While the rise in the headline unemployment rate might make it look like the labour market is getting worse - dig a little deeper, economists say, and there’s early signs of improvement.
On Wednesday, Statistics New Zealand released its labour market data for the December quarter. It showed the country’s unemployment rate had increased to 5.4% in the December quarter - hitting a 10-year high.
Initial unemployment rate projections from most bank economists suggested the rate would stay the same as the September quarter - holding at 5.3%. And in its November Monetary Policy Statement, the Reserve Bank (RBNZ) projected the unemployment rate would remain at 5.3% as well as the March 2026 quarter, before slowly reducing.
The move upwards in the unemployment figure - contrary to the forecasts of economists - came as there was a meaningful rise in the 'participation rate', meaning people who make themselves available for work, to 70.5% from 70.3%.
This meant the number of people not regarded as being 'in the workforce' dropped by 6000 during the quarter. So, in other words 6000 more people actually made themselves available for work in the quarter, which will have had a significant impact on the unemployment figures.
Meanwhile, the 165,000 unemployed people in the December quarter was a quarterly increase of 5000 people, or 2.9%.
Lagging the economic cycle
BNZ senior economist Doug Steel says it’s too early to see major changes in the labour market as it tends to lag the economic cycle.
With an increasing participation rate, Steel says: “People may be sensing some pickup employment opportunities and are entering the market. Had the participation rate not lifted in the fourth quarter, the unemployment rate would have been lower.”
With strengthening employment, the BNZ Research team see the unemployment rate moving lower in 2026 but; “remain of the view that it will take time to do so meaningfully”, Steel says.
“We continue to see the unemployment rate remaining above 5.0% for some quarters yet. This follows from our expectation that participation will continue to push higher with employment, as it usually does.”
Better than it looks
ANZ senior economist Miles Workman says the underlying details show the labour market is rounding a corner.
Employment growth was 0.5% quarter-on-quarter which was stronger than expected, Workman says, and shows firms are once again adding to their headcounts.
The higher participation rate was “consistent with improving economic activity bolstering perceptions that opportunities in the labour market are on the rise”, Workman says.
“It is normal for the participation rate to move together with employment, although this doesn’t always happen in perfect synchrony from quarter to quarter.”
Wednesday’s data “revealed stronger growth in both labour supply and labour demand than we and the RBNZ expected in the fourth quarter”, Workman says.
“But that certainly doesn’t mean the labour market is on a different (or more worrying) trajectory than expected - there is plenty of evidence here to suggest the recovery in economic activity is starting to have a positive influence on the labour market.”
Rising workforce participation a positive sign
Westpac NZ senior economist Michael Gordon says the details in the data were positive - with growth in job and hours being outstripped by an even larger rise in participation.
Also pointing out employment quarterly growth and labour force participation, Gordon says; “both of these ‘surprises’ are well within the margin of error for this survey, and we don’t regard them as being meaningfully different from our expectations.”
Another positive indicator from the household survey, Gordon says, was a 1% rise in hours worked for the quarter on top of a 1.1% rise in the September quarter.
“We certainly wouldn’t dismiss this lightly, given that this measure has been an unusually good guide to the swings in quarterly GDP in recent times," says Gordon.
“However, there was a contrasting 0.5% fall in total hours paid in the business-oriented Quarterly Employment Survey (which had also seen a strong 1.1% rise last quarter).”
'Hole still large'
ASB senior economist Mark Smith says rising workforce participation is a positive sign.
“The economic hole is still large with the NZ economy still around 32,000 jobs shy of late 2023 peaks. However, hiring is now moving in the right direction (upwards).”
"Labour cost growth for the private sector eased to a four-year low of 2% - but this looks set to pick up over the year as “the strengthening in the labour market unfolds,” Smith says.
“Further improvement beckons in 2026. The unfolding economic recovery should see excess labour capacity gradually erode with the unemployment rate moving towards the 4% to 4.5% Goldilocks zone by the end of next year.”
Infometrics principal economist Nick Brunsdon says: “Although the headline increase in the unemployment rate might look like the labour market is getting worse, below the surface a number of indicators are showing more promise."
“There are both more people in work, and now looking for work, with fewer sitting on the sidelines.”
