Let's take in more talent from overseas - and quickly

The latest net migration figures got a fair amount of media airtime, and even though a fair slab of it was on the invidious "aren't we doing better than Australia" track, the numbers were still pretty impressive - we had the biggest ever annual level of net immigration in the October '14 year (+47,700), beating the previous records set in the August '14 year (+43,500) and the May '03 year (+42,500). Net immigration is running at over four times its annual average over the past 20 years (+11,700). If you're interested in the details, the big pdf release from Stats is here and the actual data here.

It's interesting to see how sensitive these migration flows are to economic conditions at both ends of the migration journey: a lot of the media commentary, for example, picked up on the big impact on trans-Tasman flows of the strong New Zealand business cycle, compared with the currently sub-par Aussie one. But the same mechanism also works on migrant flows from other places, and it's left me wondering whether we're missing a good opportunity to attract European talent in particular.

We know, for example, that employment conditions in France are pretty grim, particularly for younger people, mostly down to the weak French economy, but aggravated by an inflexible labour market. So it's not surprising to see that the number of French people coming here on work visas has been rising strongly, from 1,187 in the October '12 year to 2,642 in the October '14 year. Unemployment isn't anywhere near as bad in Germany, but again the local slow economy is encouraging more Germans to look for jobs here, and the numbers coming on work visas have risen from 1,703 to 2,723 over the past two years.

But these opportunities to get talented people to come here from overseas don't last forever: the flows are very sensitive to relative changes in the business cycle at both origin and destination. Ireland's the classic example: business conditions were dire in Ireland until this year, when there has been a reasonably robust recovery. And the link to the net work migration flows from Ireland has been immediate: we had 1,298 Irish people coming here on work visas in the October '12 year, and 1,378 in the October '13 year, but it's already started to ebb, with a drop to 1,032 in the October '14 year.

I'd say we have a short but highly promising opportunity to get more skilled people to come here from the recessionary Eurozone. Jobs fairs in Australia are all well and good: but what about also doing a one-off liberal offer of work visas around Europe?

And by liberal, I mean one that doesn't pay too much mind to MBIE's 'Long Term Skill Shortage List', the thing that prioritises the kinds of skills we're normally looking for, partly because the list looks to me rather odd in places - I can believe we're short of engineers of all kinds, a fair array of medical specialists, and anything to do with ICT, but social workers? chefs? education lecturers? statisticians? external auditors? quantity surveyors? - and partly because we can't actually achieve that degree of precision in knowing what we'll need or in linking credentials to innovation or entrepreneurship. For all we know the next big app could be written by a self-taught enthusiast who left school with no qualification.

So I'd be inclined to hoover up as many of Europe's skilled and talented people as we can, while we can, and I'd relax the current immigration criteria to do it. Paper Marseilles and Düsseldorf with easy to complete work visa forms, and see what happens.

It can only be good for us. And if you're not too sure that immigration is good for a country, then read this opinion piece from the Brookings Institution, "Even Piecemeal Immigration Reform Could Boost the U.S. Economy", which says

High-skilled immigrants are good for America, and we should encourage more of them to come here given recent trends in entrepreneurship, where more firms are dying than being created every year. But high-skilled immigrants could help turn that trend around — they are twice as likely to start businesses as native-born Americans. This is especially true in high-tech sectors, where immigrants are not only more likely to start firms, but also to patent new technological discoveries

A bit of piecemeal immigration liberalisation would work for us, too.

What a terrific outcome

Yesterday's employment and unemployment numbers were awesome, and defied even the most determined begrudgers to undermine them, though Radio New Zealand did its best by simply ignoring them in its 7.00am news bulletin this morning, preferring more important national items like the cost of insurance for maraes and Winston Peters' sniping at our chance of a Security Council seat at the UN.

The ever dependable Brian Fallow covered the data well at the Herald. His piece, 'Economic upswing flows into jobs', in particular pointed out that the unemployment rate fell, even as the participation rate rose. In other words, despite more people opting to join the labour force, there were more than enough new jobs to go round and still see the numbers unemployed going down.

Some critics like to say, "Aha! But this doesn't count the underemployed!", such as people working fewer hours than they ideally would have liked. That's right. But even on that score the latest numbers show things turning for the better: the underemployment rate, as opposed to the unemployment rate, dropped from 4.4% last September to 4.2% this September (you've got to use annual comparisons because the quarterly underemployment data aren't seasonally adjusted).

Another good outcome was what happened to the 'NEET' rate. This is mainly relevant to younger people, as it's the 'Not in Employment, Education or Training' rate (unemployment rates make less sense as a measure, as many young people tend not to be in the labour force in the first place). On that measure, which I rate as one of the more important social indicators, it's again all good. The NEET rate for all 15-24 year olds dropped to 11.4% in September, from 12.1% in June (it's seasonally adjusted, so the quarterly comparison is kosher), and is markedly down on the 13.4% of a year ago.

