Jobless rate masks softness in employment growth
New Zealand’s labour market appeared to hold steady in the March 2025 quarter, with the unemployment rate unchanged at 5.1%.
However, economists warned the surface-level resilience conceals deeper weaknesses, including declining hours worked and cooling wage growth.
The “employment report looked to be a little better than expected, but it wasn’t,” said Kiwibank chief economist Jarrod Kerr (pictured left). “That was the ‘good news.’ The details of the report were weak, as expected.”
Employment inched up just 0.1% over the quarter, following two consecutive declines. But total employment still sits 0.7% below year-ago levels. Full-time jobs were hit hardest, shedding 45,000 roles annually, while part-time work grew by 25,000.
Work hours drop sharply for fifth straight quarter
Of greater concern is the continued drop in hours worked. Stats NZ data showed a 2.9% annual decline—the steepest fall outside of the COVID-19 era since 2009.
“Hours worked fell a hefty 2.9% over the year, and has been declining for five consecutive quarters,” Kerr said. “That’s indicative of a sharp recession.”
Westpac noted a similar concern, with senior economist Michael Gordon (pictured centre) observing “a marked drop in youth participation in particular in recent quarters, with the tougher jobs market seeing young people returning to or spending longer in study rather than actively looking for work.”
Cooling wages undermine inflation pressures
Wage growth is also easing across the board. The private sector Labour Cost Index (LCI) rose just 2.5% annually—down from a peak of 4.5% two years ago and the slowest pace since 2021.
“The costly combo of high inflation and labour shortages lit a fire under wage growth,” Kerr said. “Two years later, that fire has been put out.”
Fewer jobs are seeing significant pay hikes, and more workers are receiving modest increases between 2% and 3%.
“The number of workers receiving a pay rise above 2% but below 3% has been steadily increasing for 7 quarters,” Kerr said.
Westpac highlighted similar moderation in its review of the March data.
“The private sector LCI slowed from 2.9% to 2.5%,” said Gordon, adding that “fewer roles have seen pay increases over the last year, and the average size of those increases has moderated.”
Participation rate slides as worker confidence dips
Worker engagement in the labour market is also slipping. The participation rate fell again to 70.8%, down from a peak of 72.4% in mid-2023. This suggests growing discouragement among jobseekers.
“Put simply, the labour market is not as attractive as it once was. The demand for workers has fallen, and would-be-workers give up and leave,” Kerr said.
ASB’s Mark Smith (pictured right) echoed this view: “The employment rate eased to 67.2% in Q1, the lowest in 3 years,” adding that “firms significantly cut back on full-time hiring.”
Economists urge rate cuts to support recovery
The ongoing deterioration in job quality and labour demand is building the case for monetary policy easing. Kiwibank expects the Reserve Bank (RBNZ) to slash the official cash rate to 2.5% by year-end.
“Today’s data reinforces the need for further monetary policy easing,” Kerr said. “Downside risks to medium-term inflation are growing given the soft labour market and dimming global outlook.”
Westpac took a more measured tone, saying: “The implications for the Reserve Bank are mixed, with slightly better employment figures but a greater slowdown in wage growth than they had assumed.”
ASB, meanwhile, anticipates 75bps in OCR cuts this year, stating that while unemployment may be near its peak, “firms are likely to remain somewhat hesitant to take on new staff.”
Read the insights from Kiwibank, ASB, and Westpac.
