Roy Davidson, 5 August 2020

One of the world’s strictest lockdowns, closed borders, multiple business failures, and the latest unemployment number has come in at…. 4 per cent?

This is actually a decrease from the prior quarter where unemployment stood at 4.2 per cent and much lower than economists had predicted. It is also near the range that economists refer to as the ‘natural’ level of unemployment – as there are always going to be people moving between jobs at any given time.

Despite COVID-19 the June-quarter unemployment rate dropped to 4 per cent

secondary What can we read into a drop in unemployment

What’s going on? Does this mean we’ve made it through the woods relatively unscathed?

Not quite. There are a few factors muddying the waters of this unemployment reading. The main one is that unemployment is defined by Stats NZ as those actively seeking work – something that was obviously quite challenging to do during the various levels of lockdown. Digging deeper into the data shows that unemployment in fact reached a low of 2.7 per cent during the Level 4 lockdown in April, something that doesn’t match with reality. As we progressed into Level 1, the unemployment rate rose to almost 5 per cent.

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So, we have to be a bit careful reading too much into this particular unemployment reading, though some other numbers tell the story a bit better.

For instance, the underutilisation rate rose to 12 per cent, up 160 basis points on the previous quarter’s 10.4 per cent - a record jump. Underutilisation captures 1) unemployed people, 2) those who want a job but that aren’t actively looking, and 3) those working part-time (less than 30 hours per week) but who want to work more hours. Within this, the number of underemployed people rose by 33,000, while those who want a job but that aren’t actively looking increased by 18,900.

Hours worked also fell by 10.3 per cent, eclipsing any previous drop by a staggering margin. Hours paid fell by 3.4 per cent, showing the benefit of the wage subsidy scheme. Meanwhile, wage growth was virtually non-existent despite an increase in the minimum wage.

These numbers are more indicative of the true state of affairs. However, they still by no means paint a disastrous picture and could certainly have been much worse. We only need to look back to December 2018 to find a similar underutilisation rate for example.

While it is difficult to read too much into this unemployment data, it is the latest in a string of data releases to pleasantly surprise economists and investors in recent months. Retail sales have been much better than feared, the housing market has proved resilient, and business confidence has bounced back, albeit remains quite weak. The huge amounts of monetary and fiscal stimulus appear to be doing their job.

However, the true test is still to come in some regards. The Government’s wage subsidy programme, despite being recently extended (with a possibility it will be extended again), will eventually end. The wage subsidy scheme has seen payments made to more than two thirds of businesses. It has been a huge boost to a struggling economy (and labour market).

Looking forward, it is those sectors with relatively high labour intensity (tourism, hospitality etc.) that will continue to be the most impacted by closed borders or any possible future COVID outbreak. While we remain optimistic that we’ll avoid the worst-case economic scenario, this is no time to become complacent.