Despite all this good news, there's still been some attempt to have a beat-up on what looks like a lowish rise in pay. It's true that the 1.6% rise in what's called 'the labour cost index' over the past year isn't a huge rise. But that understates what's actually happened to folks' actual earnings.

The labour cost index is essentially what's happened to the rate of pay for a particular job. It doesn't include increases people might have got for working longer hours, or merit or performance bonuses, or the impact of promotions, or of people moving from one job to a better paying one. For that, you need to know what's happened to 'average ordinary time hourly earnings'. That's up by a more respectable 2.6% over the past year - not dancing in the streets material, I know, but still handily ahead of inflation over the past year (1.4%).

It doesn't usually get a lot of coverage, but there's also a table included in the labour market data that shows how we're faring by international comparison (using a standardised definition of unemployment). Here it is.

We're doing pretty reasonably, though not outstandingly, by OECD standards. There are 34 OECD members in this graph, and we rank 13th. I suspect we'll improve our ranking: I've highlighted Australia in green (5.8% on this basis), and it's pretty clear that we're going to overtake them, as consensus forecasts have the Aussie unemployment rate rising and ours falling.

Germany shows up to advantage, 7th in this group, with 5.2% unemployment. You might think this reflects well on how Germany's conducted its affairs (both at a business and policy level). You might be surprised, then, to discover that in recent weeks some of the blogosphere's heavyweights have climbed into Germany, essentially saying that they're exported their problems to the rest of the Eurozone. If you're interested, you could start with 'The real problem with German macroeconomic policy', or with Martin Wolf's critical piece in the FT, 'Germany is a weight on the world'.

Form your own views, but if the question is, should Germany be more like (say) France, or should France be more like Germany, I know which camp I'm in. Germany's got an efficient labour market, and France doesn't, and the social consequences of France's poor policy are enormous. 

Last month I read in the French business paper Les Echos about the latest annual survey put out by a French organisation that promotes the employment of younger people - '47 % des jeunes diplômés en 2012 sont sans emploi un an après', it said, '47% of young graduates in 2012 are without a job a year later'. And of the 53% that were employed, 30% were on short-term contracts, because of the employment 'protection' legislation that makes employers reluctant to take on full-time permanent staff. 

'Structural reform of the labour market' isn't exactly a snappy electioneering phrase, but in France's case it would go a long way to tackling appalling levels of youth unemployment and making proper use of the talents of its qualified young people.

How microeconomic reform helps the young find jobs

There's quite a bit of revisionism going on at the moment. In potted format the logic is that deregulation of finance helped, led towards, or even caused, the GFC, hence deregulation in general (or liberalisation, structural reform, microeconomic reform, 'economic rationalism', Rogernomics, call it what you will) is a bad thing, too. Given that microeconomic reform always had its sceptics or outright opponents even pre-GFC, people making this argument have got the wind in their sails. There's some risk that this is becoming the latest conventional wisdom.

I think this line of argument is deeply wrong, and jeopardises many well-deserved successes for microeconomic reform.

Putting finance to one side for a moment, the reality is that in many markets deregulation has produced more flexible, efficient and equitable outcomes than previously, and it is becoming increasingly clear that the economies that took the liberalisation route is the 1980s and 1990s are making a better fist of coping with the post-GFC world than the ones that didn't.

Here's one particularly good, though socially tragic, example of what I mean.

In an earlier post about how the OECD has come up with a very good way of presenting data on unemployment rates in the OECD area, I mentioned in passing the unusually high rate of youth unemployment in France (with its fossilised labour market policies) and how it compared badly with the US's 'sack at will' regime, and in another I noted how France's largely unreformed labour market compared badly with Germany's, which has had a dose of microeconomic reform (adding to the efficiency of a market that was already doing pretty well).

Now four researchers - two French, two German - have just published a discussion paper, "Youth Unemployment in Old Europe: The Polar Cases of France and Germany" (available here) which shows, first, the poor youth unemployment and inactivity outcomes for France and the much better ones for Germany, and second, goes on to analyse why the two large Eurozone economies have behaved so differently.

The relatively poor French outcomes came despite France being hit relatively lightly by the GFC: as this graph from the paper shows, the immediate post-GFC hit to French GDP was significantly less than the hit to Germany's (though Germany subsequently has recovered faster and more strongly).

Here's the NEET (not in employment, education or training) rate for 20-24 year olds for the same group of countries: the French rate has generally been high, and in the past few years has been rising, while Germany's has fallen substantially.

Why these patterns? It's down to the microeconomics of labour market institutions and policies.
Germany has a respected, effective apprenticeship system that efficiently matches employers' needs and education provided. In France, apprenticeships are somewhat sneered at (I'm  paraphrasing here, but that's the gist) and the link with business isn't there: "in particular [French] SMEs are reluctant to hire apprentices"(p12).

A national minimum wage in France shuts out many low-skill young workers: "A large number of young people in France are not sufficiently qualified to be as productive as the minimum wage requires them to be" (p13). Germany has more flexible, locally negotiated minimum wage rates, with the predictable result that "The vast majority of skilled younger workers still have good prospects of entering open-ended contracts in Germany" (p13).

