Increasing the Official Cash Rate by 25 basis points last week, the Reserve Bank declared in its Monetary Policy Statement (MPS) that "employment is now above its maximum sustainable level." Just what does this mean?
Since March 2018 the Reserve Bank's Policy Targets Agreement with the Government requires it to target maximum sustainable employment alongside price stability when setting monetary policy.
However, just what maximum sustainable employment is is somewhat vague. It is not a specific unemployment percentage.
Although central banks overseas such as the United States, Australia and Norway also target employment in their formulation of monetary policy, it's inclusion in the Policy Targets Agreement didn't receive universal support. Former Reserve Bank Chairman Arthur Grimes, for example, described the Treasury as “utterly incompetent” for advising the Government to make the addition, saying this has led to the Reserve Bank lowering interest rates by more than it should have.
A school of thought is that tackling unemployment should be left to the Government, which makes jobseeker payments to those out of work, rather than the Reserve Bank. Others have suggested that instead of having the Reserve Bank target the concept of maximum sustainable employment, the Government could implement a Universal Basic Income or a Job Guarantee.
In this year's Budget Finance Minister Grant Robertson said the Government is looking at establishing a Social Unemployment Insurance scheme. This would ensure people who lose their jobs temporarily receive more support than they would from the regular welfare system.
Employment above its maximum sustainable level with 98k out of work
While the September quarter unemployment rate came in at the surprisingly low 3.4%, that still left 98,000 people officially unemployed. So with the Reserve Bank assessing employment as being "above its maximum sustainable level," does that mean the policy wonks at the central bank want more people to lose their jobs?
It's not quite that simple.
"The Reserve Bank interprets the term ‘maximum sustainable employment’ to mean the highest utilisation of labour resources that can be maintained over time," the Reserve Bank said in 2018.
"The maximum sustainable level of employment is not directly observable and can vary over time. This makes real-time estimates of maximum sustainable employment (MSE) highly uncertain. In addition the Reserve Bank has a limited ability to affect the long-run level of MSE. Given these limitations, the Reserve Bank does not have a specific numerical target for employment, unlike for inflation. Instead, the Reserve Bank monitors a wide range of labour market indicators to form a holistic assessment of whether the economy is currently operating at MSE."
"The ideal indicator of MSE should help us identify when the demand for labour is growing at a different rate to the supply of labour, and hence should be well-correlated with cyclical fluctuations in wage growth," the Reserve Bank said.
It uses a range of labour market indicators in its MPS to come to decisions as to whether the economy is operating above, below or at MSE.
In 2018 the indicators given included:
Level of employment
Employment rate
Labour force participation
Unemployment rate
NAIRU (the non-accelerating inflation rate of unemployment)
Under-utilisation
Underemployment rate
Potential labour force
Employment gaps
Have the Reserve Bank's views evolved much since 2018?
In last week's MPS the Reserve Bank said: "Capacity pressures have continued to tighten. For example, employment is now above its maximum sustainable level."
"We assess employment as being above its maximum sustainable level, with many of our labour market indicators near or at record levels. We assume that the unemployment rate will decline further in the final quarter of this year as businesses continue to focus on retaining and boosting staff numbers to meet strong underlying demand. We assume access to workers from abroad will remain limited by border restrictions during at least the first half of 2022. We expect the unemployment rate to slowly rise towards a more sustainable level as capacity pressures ease," the Reserve Bank said.
It pointed out the unemployment and labour force under-utilisation rates were at their lowest levels since 2007.
"There has been strong demand for more workers in some sectors, but it has been difficult for businesses to recruit extra staff. This has seen wages rise as firms compete for workers. Employment is expected to remain above its MSE over the projection horizon, but to return towards MSE over the projection as capacity pressures ease," the Reserve Bank said.
The diagram below, from last week's MPS, shows where the Reserve Bank currently places the range of MSE indicators it monitors.
According to Statistics New Zealand, the under-utilisation rate was 9.2%, or 278,000 people, in the September quarter. The labour cost index of salary and wage rates, including overtime, increased 2.4% in the year to the September quarter. And average ordinary time hourly earnings, as measured by the Quarterly Employment Survey , increased 3.5% year-on-year reaching $35.25.
The diagram below comes from Statistics NZ.
*This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.
51 Comments
Just using the MSE concept indicates that at governmental level, including Government Departments, they do not yet understand the depth of the problem behind climate change and a sustainable future. The MSE concept is solely about supporting future growth, when they should be considering how to draw back, while reducing emissions, increasing sustainability and raising or maintaining living standards.
And behind all this is the assumption, that if we let too many people have jobs, inflation will rise!
