Liam Dann: Can low unemployment and high wage growth really be a bad thing?

OPINION:

Unemployment stayed steady in the September quarter at 3.3 per cent, but wage growth was stronger than expected.

So, on balance, the takeout from today’s StatsNZ labour market data was that it will continue to add inflationary pressure to the economy.

That will keep the pressure on the Reserve Bank to hike interest rates and that’s bad news.

But while we may be on course for tough economic times, it would be cold-hearted to ignore the upside this strong job market brings for many workers - particularly younger workers.

“The good news for financially stretched households is that average wage growth is now comfortably exceeding annual CPI inflation, with private sector average hourly earnings rising 8.6 per cent (7 per cent previously), versus inflation of 7.2 per cent,” said ANZ economist Finn Robinson.

“Private sector productivity-adjusted labour costs lifted 3.8 per cent year on year (from 3.4 per cent previously). Both wage measures posted their strongest gains on record, in data going back to the 1990s.”

The Labour Cost Index (up 3.4 per cent) reflects the cost of employing a worker in a specific job, this year versus last year, whereas the Quarterly Employment Survey captures changes in the composition of the workforce.

In other words, people who got pay rises through upskilling, promotion or switching jobs will have lifted the average.

Average ordinary hourly earnings, as measured by the Quarterly Employment Survey (QES), increased to $37.86, an annual increase of $2.61.

This is the largest annual rise in ordinary time hourly earnings since this series began in 1989.

“Interestingly, there was notable strength in the employment of younger workers. We take this as a sign of significant tightness in labour supply. Businesses are more willing to take on younger workers, as they struggle to find experienced workers, and train them,” said Kiwibank chief economist Jarrod Kerr.

It is clearly a good time to be a worker if you are mobile and open to changing roles. Anyone who wanted to work more in the last quarter could.

“There was a meaningful decline in the underutilisation rate to 9 per cent (from 9.2 per cent). More people are getting the hours they need. The participation rate rose to a record 71.7 per cent, as more and more people are being attracted into the workforce.”

Remarkably, the topline rate of unemployment didn’t budge, despite a 1.3 per cent jump in the number of people employed, after three-quarters of zero growth, noted Westpac chief economist Michael Gordon.

The rate of labour force participation was “easily a new all-time high”.

The details suggested that the growth in jobs had been concentrated among the very young, he said.

“Indeed, there was a sharp lift in the number of people working while studying and a strong rebound in the share of part-time work. While a lift in youth employment is certainly not unwelcome, these results demonstrate how few remaining avenues businesses have to find more workers.”

That’s about where the good news ends, although it is worth noting there was little in the job market data to suggest the inflationary pressure was worse than expected.

“The Reserve Bank was already braced for some strong wage outcomes, so today’s results don’t necessarily increase the risk of a large OCR increase at the next review later this month,” said Gordon.

“However, they do highlight the extent of the challenge that the RBNZ faces in bringing inflation pressures under control – there is no room for relenting on the path to higher interest rates yet.”

Despite the dramatic monetary policy tightening already delivered, we are getting “further into wage-price spiral territory,” said ANZ’s Robinson.

“And with labour demand still miles ahead of supply, that’s unlikely to change without further action from the RBNZ.”

The data supported the RBNZ’s need to deliver further rate rises, said KiwiBank’s Kerr.

Jarrod Kerr, Kiwibank chief economist. Photo / Supplied

“The labour market remains too tight and exceeds a reasonable definition of maximum sustainable employment.”

Wholesale interest rates markets are factoring in a 5 per cent RBNZ cash rate (currently 3.5 per cent), with a 75 basis point hike to 4.25 per cent probable in November, Kerr said.

“We are wary that too much central bank tightening may cause an economic accident, both here and offshore.”

Those risks were outlined in the RBNZ’s latest financial stability report and relate to financial pressure going on mortgage-holding households as interest costs rise.

Unsurprisingly, employer group Business NZ didn’t see much to cheer about in the data.

“Our workforce is nearing dangerous levels of burn-out, caused by a lack of skilled workers to fill job openings. The safety risks involved with stretching our current workforce are mounting and alarm bells are already sounding in the business community,” said chief executive Kirk Hope.

He emphasised the need to open up the labour market through more open immigration.

“It’s essential our immigration policy is working to welcome more international skills and workers, during a global war for talent.

“BusinessNZ favours immigration policy that is simple, open and permissive.”

The alternative, unfortunately, is waiting for the Reserve Bank to squash the economy with ever-higher interest rates until the recession starts to push the unemployment levels back up and labour costs subside.