New research by the Reserve Bank (RBNZ) recommends switching up how it monitors inflation pressure in the labour market and communicates it to the public.
In an analytical note published on Monday, analyst Christopher Ball said the central bank shold be using four new measures for a real-time assessment of whether labour market tightness is driving inflation.
These are the job transition rate, the ratio of vacancies to unemployment, the unemployment rate, and survey questions about whether businesses have enough staff.
While the RBNZ no longer has an employment target as part of its monetary policy mandate, the central bank still pays close attention to the labour market.
Ball says employment is “an important consideration” when assessing the economy and that the updated remit includes avoiding “unnecessary instability” in employment.
“We continue to study labour market indicators as they provide useful insights on domestic inflationary pressure, volatility in the real economy and the transmission of monetary policy”.
When the Reserve Bank did have an employment target in its remit, it self-defined it as being the lowest level of unemployment that could be maintained without causing inflation. This level could never be known exactly and could move higher or lower depending on government policies and economic conditions.
New measures
Ball says many of the labour market indicators which have been used previously have performed poorly in the volatile pandemic years.
There are 44 indicators the RBNZ has been using to assess labour market tightness but some are given more weight than others.
A 2019 analytical note suggested focusing on the Māori and youth unemployment rates, underutilisation, the job finding rate, and the gap between unemployment and the trend.
But Ball’s updated research finds a different set of indicators ae more closely correlated with the output gap and have the strongest causal links with inflation.
- The job transition rate, or how many workers are changing jobs.
- Responses to NZIER’s Quarterly Survey of Business Opinion question about whether the availability of workers is limiting businesses’ output
- The ratio of job vacancies to unemployed people
- And the headline unemployment rate
Ball says the unemployment rate itself is not as useful for determining inflation pressure as the other three measures but it should be kept for communication reasons.
“The unemployment rate is suggested as one of the high-quality variables because it remains central to the Reserve Bank’s monetary policy communication on the labour market, in large part because it is an economic variable well-known by the public,” he writes.
It's also one of the few labour market indicators forecast by economists and is “critical” for demonstrating how the Monetary Policy Committee moved the economy.
Policymakers should still use the full list of employment indicators when analysing the economy, but they should emphasise the most useful ones in their communications.
Ball suggests monetary policy statements should include a time series graph of the four highest-quality indicators and a heat map of the top 20.
The current dot-plot style graph could be misleading for non-expert audiences who weren’t familiar with the historical context of the labour market.
“The suggested approach is to focus on a narrow set of four high quality indicators of inflationary pressure, while retaining the full set of existing indicators for understanding the broad context of the labour market,” Bell says.
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