‘We need to see the labour market really turn, not just stabilise'
Kiwibank economists Mary Jo Vergara and Sabrina Delgado say while at first glance it may not look good; “beneath the bonnet, there’s encouraging signs of greater engagement in the labour market along with a gradual improvement in appetite for labour”.
Wednesday’s data showed signs of a labour market that is stabilising, they say.
"But the economy still clearly carries a meaningful degree of spare capacity. Spare capacity which will take time to be fully absorbed. We need to see the labour market really turn, not just stabilise, to have confidence in the recovery."
“We don’t think we’ll see that until the tail end of this year, maybe even early next year,” they say.
Inflationary pressures
The latest data, ANZ’s Workman says, is broadly consistent with the Reserve Bank’s expectations.
This suggests the data is unlikely to “materially shift the Monetary Policy Committee’s assessment of the inflation outlook”, Workman says.
“However the February MPS (Monetary Policy Statement) will still need to account for stronger third quarter GDP growth and stronger-than-expected fourth quarter consumers price index outturn, and that could have implications for the Reserve Bank’s outlook for the labour market and their assessment of how much pain the labour market needs to endure in order to contain underlying inflation pressures.”
Westpac’s Gordon says; “there is little here to hurry the Reserve Bank quickly towards reversing those last 75 basis points of Official Cash Rate cuts made after August 2025.”
“Still muted wage pressures should imply there is time to assess the strength and durability of the recovery before raising rates.”
ASB's Smith says; “today’s figures will not cause any sleepless nights, with the NZ economy showing few signs of overheating.”
“Official Cash Rate settings remain conditional on the economic outlook, but we envisage the Reserve Bank can be patient in normalising monetary policy settings.”
BNZ’s Steel says: “At face value, a nudge higher in the unemployment rate compared to expectations may encourage the RBNZ to not rush to hike rates. But there is enough in the employment details, along with other recent indicators of economic activity and inflation, to suggest some removal of monetary stimulus will be required this year.”
Willis' take
When asked about the Official Cash Rate (OCR) and potential rate hikes, Finance Minister Nicola Willis told reporters at Waitangi that forecasters across different banks and the Reserve Bank continue to say the OCR won’t be hiked for some time.
“It will of course be the decision of the independent Reserve Bank. It is the case that as economies grow faster … that less accelerator, less pump, less priming is needed from the Reserve Bank."
“At some point, as the economy recovers and growth returns and more jobs are being created, we will see them take their foot off the accelerator,” Willis says.
Willis says the growing number of people in work is good news for the country.
“In addition, the hours worked and the number of people actively seeking work also increased. Together with other recent surveys showing rising business and consumer confidence, these are signs of a growing economy in which people see increased opportunity,” Willis says.
“Obviously we would prefer the rate to be lower still but the underlying details are positive and economists are expecting the unemployment rate to fall this year as the economy recovers.”
“I always want to drive that unemployment number lower," Willis says.
'Rising unemployment doesn't happen by accident'
But Labour says the latest unemployment figures reveal the “cost to New Zealanders of Christopher Luxon’s economic decisions.”
Labour finance and economy spokesperson Barbara Edmonds says: “Rising unemployment doesn’t happen by accident. It’s the consequence of decisions, and Christopher Luxon has chosen an economic plan that has cost tens of thousands of people their jobs.”
“When you slash investment, when you prioritise tax breaks for landlords over investment in the real economy - this is what happens. People lose their livelihoods.”
“None of this happened by accident. It is the predictable result of Luxon's choices. Christopher Luxon promised to fix the economy, but things are getting worse.”
Rates
As of Wednesday afternoon, the NZ dollar is down very slightly from where it was before the labour market data release.
Currently it is:
- $1 NZD to $0.6044 USD
- $1NZD to $0.8594 AUD
- $1 NZD to $0.5109 EUR
- $1 NZD to $0.4408 GBP
- $1 NZD to $94.3731 JPY
As for swap rates (this is where two people - or counterparties if you want to be technical - agree to exchange two different types of interest rate for a specified period of time), BNZ senior markets strategist Jason Wong says they have fallen which would be a relief to financial markets.
Two-year and five-year swap rates were down five to six basis points while 10-year swap rates were down four basis points, Wong says.
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