Unemployment expected to drop lower when new labour market data revealed

By Nona Pelletier for RNZ

The record low unemployment rate is expected to have dropped further over the first three months of the year, while tight labour market conditions continue to drive wage growth.

First quarter labour market data to be released on Wednesday is expected to show unemployment fell to around 3 percent from a record 3.2 percent in the last three months of 2021.

Wage inflation was expected to have accelerated in the first quarter, from a annual rise of 2.8 percent in the December quarter.

Westpac Bank acting chief economist Michael Gordon said the tight labour market was expected to remain a significant source of domestic inflation pressure for the rest of the year, as employers bid up wages to attract and retain talent.

Wage growth tipped to beat annual inflation rate

Wage growth could have enough momentum to match or eventually outpace overall annual inflation, which hit a 30-year high of 6.9 percent in the first quarter.

"In the last year in particular, a large chunk of (inflation) has been the international cost shock side. I think going forward, that will probably be less of a driver of price increases, and it'll be more about domestic conditions and that's where we might see in a year's time, we might actually see some wage growth that exceeds inflation," Gordon said.

"It's a tough environment and it's reflecting this combination of pretty major shocks to the economy, coming from several different sides, and it's just really unusual circumstances."

Gordon said the return of normal migration patterns may have little effect on the national labour market, with the hospitality sector likely to benefit most from a return of people on working holiday visas.

Labour market conditions were expected to give the Reserve Bank cause to continue with aggressive interest rate hikes, with another 50 basis point hike to the official cash rate later this month, taking it to 2 percent, he said.

"Part of dealing with the inflation problem is that we're going to need to correct back to something more sustainable and that actually means somewhat higher unemployment in the medium term.

In the meantime, labour market conditions were expected to tighten further, he said.

"That degree of demand for workers is just so remarkable at the moment.

"The number of job advertisements is just blowing away what it was before Covid and it's quite remarkable to say we went through this massive economic shock, and now workers are more in demand by far, than they were before that happened."