Unemployment rate: 4.8% (prev: 4.6%, Westpac f/c: 5.0%, RBNZ f/c 5.0%)

Employment change (quarterly): -0.5% (prev: +0.2%, Westpac f/c: -0.6%, RBNZ f/c -0.4%)

Labour costs (private sector, quarterly): +0.6% (prev: +0.9%, Westpac f/c: +0.7%, RBNZ f/c +0.7%)

Average hourly earnings (private sector, ordinary time quarterly): +1.1% (prev: +1.4%)

New Zealand’s labour market continues to soften, in line with the shallow drawn-out recession we have been experiencing over the last couple of years. The unemployment rate rose from 4.6% to 4.8% in the September quarter, the highest level since December 2020.

This was a smaller rise than we and the Reserve Bank had been expecting, with the miss being entirely due to a sharper than expected fall in the labour force participation rate. This reflects an ongoing unwind of the pressures that had built up in the labour market in previous years.

The number of people employed fell by 0.5%, roughly in line with what the Monthly Employment Indicator (MEI) had signalled. In fact, the various employment measures were unusually in agreement this time, with the Quarterly Employment Survey (QES) also showing a 0.3% fall in filled jobs and full-time equivalent employees.

While these job losses did lead to a rise in unemployment, there was also a large number of people who exited the labour force altogether. The participation rate fell from 71.7% to 71.2% in the September quarter, its lowest level in over two years – we had assumed a fall to 71.4% in our forecast.

The fall in participation appears to have been strongly concentrated among young people (15-24 years old). In the initial post-Covid period, the economy was running hot and the border closure meant that migrant workers weren’t available. In this time, many young people were drawn into the labour force to fill the gap – often at the expense of study. As the economy has slowed and migration has rebounded, this group has been at the forefront of job losses. While this has led to a rise in the number of unemployed, we’re also increasingly seeing young people return to or remain in study, ending their job search altogether. Indeed, the NEET ratio (young people not in employment, education or training) has actually fallen over the last few quarters.

Turning to wages, the Labour Cost Index (LCI) rose by 0.6% for the quarter, slightly lower than the 0.7% that we and the RBNZ expected. Public sector wages were up by 0.9%, boosted by a pay increase for police, but this didn’t have an impact on the overall results. The unadjusted analytical LCI (which doesn’t exclude pay increases that are related to productivity) rose by 0.9%, the smallest quarterly increase since March 2021.

So what does this mean for the RBNZ? We think not much – it simply highlights the degree of flex that there is in the labour force as economic conditions change. The bottom line is still that employers are shedding workers, and wage pressures are easing accordingly. That’s consistent with the view that inflation pressures are being reined in and that monetary policy no longer needs to be as restrictive. But we don’t think that there’s anything in the figures that would shift the RBNZ’s thinking for its next policy decision at the end of this month.