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Improving how we measure inflationary heat in the labour market

Measuring inflationary pressure from the labour market can be improved by watching a narrow set of 4 high-quality indicators, a research paper shows.

A newly published Analytical Note, by Senior Adviser Christopher Ball, proposes improvements to the methodology used by the Reserve Bank of New Zealand -Te Pūtea Matua (RBNZ) to assess labour market indicators of inflationary pressure.

The key indicators are:

  1. the job transition rate (the share of workers switching between jobs)
  2. the job vacancy-to-unemployment ratio
  3. the unemployment rate, and
  4. a survey measure of labour as a limiting factor for business production.

The RBNZ has always monitored the labour market as part of setting monetary policy. It looks at a broad range of 44 indicators and how they compare with their strongest or weakest levels since 2000.

The Analytical Note recommends that the RBNZ keeps the full set of existing labour market indicators for understanding and monitoring the broader context of the labour market.

The paper uses 20 indicators, a subset of the 44 total, which are regularly used in the Monetary Policy Statement. The analysis ranks each indicator based on how well it predicts price and wage inflation.

Based on this analysis, the paper shows 2 different visual representations of inflationary heat in the labour market:

  • The 4 key indicators with the greatest predictive power show that inflationary pressures in the labour market have been exceptionally high since 2018 but are now easing. Focussing on these 4 key indicators provides a useful summary of inflationary heat in the labour market. 
  • A wider set of indicators, shown in a coloured heat map dating back to 2000, are ranked in descending order based on their power to predict inflationary heat in the labour market. Through time, each indicator is coloured depending on how strong it is relative to its average value since 2000. This shows that inflation pressures in the labour market have been easing over recent quarters but are still stronger than the post-GFC period. This chart is a useful way of presenting the broad range of labour market indicators regularly published in Monetary Policy Statements to assess inflationary pressures coming from the labour market.

High quality labour market indicators of inflationary pressure

High quality labour market indicators of inflationary pressure.
Inflationary pressures from the labour market have eased recently.

Broader labour market pressures continue to ease, although wage growth remains strong

Heatmap of labour market indicators of inflationary pressure from 2000 to 2025
Broader labour market pressures continue to ease, although wage growth remains strong.
Fill colour shows the standardised value for each variable compared to the weakest, median and strongest since 2000. Sorted by rank correlation with output gap, top (highest) to bottom (lowest).