Another sign that our labour market is surprising?

So the unemployment rate was on the low side of expectations. However, as I and others have said – hours worked collapsed, so surely this is the first sign of worse to come.

However, lets think about this a little more. Falling hours worked only really matter (in a welfare maximising sense) if people want to work more hours. Fundamentally, we need to see underemployment ticking up. But is that the case?

First lets look at actual underemployment numbers. Now these numbers will exaggerate the significance of the increase in underemployment, as the working age population is increasing.


Source (Stats NZ infoshare – HLFQ.SNH3JA)

Now, someone eyeballing the data may say that it ticked up strongly in December – indicating that the labour market is loosening. However, this would betray the fact that this happens EVERY December. As a result, we must seasonally adjust it:


When accounting for normal seasonal gyrations, underemployment is virtually unchanged.

As a result, unemployment is still in “tight” territory, and is rising surprisingly slowly given the decline in economic activity AND underemployment isn’t changing. Sure hours worked are falling, but people don’t want to work the extra hours at the current wage rate anyway.

This isn’t a situation of an underutilisation of resources and as a result current figures don’t demand government action.

Sure, we may believe that the labour market is not going to clear at some point in the near future – but given how slowly it is moving I’m not sure we can take that as a fact …

3 replies
  1. Bernard Hickey
    Bernard Hickey says:

    Great post Matt. I am amazed that our OCR is 3.5% and falling while our unemployment rate is still below 5%. Without that rise in the participation rate it may not have risen above 4.5% in the December quarter.
    There is a lot of hoarding going on and we still have a tight labour market. We’ve been looking for a data analyst for months with no luck.

  2. Matt Nolan
    Matt Nolan says:


    The labour market is THE essential element in the current economic situation. GDP could fall for the next three years, but if unemployment stays below 7% (with 5% as neutral) I’m not sure there is the role for government intervention.

    I would also note that the RBNZ could justify current interest rates on the basis that they believe that the natural rate of growth will be weak over the medium term – if they expect 1% growth (so growth solely from rising population) and underlying inflation of 2.5% then 3.5% is really neutral. However, this is a relatively bleak view if that is what they believe.

    These labour market figures were a surprise – the labour market is taking its time to show weakness. If labour can move from consumption oriented industries to export/production focused industries in NZ then we will be in good shape – I expect an increase in demand for polytech courses as people update skills.

    Good luck finding a data analyst – hopefully when people start coming back from overseas you’ll be able to pick someone up.

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