This idea of consigning a sector of the population to deprivation and poverty so that the rest don't suffer the inconvenience of rising prices is perhaps outdated.
Interesting perspective. But it's still illusion in my opinion. An important factor that you missed out is purchasing power. It seems that your mortgage "reduces" as you are paying off the same amount of mortgage in a inflation scenario. Yet during a inflation scenario, you also pay more cost of living while paying off your mortgage. The total amount of your expenses still goes up like anyone else. Yes, owning assets can protect you against inflation. But to a degree, it depends on the size of the mortgage, interest rate and the potential capital gains. You could lose money over time if those factors are not in your favour. Your theory possibly works well in 1970s but probably wouldn't work well now as most of the size of mortgages would be more than 70%.
Here is a video has well explained about purchasing power:
Prof. Antony Davies: Why the US doesn't want inflation, explained - YouTube
" Wages and benefits adjust over time to meet increases in daily costs" Slaves used to be fed & housed the minimum sustainable subsistence to enable them to keep slaving, the other side of the coin from "maximum sustainable employment" & other ivory tower academic macroeconomic constructs that serve primarily to keep the huddled masses in their dependent place. At the household/microconomic level the only sustainable wage is the maximum the market will bear & the starting point for negotiation should be "more".
I agree with the basic point I think. Although the lower end of wages (bottom quintile) have, in general, increased by slightly more than the cost of living (HLPI) over the last 15 years - thanks in large part to decent increases to the minimum wage. The minimum wage is of course a very necessary safeguard against the market finding the 'minimum sustainable subsistence' level for wages!
"the 'minimum sustainable subsistence' level for wages!"...That there in itself shows just how abysmally below poverty level government benefits are if they are 'below minimum subsistence' wage rates. Then add to that MSE which is a gauge designed to ensure the economy holds a percentage of the population out of work on below poverty level subsistence, all to hold inflation at bay.
Think of it this way...you gauge economic development in this way, to ensure enough people remain on unemployment benefits, putting downward or stagnant pressure on wages. The unemployed are paid by tax payers to hold back consumer price inflation(which happens anyway if you haven't already noticed your grocery bill consistently rising), which then transfers wage inflation over to taxation. All so company management and shareholders are ensured a larger chuck of a companies revenue in profits, while their customers don't see a huge jump hit their pockets directly each shop, instead of paying higher wages and prices.
So the whole tax base(those not avoiding or unable to afford to minimise) are paying inflation via taxation. Sneaky isn't it, but inflation is always happening in one place or another, while companies get to look good growing their profits each year and as such the countries GDP.
It's all in the measure, OECD Govt's use common calc definitions & fudge the figures to suit their self promotional purposes. For eg. only those who are "actively looking for work" are classified as unemployed, but lockdown conditions make this impractical.
For reference, the ABC has just had a series of articles exposing Australian unemployment stats calculations & how it disadvantages people by massive understatement of the problem; I've never seen anything similar from NZ media however our stats criteria are aligned.
Bury yourself in detail, detail, and lots of detail.
What if there was absolutely no detail considered at all in certain decisions?There is an official timeline for tectonic change that will be packaged for public consumption and implemented regardless. Financial, A.I., and social change, is plotted on a timeline which is not optional. An example would be the following "White paper, June 2020, from the World Economic Forum entitled, "Reimagining Regulation for the age of A.I. - New Zealand Pilot Project".
Yes, we are the pilot project for the world in implementing digital regulatory controls of movement. There is a specific timeline and this explains all the pressure we are living under right now. Ardern is the Forums "Young Global Leader alumni" poster-child if you care to google just that!
Everything is interconnected and the financial system is part and parcel of the tectonic changes being undertaken, for no other reason that could possibly be explained in any detail. The "White paper" sets out a month-by-month timeline and supporting strategy for implementation. So we know with no doubt at all who our government is working for.
Nice to see one of my biggest bugbears covered!
The article stops short a bit for me though. It touches on RBNZ still using the 1970s NAIRU / Phillips Curve approach to managing inflation, which involves keeping hundreds of thousands of people unemployed / under-utilised to suppress wages (and prevent wage / price inflation). This quote lays it bare:
We expect the unemployment rate to slowly rise towards a more sustainable level as capacity pressures ease
So... we need more unemployed people or everyone will start demanding higher pay and we will get inflation. Why do we tolerate such an inhumane economic system?
There is an alternative. Instead of paying people poverty wages to be soldiers in the fight against inflation (i.e. sat at home on benefits), we could offer anyone who wants to work a 'transition job' doing something useful in their community (at minimum wage). This could be teaching kids to swim, music lessons, fencing off streams, clearing trails, helping out in schools etc. This basic 'transition job' would be managed locally by the local community job shop and would come with on the job training etc. When the economy picks up, people will go into better paid jobs and the number of people in transition jobs would reduce. When the economy drops, more people would go into transition jobs but the wages they receive would act as a stabiliser - smoothing out the cycle. This approach basically replaces the bufferstock of desperate unemployed people with a bufferstock of people contributing to their community in transition jobs.