The French labour market is also highly segmented, with an 'insider' group (my description) of "employees in permanent contracts, protected by many rules, often leading to contentious litigation, and not effectively protecting employees while at the same time resulting in very uncertain outcomes for employers" (pp14-15), and everybody else on, at best, short-term contracts. Germany's no paragon, either, but it doesn't have anything like the rigidity of the French system, which again hits the young and inexperienced particularly hard.

It doesn't help that the French network of local placement offices is nigh on useless (much like large swathes of the rest of the French bureaucracy), though to be fair there probably isn't a lot they could achieve, even if they got their act together, when faced with all the other institutional rigidities of the French labour market. And finally the demographics don't help, either, with modest increases in the size of French youth cohorts in coming years (Germany doesn't have the same issue).

The bottom line is that "The situation in France is very alarming and the future prospects of French youths are increasingly dire. This is a socially explosive situation and politicians must act now to avert a lost generation" (p21). The authors are unambiguous about the reason for this social tragedy: "The roots of the problem are located in the structural design of national labor markets and education systems. Hence, Europe’s youth unemployment disease has to be cured with structural reforms" (p25, their emphasis), and they've got a bunch of reform proposals lined up (see the Table, p22), recognising that you can't readily 'cut and paste' things that have taken decades to embed, like the German apprenticeship system, from one country to another.

There are over 5.5 million young people unemployed in the European Union. For them, liberalisation and deregulation isn't the problem: it's the answer.

NZAE conference update - some slides from Maurice Obstfeld's speech

I posted earlier a summary of Prof Obstfeld's impressive keynote speech at the NZAE conference on  "Finance at Center Stage: lessons from the Euro Crisis". At the time I mentioned I'd write some of his slides when they became available on the NZAE conference website, so here they are.

The first one that especially piqued my interest was this one about house prices in the Eurozone (with the US included for reference). Bubbles had developed pre-GFC in a wide range of housing markets, and are mostly deflating since, notably in Ireland (green), the US (dashed red), Greece (solid red), and Spain (light purple). On the downside, the unwind poses major problems for banks (who lent on the boom-time valuations of property) and households (negative equity and serviceability issues), but, on the upside, at least the process of setting saner prices and cleaning up the mess is underway.

It's more troubling, however, that some markets rose strongly but haven't dropped from their pre-GFC levels, notably France (bright blue), Finland (brown), and Italy (purple). It may be that the underlying supply/demand characteristics of the French housing markets genuinely explain the ongoing high prices: Paris for example is still a highly desirable city with limited supply. And there may be good reasons for the behaviour of the Finnish market (about which I know nothing). House prices holding up in Italy, however, look harder to explain.

Overall, you're left with the queasy feeling that there is still quite a bit of house price adjustment yet to happen in parts of the Eurozone, and on the policy front some urgency to have Eurozone-wide bank assistance programmes in place before it happens.

The second slide that caught my eye was this one, which shows real interest rates in the PIIGS (Prof Obstfeld prefers to call them by the less offensive GIIPS) compared to Germany. And the lesson here is that one monetary policy did not fit all. In Ireland, in particular, the economy pre-GFC was very strong, prices and wages were rising, and real interest rates were piffling or negative. No wonder the house market ignited.

This is all, of course, with 20:20 hindsight, but even at the time it would have been a good idea to have had some levers to pull to offset an ECB setting of monetary policy that was wildly too loose for parts of the Eurozone (or possibly this is a roundabout way of saying the Eurozone economies never met the criteria for a monetary union in the first place). Either way, the lesson here is something to remember if the idea of a common currency with Australia ever resurfaces.

And the third and final one I'd like to show you is this, which charts the competitiveness of the peripheral GIIPS back to the start of the Euro: a rising graph means worsening competitiveness. If you want to look at the data for yourself, these are the Harmonised Competitiveness Indices that the ECB prepares, they come in three flavours (based on consumer prices, GDP deflators, or unit labour costs), and you can access them here. 

Very notably, competitiveness in Ireland (green) and Spain (red) deteriorated badly in the early 2000s - but only Ireland has been able to do anything effective about it, and without getting into the whole austerity debate, you can see why it has been the poster-child for getting its act together. You can also see where Greece's reputation for failing to deliver on reforms has come from, and what effect its inactivity has been having on its eventual ability to trade its way out of its problems. And while Italy's and Portugal's competitiveness never blew out the way it did in Greece, Ireland and Spain, they haven't been doing much to improve theirs, either. 

Finally you can see how well Germany has been doing, at least in part because it was fortunate to do some labour market reform before the GFC struck. As a result its latest (May) unemployment rate is 5.3%, under half the rate of largely unreconstructed France (10.9%). Prof Obstfeld's graph didn't include France, so I've dug out the data: on the same basis (Q1 1999 = 100 to Q1 2013), French competitiveness on a unit labour cost basis deteriorated by 1.7%, whereas Germany's improved by 18.5%.