Friday's Top 10: Matt Nolan on labour market recoveries, regional divergence, youth unemployment, NZ's real crisis, robots, Dilbert & more

Today's Top 10 is a guest post from Matt Nolan, his third. His previous one is here.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. Labour market recovery on the way in New Zealand …
The labour market has been strengthening according to Statistics New Zealand data.

The Household Labour force survey was a strong one, with employment, participation, and usual hours worked all rising strongly and the unemployment rate easing to 6.0%. 

The Reserve Bank expects things to keep improving, with the unemployment rate down to 5.6% in March – and down to 4.9% by March 2015. 

At these levels, the vast majority of those out of work will be “in transit” between jobs, rather than excluded from the labour market – a definite improvement on recent years.

2.  … and around much of the world
Of course, New Zealand isn’t the only country experiencing a resurgence in its labour market.  Our friends in the United States and the United Kingdom are also seeing unemployment rates shift downwards.

Where we are bucking the trend is against our big brother – Australia.  The unemployment rate in Australia is now 6.0%.

It is likely higher than the current New Zealand unemployment rate for the first time since March 2009.

3. Regional divergence bites the north
Coming back to New Zealand, it is important to keep in mind that aggregate (over the country as a whole) numbers never tell the full story – and sometimes they can hide important issues.

Shamubeel Eaqub touched on one of these issues by discussing the rate of unemployment between New Zealand’s regions here.

The stark difference between the North and South Island – with unemployment a lot higher in the North – is indicative of one way that New Zealand is experiencing a “two-speed” economy at present.

4. Job types and the nature of the recovery
Although I mentioned that New Zealand wasn’t the only country experiencing a labour market recovery, it is a different type of recovery.

After a period of preparation it appears that rebuilding activity in Canterbury is picking up – this is a significant lift in the level of “non-traded capital” in New Zealand.  This type of issue is discussed in the economic literature, with two useful papers found here and here.

Although considering the New Zealand economy in this way is useful for thinking about a number of things (eg higher current account imbalances if we view household durables/firm investment as complements in production), the key point when it comes to employment is that higher demand for construction will increase employment in construction and construction exposed sectors. 

However, once our labour market is back to normal this increased demand is met by bidding up the price of these workers – reducing the quantity demanded by other industries.  We may see this through a high exchange rate and/or high wage growth, but either way it will change the composition of industries people are working in and the types of jobs people train for.

5. Is this “structural” unemployment?
One question I’m often asked is, given the prolonged nature of the slowdown, will unemployment get stuck at a “high” level during the recovery?

This is a fair question, if individuals have been disconnected from the labour market, or young people have been unable to enter in the first place, it may be harder for them to get work until an economic recovery is well underway.

When economists discuss this they are asking whether there is some “structural unemployment”.

Recent writing in the United States and in New Zealand indicate that structural unemployment is not a significant issue, and as a result once the economy is back on track the labour market will get back there soon as well.

In the New Zealand context, the fact that changes in the unemployment rate seem well explained by changes in real GDP, “matching efficiency” doesn’t appear to have declined during the recession, and also the fact that long-term unemployment has peaked at a relatively low rate make the case for why there isn’t likely to be a structural unemployment issue going forward.

6. Youth unemployment, long-run unemployment
However, it isn’t just an issue of whether unemployment is structural - as a society we are justifiably concerned if certain, otherwise disadvantaged, groups face a disproportionate amount of the pain associated with any adjustment. Concerns about both youth and long-term unemployment are part of that.

So what has been happening with these? 

The youth unemployment rate takes all those, both in education and not in education, who are willing to work - but aren’t.  The NEET (not in education, employment, or training) rate tells us what proportion of people between the ages of 15 and 24 are not in education, employment, or training.

The long-term unemployment rate is somewhere between the following two graphs:

Unemployed individuals in the HLFS are asked how long they have been out of work.  Most respond, but some proportion are unsure and don’t specify.  The bottom graph adds a proportion of the group that don’t specify to the long-term unemployed, equal to the long-termed unemployed ratio of total unemployment.  However, it is likely that more of the people saying that they can’t recall have been unemployed for longer.  The highest graph simply adds all not-specified individuals to long-term unemployment - so is a maximum.