FYI, I've done other stories in this area previously.
For example this one https://www.interest.co.nz/news/111753/reserve-banks-focus-moveable-feast-maximum-sustainable-employment-appropriate-or-could
And this one https://www.interest.co.nz/opinion/107931/opine
The MOW trained a highly skilled workforce of design engineers, construction engineers, architects, town planners, physical works people, plant managers and overseers, developed through generous public service study awards, apprenticeships and cadet schemes, that greatly increased the country's knowledge and skills base. The Treasury of the 1980s and 1990s wanted them gone because you can't have a department that actually plans if your belief is that you can leave these things to the free market.
What isn't generally known is that Treasury went further and destroyed archival material that had been collected by departments. Again motivated by the desire to prevent government from planning.
That is a disgrace. We have now had 30 years of the 'market' taking is nowhere - with politicians launching piecemeal showboating initiatives designed to generate PR to win votes for the next election. I seriously believe that any party that presented a clear 20 year plan to 'create a country that our kids want to grow up in' would clean up.
Ever considered the possibility that some people without employment don't want to work but prefer to be on various benefits? I just had a part-time cleaner who was doing the minimum number of hours to keep WINZ of her back and collect maximum benefits (multiple) leave because she could no longer "be bothered" working.
Introducing UBI will be the ultimate work disincentive, many will think "why work when I get income to live while I can do whatever I like"
Nah, you have this wrong.
The person doesn't want to work more because they would be getting less from the government to do more work. Essentially abatement rates disincentivise work, the more you work, the less government gives you free money. So why work more when you can earn just the same by not working?
So first thing, it's important to note that a UBI would only pay bare minimums, if you are lucky. So yes, the person in question might *just* be able to get by on the UBI, but it's likely they would be scraping by, if at all. However, the person would quickly recognise that if they worked, they would get to work as much as they want and they would keep all their wages (minus tax, which should be a flat rate) on top of the UBI they already get. So without any abatements, they can work 60h a week and get to keep it all (minus tax), including the UBI. Yes, they may decide they only want to work just enough so they can live a half decent lifestyle, but the option to have an even better lifestyle is fully dependent on how much work the person wants to do. This reverses the current situation which says "sure you can work more, but we take away more money from the government top up, the more you do".
Exactly, it also encourages people to work longer in life, to the capacity they are comfortable with. Right now, my father gets double tax rates for work that he does because his super is considered his primary income. But he is an active dude who doesn't want to sit at home all day doing nothing WHICH IS WHAT THE CURRENT SYSTEM ENCOURAGES. It's truly batty, especially at a time when we are "beyond maximum employment". As said elsewhere, our entire tax system needs an overhaul.
I would suggest that they're screwing with the real unemployment figures.
11.4% is the real number of people in receipt of a benefit payment.
This does not include the 380,000 people in receipt of the Wage Subsidy. we have a two-tier Welfare system now.
https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/s…
Maximum employment should never had been the remit or mandate of any central banks.
It is the governments' responsibility to formulate their fiscal policies to encourage hiring and employment seeking behaviours.
Monetary polices cannot and will not have any meaningful impact on unemployment.
When government fails and pass that responsibility to an agency that has no powers to make laws and modify social incentives, the result will be of a certain certainty- abject failure.
“In its setting of monetary policy the Reserve Bank must target 'maximum sustainable employment.' So just what is this?”
In the 4 years this policy has been implemented housing prices have increased to unaffordable levels because of excessively low interest rates and cheap finance.
It is ironic that those that voted for this Labour policy have seen inequality in housing affordability increase to levels that are now unsustainable (Reserve Bank’s own words). The damage has now set in and the next generation will suffer because of this.
The next generations suffer from Natbour and this weird but common idea that house prices are only allowed to go up. So much intergenerational wealth transfer has been facilitated through the combination or artificial scarcity, welfare subsidies, tax privilege, and protection from risk that has been required from governments and the reserve bank to achieve this end.
UBI was canned in Finland after three or so years. Don't know the reason behind it. The bit I do recall was it didn't help to get any more into work. Perhaps it was too high.
Maximum sustainable employment is a labour feel good/well being factor. At least one person in the monetary policy committee probably drums this up. The ex trade union economist comes to mind.
I always question trade unions motives with regards to unemployment. IMO they are much more concerned about their members benefits than overall unemployment.
