Tuesday, 6 September 2016

Hard core unemployment

The latest set of Treasury's Monthly Economic Indicators came out yesterday. The media reported on the headline news - the economy picked up in June and carried on in good nick in September - and I was tempted to leave it at that, but there's often something quite interesting in the Indicators that flies below the radar (particularly in the accompanying Chart Pack) so I had a fossick.

Have a look at this.

From which we learn three things.

One is that, as cyclical indicators, the 'underemployment' rate and the 'unemployment' rate tell almost exactly the same story and it doesn't really matter which one you focus on. For some policy purposes the broader 'underemployment' rate, which emerged from the recent revamp of the Household Labour Force Survey and which, as Treasury says "includes people who are unemployed, underemployed and who would like a job but are not actively looking or immediately available for work", is probably the better pick. But as indicators of the cyclical state of the labour market, they're well nigh identical.

The second thing that emerges, with hindsight, is the immense and long-lasting damage the GFC-related recessions here and overseas wrought. Even after six years of recovery we're still well shy of getting back to the labour market outcomes we had pre-GFC.

And the third thing follows from the second: there is still a wide 'output gap' of spare labour market capacity. On a totally instinctive eyeball-the-graph basis, I'd guess that a roughly full-capacity economy would be running an unemployment rate of around 4% (going down to under 3½% near cyclical peaks). Our current unemployment rate (5.1%)  is well above that. And in turn this helps explain why the Reserve Bank has been having such difficulty in getting inflation back up to 2.0%: that's not going to happen unless our domestic spare capacity gets used up a lot more than it has to date.

But there's also one graph in the Chart Pack that makes you wonder about some of this apparently spare capacity.

It's a bit surprising, if there's this supposed slack in the labour market, that employers are reporting that it's getting difficult even to find unskilled employees, and even more difficult again to find skilled employees. Even well-meaning initiatives like the New Zealand Seasonal Workers scheme, which aims to get people off unemployment and at least into temporary work, aren't helping out, as this report from Radio New Zealand showed ("We had 1400 people be interviewed and we struggled to fill an eight-seater bus").

What I see in these graphs, taken together, is that the best we can manage, when times have been good for a while and anyone with a pulse should be able to get a job, is that we would still be left with an unemployment rate of around 4% (and a bit lower again in real boom time conditions). But even allowing for the fact that we'll always have a bit of transitional unemployment, that would still leave a couple of percent of the labour force high and dry in all economic weathers.

We - well, I - don't know exactly why there is this irreducible rump, and it's only restating the issue to say there's a mismatch between what employers are looking for and what would-be employees have (or want) to offer, which might be down to anything. The education system would be near the top of my list, but you'd also wonder about technological change, family background, discrimination, and [insert your own hobbyhorse here]. And perhaps we should be grateful that it's only a couple of percent of the workforce. That's a good deal better than some economies can manage: good luck if you're young and not well-connected in large swathes of western Europe

But it's still an issue worth unpicking and working harder at. There's something going wrong at one end of our workforce when the underemployment rate is still in double digits but employers can't get bums on seats.


  1. Hysteresis!

    Seriously, though - NZ's not doing bad here. We've got one of the highest labour force participation rates in the OECD, and one of the lowest unemployment rates. So regardless of other ills in the NZ economy, labour market policy is probably reasonable.

  2. Fair comment. And joking apart there's something in the hysteresis story: I read somewhere that there's research showing that people who graduate when there's a recession on suffer a long-term hit to their lifetime earnings.
    And it's probably true too (I should have squeezed it in somewhere) that our residual tail of hard-to-get-into-employment people is probably smaller than in a lot of other places. But we do have one, and I suspect it ties in with the tail of underperformance evident in secondary school outcomes: we do a good job for most, but there's a group that's already fallen through the cracks at that point.

  3. Do they publish those statistics regionally? It would be interesting to know if there is a geographic mismatch between un/underemployment and difficulty finding labour. I suspect part of your missing % may reflect a growing mismatch between the cities and the regions.

    As a long term city dweller, and someone who has moved my family between cities for work, I do wonder if it would ever be economically feasible to pay me what it would take to move away from (a) the ever increasing amenities of city life and (b) friends and family, in order to work in the Hawkes Bay or Marlborough, even though I love visiting both regions and their agreeable climates. Somewhere like Southland, Taranaki or the West Coast wouldn't stand a chance.

    On top of that, in no particular order, you would have to factor in the barriers to moving like: finding a job for my partner (dual income a must to buy a house these days), dislocation of the children, the actual costs of moving, the effort in acquiring information on an unknown region, and the human bias against change.