Another 29,000 unemployed to come, despite jobs still being created
Back in 2022, at the height of the post-lockdown boom and associated cost pressures, it was estimated that 50,000 more people would need to find themselves out of work as demand was reined in across the economy to bring inflation under control. Since then, we’ve seen a lift in unemployment of 40,000 people, according to the latest Stats NZ’s Household Labour Force Survey (HLFS). But because our labour force has grown rapidly over the last two years, by 163,000 people, the number of unemployed people is set to rise by more than another 10,000 over the coming year.
In this article we look to delve deeper into the job market, what trends we are seeing by industry, how the unemployment rate compares to history, and what these trends mean for households.
Migration has expanded the working-age population
Yesterday the Reserve Bank kept the official cash rate at 5.5%. The Bank considered an interest rate increase due to “persistent domestic inflation, weaker productivity growth, and uncertainty regarding the pace of normalisation in wage and price-setting behaviour”. Among other things, this statement indicates the Bank is not seeing enough of an easing in the labour market or wage cost pressures for interest rates to be cut in 2024.
The Reserve Bank’s latest forecasts imply there is still another 29,000-person increase in unemployment before the unemployment rate reaches its forecast peak of 5.1% next year. However, it’s important to note that, over the same period, the Bank also expects employment to continue to rise, with an increase of 31,000 jobs forecast.
Job ads are falling as businesses look for efficiencies
Businesses are reluctant to take on more employees or fill any vacancies that appear. This reluctance relates to uncertainty about future demand conditions, with businesses looking to keep costs down, rather than passing increasing costs onto consumers and risking losing market share. Job ad numbers reiterate this reluctance, with job ads dropping 6.2% between the December 2023 and March 2024 quarters to be 26% down from a year earlier.
Chart 1 shows that there are large disparities in filled jobs growth across different industries. Over the year to March 2024, jobs in administrative and support services, professional services, and agriculture fell by 1-3%. Job numbers in industries such as retail trade and construction remaining largely unchanged, but activity in both industries has slowed significantly, with consumers having little discretionary income to spend at retailers, and developers facing high interest rates. In contrast, some industries such as health care and education have still recorded strong growth in job numbers of 4-5%.
The nature of an economic downturn is that jobs will be lost along the way. However, the fact that new jobs are being created in other areas implies that there will be significant churn in the labour market. It is unlikely that a larger portion of the 29,000-person increase in unemployment will remain out of work for an extended period.
Unemployment is historically low
An additional 29,000 people out of work, taking the total increase in unemployment since 2022 close to 70,000, sounds like a large number to reach the peak of unemployment, but it is important to consider how unemployment has changed over time and in other recessions. Chart 2 shows that the unemployment rate is at lower levels than seen over most of the past 30 years.
Economic reforms in New Zealand in the 1980s, combined with weak global growth in the early 1990s, resulted in significant shifts in the economy. New businesses took time to be established, and many workers needed to retrain before re-entering the workforce. The length of time associated with this transition resulted in the unemployment rate reaching 11%.
Since the beginning of the 2000s, the labour force has generally operated much more dynamically, meaning people have mostly not been out of work for long periods. Even in weaker economic times, such as following the Global Financial Crisis, labour and capital resources have moved relatively quickly towards areas of stronger demand where business is more viable.
What does the future look like for households?
Weaker economic activity is forcing businesses to be cautious with hiring, looking to find internal efficiencies, as opposed to bringing in additional staff or filling vacancies. Along with high net migration in recent times there has been a softening in the labour market, and we anticipate this to flow through to lower wage cost inflation from reduced competition for staff and less bargaining power for workers.
Fewer available roles and limited grounds to negotiate higher pay mean that consumer confidence continues to be poor. The outlook of many consumers for their own financial situation is negative, and reducing job security is likely to be a big part of it. Although this labour market uncertainty will not translate into job losses for most people, continued pressure on household budgets and weakness in household spending is expected throughout the remainder of the year.
