Why unemployment is more likely to drop than rise

Bank economists weigh in on unemployment over the September 2021 quarter ahead of Wednesday's announcement.
Bank economists weigh in on unemployment over the September 2021 quarter ahead of Wednesday's announcement. Photo credit: Getty Images.

Unemployment figures for the September 2021 quarter are out on Wednesday - and they're more likely to show a drop than a rise, bank economists say.

Currently at 4 percent, unemployment, a measure of the number of people actively seeking and available for work, has dropped for three consecutive quarters. Despite the COVID Delta outbreak, which put the country into level 4 lockdown at just before midnight on August 17, unemployment is expected to drop in the September quarter.

ANZ is forecasting unemployment to drop from the current 4 percent, to 3.8 percent. Similarly, Kiwibank is forecasting the unemployment rate to "ease a touch", to 3.9 percent. 

Statistics New Zealand collects data across all weeks, meaning quarter three figures will capture unemployment both before and during lockdown.

Describing the third quarter of 2021 as a "messy mix" for unemployment, ANZ economist Finn Robinson told Newshub the labour market looks to have held up "pretty well".

"It's going to be difficult to see the full impact of lockdown on the labour market in [Wednesday's] data  - we went into lockdown half way through the quarter, and the data is going to be a messy mix of pre-lockdown momentum (which was considerable) plus the sudden stop as we went into Level 4 lockdown," Robinson explained.

 Latest Statistics New Zealand employment indicators show filled jobs were up 0.3 percent (5690) in September, compared to the same time last year.  Rises in filled jobs were highest in construction, professional, scientific and technical services, and accommodation/food services.

In it's August Monetary Policy Statement, the Reserve Bank estimated employment was  "at or above its maximum sustainable level".  Border closures due to COVID-19 meant limited access to overseas workers, contributing to a tight labour market. "More businesses than ever" reported difficulty finding skilled and unskilled labour.  

Before the Delta outbreak, measures of "stretch" in the labour market, job vacancies and difficulties finding labour were all at "record levels", Robinson said. 

As it's difficult to actively look for work during lockdown, COVID-19 restrictions are a "temporary pause" on labour market tightening.

"But as we saw in 2020, the labour market tends to rebound rapidly once lockdowns end - so don’t expect the pressure in the labour market to go anywhere fast," Robinson said.

Unemployment  is expected to "tick up to 4 percent again" in the December 2021 quarter he says, as unemployment figures reflect "some of the pain" from ongoing COVID-19 restrictions.

"However we remain optimistic that the current lockdown won’t have a long lasting impact on the labour market - and we’re expecting the unemployment rate will keep falling over 2022 to a low of around 3.5 percent - that’s getting close to as low as it’s ever been," Robinson added.

Due to momentum and strong demand for labour heading into lockdown, Kiwibank expects the labour market to tighten further. The bank expects employment to have risen 0.6 percent over the September quarter, less than the 1 percent gain in the June quarter.

"With a closed border drastically limiting growth in the labour force, employment growth will see the unemployment rate ease a touch to 3.9 percent," Kiwibank said in Monday's weekly economic report.

Released by Statastics New Zealand as part of it's unemployment figures, the "underutilisation rate" looks at spare capacity in the labour market.  It takes into account three things: unemployment, underemployment (willing and able to take on more work), and the potential labour force (people wanting jobs).

Movement in the "underutilisation rate" and total hours worked are likely to provide a truer picture of lockdown's impact on jobs, Kiwibank's report said. 

But changes in those measures are more likely to be seen in December unemployment figures.

"A lift in the former and fall in the latter can be expected. However, any damage done will likely show up in the fourth quarter among jobs in industries most exposed, such as retail and hospitality," Kiwibank said.

As the economy is still heavily distorted by the impacts of COVID-19, ANZ said it wasn't yet possible to get unemployment really low without generating unsustainable wage pressures.

Consumer price inflation was tracking just under 5 percent and would likely increase to just under 6 percent.  It's possible higher wages feed into higher prices, leading to a classic "wage-price spiral".

By raising the Official Cash Rate, the Reserve Bank will be looking to get a handle on inflation by slowing the economy down.

"A really strong labour market outturn [on Wednesday] would only increase the urgency for this," Robinson said.