Unemployment peak: Will the last big piece of pre-election economic data shift the dial?

The September-quarter unemployment outlook depended on both jobs and workforce participation. Kiwibank economists forecast a fall to 5.4%, while ANZ expected unemployment to remain at 5.6%. Gordon also expected employment growth to be strong enough to stop unemployment rising, but the participation rate could decide the direction.

Employment growth of about 0.5% was expected to exceed the 0.3% increase in the working-age population. That normally points to lower unemployment. However, Gordon expected participation to rise another 0.1 percentage point, reaching 70.8%, after an unusually large 0.3-point jump in June.

The mechanism is simple: new jobs can absorb existing jobseekers, but not necessarily newcomers to the labour force. If participation rises sharply, the number seeking work also grows. That can keep unemployment flat or even lift it, despite job creation. The competing forecasts reflected this uncertainty.

The labour-force participation rate is the share of working-age people who are either employed or actively seeking work. It shows how many people are taking part in the labour market. The article describes it as the number of people entering or exiting that market, and it expected participation to reach 70.8%.

The unemployment rate uses a narrower group. It measures people who are in the labour force but do not have a job. Someone outside the labour force is not counted as unemployed. Someone who starts looking for work can therefore increase both the labour force and the number of unemployed people.

That difference explains why the measures can send different signals. Employment might grow, while unemployment stays flat if many new jobseekers arrive. Participation can also rise when people become more willing to look for work. The September-quarter forecasts depended heavily on that interaction.

Economists expected employment to grow by around 0.5% during the quarter. The working-age population was expected to increase by a more modest 0.3%. Participation was forecast to rise 0.1 percentage point to 70.8%, following a much larger 0.3-point June-quarter increase to 70.7%.

Unemployment forecasts differed. Kiwibank expected it to fall to 5.4%, while ANZ expected it to remain flat at 5.6%. Wage expectations were restrained. Kiwibank forecast private-sector wages to rise only 0.7% from the June quarter.

Other wage measures gave a wider scale. Matthew Galt expected annual Labour Cost Index growth to rise 0.1 point to 2.1%. He expected private-sector average hourly earnings to grow 3.6%, compared with 3.7% consumer-price inflation. Total-economy hourly earnings growth was expected to be slightly lower.

The unemployment rate compares unemployed people with the total labour force, not with the entire working-age population. Employment can therefore increase without lowering the rate. The crucial question is whether the labour force grows faster, slower, or at the same pace as employment.

For example, suppose employment rises by 0.5%, but participation also increases as people enter the market. Those newcomers may include people who are actively seeking jobs but have not found one. They enlarge the labour force and can add to unemployment even while existing workers benefit from job creation.

That was the concern in the September-quarter forecasts. Employment growth was expected to exceed the 0.3% rise in the working-age population, which normally supports falling unemployment. But participation had already jumped 0.3 percentage points in June. A further increase could keep unemployment at 5.6% or affect the expected decline.

A labour market can look stronger overall while offering very different outcomes across age groups. The article expected older people to snap up more jobs, while unemployment among under-25s remained painfully high. That means total employment growth would not necessarily be shared evenly.

The mechanism is competition for available positions. If older workers secure a larger share of new jobs, fewer opportunities may remain for younger workers. High youth unemployment can then persist even when headline employment rises. The participation rate and unemployment rate may also hide this age-based unevenness.

The likely result was a divided labour market. Older workers would strengthen their employment position, while younger people could remain disconnected from jobs and early work experience. The article said this unevenness was likely to persist. It therefore warned against treating a small fall or stable overall unemployment rate as evidence that conditions had tightened for everyone.

Spare capacity means the labour market still has unused resources, including people seeking work or available for employment. For the Reserve Bank of New Zealand, that matters because weak labour-market pressure can restrain wage growth. Lower wage pressure makes it less likely that inflation becomes embedded.

The article expected enough employment strength to prevent unemployment rising further, but still described considerable spare capacity. Wage growth was forecast to remain subdued. Private-sector average hourly earnings were expected to rise 3.6%, while the Labour Cost Index was forecast to grow at an annual 2.1% rate.

This gives the RBNZ an important inflation signal when setting the Official Cash Rate. The bank was relying on ongoing labour-market slack to offset pressures from fuel prices, a falling kiwi dollar, and rising administered prices. A larger-than-expected rise in wage inflation would cause “consternation,” because it could make inflation harder to contain.

A wage-price spiral is a repeating cycle in which higher wages increase business costs, prices rise, and workers then seek still higher pay to cover those prices. The cycle can make inflation persistent. The article linked this risk to wage growth, household cost pressures, and the Reserve Bank’s inflation concerns.

Weak wage growth reduces the mechanism’s force. If pay rises remain contained, businesses face less wage-driven cost pressure, and workers’ pay is less likely to chase rising prices. The article forecast private-sector wages to grow just 0.7% from the June quarter. ASB also said strong labour supply and higher default KiwiSaver contributions would contain wage pressures.

That was not entirely good news for households facing acute cost-of-living pressures. But it did mitigate wage-price spiral risks. The RBNZ was relying on labour-market slack to prevent inflation becoming embedded, although ASB suspected labour-market disinflation might be weaker than the bank assumed.