Unemployment rate rises to 5.7% but labour force participation rate reaches record high of 69.7%

The unemployment rate rose to a seasonally adjusted 5.7% in the December quarter from 5.4% from the September quarter, Statistics NZ says, with an additional 8,000 people unemployed over the quarter.

The increase is a surprise given the consensus of economists' expectations was for a slight fall in the unemployment rate to 5.3%.

In the year to December 2014 quarter, the unemployment rate fell 0.3 percentage points from 6.0%.

Meanwhile, the labour force grew by a seasonally adjusted 36,000 in the December quarter, the biggest increase since the Statistics NZ series began in March 1986.

The labour force participation rate therefore rose 0.7 percentage points to 69.7% during the quarter.

That's the highest participation rate since the series was launched, topping the revised previous high of 69.3% in the March 2014 quarter.

"The rise in the labour force reflected continued population growth and fewer people not being in the labour force. Over the latest quarter, the strong rise in employment (up 28,000 people) did not keep up with the record number of people entering the labour force. Therefore, the number of people unemployed, and the unemployment rate, also increased," Statistics NZ says.

The number of people employed increased by 80,000, or 3.5%, last year in seasonally adjusted terms.

"Although the unemployment rate rose in the December quarter, conditions in the labour market have actually remained firm, and are consistent with the domestic economy continuing to grow at a robust pace," Westpac senior economist Satish Ranchhod said.

"While employment has been increasing, wage inflation has been soft. The private sector LCI (all salary and wage rates) increased by 1.8% over the past year - as expected and a very modest result in the context of an economy that’s been growing at a solid pace for some time now."

"Overall, today’s data adds to the more general picture of a solid domestic economy but subdued inflation. This supports our expectation that the Reserve Bank will keep the Official Cash Rate (OCR) on hold for some time," said Ranchhod.

ASB senor economist Chris Tennent-Brown said the key surprise in the data was the "turbo-charged" increase in the supply of labour, with the labour force growing by 36,000 in the December quarter.

"That is the largest level increase on record, and why we expected the unemployment rate to remain roughly steady despite anticipating strong employment growth. The surprise within the release came from a spike in the labour participation rate to a record level. Labour force participation often goes hand in hand with strong employment growth," Tennent-Brown said.

"And the strong net flows of recent migrants featured a lift in 20-34 year olds, a group likely to be highly motivated to work. That might go some way to explaining the quarter’s participation rate spike, though these spikes often reverse, so we are wary of reading too much into it."

Tennent-Brown said there were no implications for ASB's view that the Reserve Bank will hold the OCR at 3.50% for the foreseeable future.

"Although in the near-term the risks are for a lower OCR, we don’t judge the Reserve Bank’s inflation outlook has shifted down that far. The labour data reinforce other indicators that Q4 experienced solid growth. The wage implications are fairly neutral, with tiny signs of a lift in pressure from low levels negated by this quarter’ spike in the supply of labour."