidedly perky, for now at least.

He said the figures were the final nail in the coffin for the prospects of a fourth cut in the official cash rate next Wednesday.

But WestpacTrust economist Donna Purdue said that although wage growth was clearly headed upwards, what was more important for monetary policy was the limited ability of employers to pass on those rising costs to consumers.

Any tendency to 1980s-style, cost-plus behaviour was likely to be crushed under the weight of international competition.

"In this environment we expect rising wage pressures to come at the expense of expected profits rather than rising consumer price inflation," Ms Purdue said.