The unemployment rate fell much more than expected in the June quarter to an 11-year low.

Figures released by Statistics New Zealand show the unemployment rate fell to 3.9% - an improvement from 4.2% in the May quarter and 4.4% in the June 2018 quarter.

The Reserve Bank (RBNZ), which is widely expected to cut the Official Cash Rate (OCR) on Wednesday, had forecast the unemployment rate to increase to 4.3%.

Bank economists were on a similar page, if not a tad gloomier. Wary of the deteriorating domestic economy and US-China trade war, those from ANZ and Kiwibank even revised their OCR outlooks down this week, saying they expect the rate to fall from 1.50% to 0.75% by next year.

While the data is highly unlikely to prevent the RBNZ from cutting the OCR on Wednesday, the question is how much weight the central bank will put on it in its commentary looking ahead.

It is worth noting the labour market is a lagging indicator of the health of the economy. The data can also be volatile.

The New Zealand dollar rose a half a cent to US65.7 cents on the news.

The headline unemployment figure reflected a jump in the number of employed people without any corresponding jump in labour supply.

The participation rate remained at 70.4% in the June quarter, having sat at around 71% during the previous year, following several years of strong increases.

The under-utilisation rate fell to 11.0% from 11.3% in the previous quarter. This was the lowest rate since 2008.

The portion of 15 to 24-year-olds not in employment, education or training also fell to 10.3% - a figure relatively low when compared to that of recent years.

This picture of a tight labour market will go some way to supporting the argument made by the Government, as well as some economic observers, that capacity constraints are an impediment to more aggressive fiscal stimulus - IE the Government borrowing more than it currently is to spend more on infrastructure, teachers' pay, etc.

However economists see things changing, with domestic growth sagging.

ASB economists said: "Today’s data showed the RBNZ continued to meet its “maximum sustainable employment” labour market objectives in Q2. Employment was strong and indicators of labour market slack pointed towards a clear tightening in labour market conditions.

"But more timely indicators suggest the worm has turned for the labour market.

"The broader economic slowdown now looks entrenched, and will likely translate into additional labour market slack ahead. Firms are reporting acute margin pressure and employment intentions are consistent with firms cutting staff.

"More policy support will be required to keep employment near its maximum sustainable level."

Wage growth boosted by minimum wage increase

Wages, or the labour cost index, was up 0.7% in the June quarter compared to the previous quarter and 2.1% compared to the June 2018 quarter.

This was the largest quarterly increase since December 2008.

The jump to some extent came off the back of the minimum wage increasing from $16.50 to $17.70 an hour in April. A number of collective agreements, like the nurses’ agreement, also came into effect.

Stripping out the minimum wage increase, the labour cost index would have increased by 0.5% in the quarter.

While wage increases were particularly notable in the retail and accommodation sectors, they were relatively broad-based, indicating there was some spillover from the minimum wage hike.

ANZ economists said tightness in the labour market had started to lift underlying wage inflation and was consistent with anecdotes that firms were struggling with cost pressures.

However taking out the minimum wage effect, they said wage inflation was picking up slowly.

They concluded: “This labour market release comes too late to be incorporated into the RBNZ’s published forecasts, due out tomorrow. But the report certainly does not undo the case for a rate cut tomorrow morning.

“The global growth outlook has worsened, the domestic economy doesn’t look like it will pick up any time soon, and leading indicators of the labour market are turning in the other direction.

“We expect the RBNZ will leave the door open to further rate cuts beyond August, although the strength in this labour market report could weigh on the tone of the Committee statement and press conference.

“We think it is prudent to discount the noisy survey somewhat, given its inconsistency with other indicators.”