Both the long-term unemployment rate and youth unemployment rate have been coming down but remain high.  These will be important indicators to keep an eye on - to see if the recovery is benefiting those in the most difficult circumstances - over the next year.

7. Long term unemployment in the United States
The long-term unemployment issue, and its relation to potential structural unemployment, has recently been getting play in the United States.

A key point from this is that, once someone has been out of work for a long time, employers look at them in a different way - and impose certain judgements about why that individual has been out of work.

As a result, the labour market is “segregated”, and we can’t necessarily just rely on monetary policy or good luck to help people out.

In this way, the bad luck associated with a long-recession reduces the opportunity of some in society - and it may well give credence to the idea we need to actively help these individuals out.

Note that this doesn’t mean punitively bullying those who are out of work, or acting as if moving them into work immediately is the solution, but instead working with them and employers to help integrate people back into the workforce.

8. New Zealand’s real crisis and structural unemployment
However, long protracted crises can lead to more sizable periods of unemployment – as can be seen if we look at the impact of the combined reform and recession period of the late-1980s and early-1990s.

Via Brennan McDonald, comes this paper from Treasury discussing the behaviour of New Zealand’s unemployment rate since 1992 (by Weshah Razzak).  The paper finds that the average rate of employment is above the natural rate you’d expect (think the rate of people moving between jobs or finding they need to do new training). 

However, the author states that the gap is partially due to the fact that negative shocks do more to increase unemployment than positive shocks do to increase it, and that these same negative shocks also reduce how easy it is for workers and employers to “match”.  [The author’s blog can be found here.]

In a 2008 paper on the impact of the recession, authors from Victoria University were less positive about the impact of this period in New Zealand’s history on employment, skills, and outcomes for communities.

Now the reforms are a contentious issue – high levels of government debt, the failure of BNZ, a negative oil shock, and poor export prices were all non-reform related issues that hurt.  In the same way that the nature and speed of the reforms, and the size of monetary tightening at the time, also hurt.  If any event was to cause “structural” unemployment, it would be something along the lines of the rapid adjustment New Zealand experienced during that period.

The paper by Razzak points out that the “natural” level of unemployment appears to have been declining post reforms – while the Victoria University paper indicates that specific groups and communities may have been disadvantaged.

9. Labour markets and ICT
One claim we hear constantly is how New Zealand needs to be a high tech, high wage, economy. Sounds nice, looks good on billboards, it is perfect campaign fodder for all the political parties.

But like most things that sound nice, it’s usually because the prices is being hidden.

The clearest example of where these aspirations for high tech can get complicated is with regards to New Zealand and its low uptake of ICT, an issue I discuss here.

The key point is that countries with a high uptake of ICT, and other potentially labour saving technologies, have also seen more sizable increases in inequality and lower employment rates. See page 151 here.

This doesn’t mean there is a relationship, or that even if there is the costs are not cancelled out by even greater benefits (the higher level of capital does imply a higher level of income per person on average).  However, there are complicated distributional issues that need to be considered when we think about technology and how it impacts upon production structures. 

10. Robots
How could I talk about the labour market without talking about robots.  I recently stumbled upon a blog called “robotenomics” through this post on automation.  According to the paper they link to, 47% of current labour is “at risk” of being automated.

There are undeniably massive changes occurring in terms of technology, and given that much of the recent change appears to be “labour saving” this implies that many individuals with current skills may have to train to do different things - or may have their wage growth limited by the cost of capital/robotics which could replace them.

How society deals with these changes will be fascinating - especially since the impact is never as clear as people like to point out.  The big winners from the increasing productivity of capital/robots will be those who work in industries that cannot be easily automated, and those who find related service work. 

In the same way that increasing industrialisation drove up wages for service workers in the past - some types of service workers may be some of the big winners from this change!

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* Matt Nolan is an economist at Infometrics, and an author at the blog TVHE. He specialises in looking at the household sector, and household economic data, but will offer an opinion on pretty much anything related to business and the social sciences.