Labour market improving rapidly. But still weak.

Yes the labour market is recovering incredibly rapidly.  Yes the labour market is still weak.  This illustrates it:

In the same vein the Reserve Bank is right that it should lift rates.  But should still keep them in stimulatory territory at present.  How long it should stay there is an issue for debate – and one where I am sure a lot of different people and economists will disagree 😉

The labour market data is strong than expected, but it is a very backwards looking indicator.  It appears that workers have been willing to take lower wages to get back in the labour market – moving us down the demand curve and helping reduce the “surplus of labour” (see the QES and LCI for the wage data).  As a result, growth may still be moderate going forward even off the back of this.

I’d take this as a sign that our labour market is more dynamic, robust, and flexible than I’d previously realised.  That is good.  But it doesn’t mean the NZ economy is on the verge of taking off.

Update:  Kiwiblog discusses here.  A lot of good points are raised in the post definitely worth a look.  However the December to March comparisons are a little bit misleading IMO.  Why?  Two reasons:

  1. Well the September to December 09 increase was substantial and unexpected – there is some feeling that this increase “overstated” the real weakness in the labour market.  As a result, comparing December to March may, in some sense, overstates the improvement in labour market conditions.
  2. Seasonal patterns can break during recessions, and the movements in the SA numbers in December and March are a good example of how this may occur methinks.
6 replies
  1. Miguel Sanchez
    Miguel Sanchez says:

    Matt – two observations from an statistics nerd:

    1. The September to December rise was indeed overstated – with the number of unemployed rising virtually in a straight line, the seasonal adjustment program had trouble distinguishing any seasonal variation, and therefore treated it all as ‘genuine’. Once the trend turned, there was some variation and the program was able to treat more of the rise as seasonal. That’s why December was revised from 7.3% to 7.1%.

    2. March quarter won’t suffer from the same problem, since the trend has already turned. I’ve done a barrage of tests on the seasonal factors, and the 6.0% looks to be genuine. The 7.3% was not – as we now know – and with time it may even be revised below 7%.

  2. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    Excellent points.

    I’d that note I’d say that 6.0% still implies we have a lot of spare capacity – implying that there is still an “output gap” that stimulatory interest rates can help out with. Of course, this gap is now a lot smaller than we expected.

    Interestingly, the RBNZ did expect the UR to fall quickly when it started falling, and may just see this as moving the shift forward – as a result this release might actually have very little direct impact on how far they think they have to move rates.

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