Not sure saying it was 'canned' is accurate. It was a 2 year trial and they declined a request to expand the trial
https://www.theguardian.com/world/2018/apr/23/finland-to-end-basic-inco…
"The world’s most robust study of universal basic income has concluded that it boosts recipients’ mental and financial well-being, as well as modestly improving employment.
It was also critiqued because it wasn't actually an UBI, they only gave it to the unemployed.
better detail: https://www.mckinsey.com/industries/public-and-social-sector/our-insigh…
I read two of the links, newscientist and mckinsey and my summing up is its not worth implementing given the small effect it had and the complexity trying to integrate or separate out from other unemployment issues such as housing. Finland I'd suggest has a far better educated population than NZ with probably far fewer don't want to work section of the population.
UBI won't work without wholesale taxation changes, particularly flat to slightly progressive income tax rates, plus broad capital gains taxes to avoid other unintended consequences. Finlands experiment was doomed to fail for these reasons.
Under the current environment, if we don't want to change too much but want to have a similar effect, we should do as many other countries have done and implement a tax free threshold rate. And we could make this a "non abatement" rate, where abatement of benefits doesn't happen until you go over this rate. You would need to add in a bunch of other welfare changes as well though and create another tax stream (likely capital gains) to make up for the tax shortfall. Setting a tax free rate of say $20k for all work, but continuing to tax benefits, would have a similar effect to encourage paid work. It would also discourage underemployment, which our country really needs right now...
I went through a bit of a UBI phase. I am now opposed for the following reasons:
- To be meaningful a UBI has to be at a decent (survivable) level - say $450 per week in NZ (same as pension)
- The bill for a UBI would be around $70 billion per year - that's about $30 billion more than the current social security and welfare bill
- Given that lots of people would still be eligible for benefits (e.g. accommodation supplement) it is safe to say that the net bill for UBI would be in the region of $40 - $50 billion
- The trap people fall into here is assuming that the issue here is affordability. It isn't. Most of the extra expenditure would flow back to Treasury in taxes (GST, corp tax etc). The real issues are...
- ... Adding $40 to $50 billion of extra demand into the economy would be disastrous - increasing consumer spending by around 20% and blowing through our remaining carbon budget. We do not have enough 'stuff' and there is a real risk of creating inflation
- ... Giving $450 per week to wealthier people who don't need it would be political suicide - it would also lead to inflated asset prices / increased savings
- But, don't worry the UBI enthusiasts say - we can just increase tax on the wealthy to offset the UBI payment and reduce their consumer spending to prevent asset price inflation and free up goods for the UBI beneficiaries to buy
- Well, firstly, this is no longer a universal basic income is it? What we would be doing is taxing the rich to give to the poor. I'm all good with that but we don't need a UBI to do that
- Secondly, and this is the real kicker, UBI will quickly become an enabler for more low-wage uber-type jobs and high rents (noting that rents are capped by what people can afford to pay rather than any actual market theory). There is a reason that the tech giants love a bit of UBI - they see it as a way of turning labour into a more proftable resource
Oddly we still have a UBI for older folk and tax many of the poorer folk to fund this for wealthier ones.
A UBI would seem only to mop up the last few who aren't already receiving benefits after the pension, landlord subsidies, WFF etc...I'd expect if we did have a UBI it would have to replace *all* other benefits though.
Not arguing for it, just some notes.
To that list of drawbacks I’d add:
- a UBI is inherently inflationary for the reasons you point out above. It just encourages price increases to sponge up the extra $ in people’s pockets
- a UBI completely neglects the social and mental health benefits of collaborating with others in work. Sure, some jobs are themselves not great for society or mental health, but the answer is not to ditch work entirely.
A job guarantee funded by a currency-issuing government and administered by communities designing work to fit their needs solves both of these problems and is a far better way forward.
As usual all the posters on this article overlook the facts. If anyone out there is capable of logical inference then look at the actual situation.
As I've said time and time again it is the buying of houses by new immigrants and overseas investors that have pushed house prices higher.
For example, in my leafy suburb just outside the grammar zone I am surrounded by 7 townhouses which are owned by 'Asian' overseas owners or new residents from overseas.
And not too far away, around my sister's home unit, there are 3 units in a block of 6 that are owned by absentee overseas Asian owners.
All these houses are rented out to traditional New Zealanders who aren't new citizens or absentee overseas owners.
This reality must surely be repeated all over Auckland.
So, these facts are not economics 101 as they say, but economics primer 1.
I would request that all posters complaining about the causes of house price increases support their complaints with concrete evidence as I have done above.
Has everyone forgotten when some years ago, the sickness benefit was ditched and many people who are considered 'work ready' are in fact are limited to what they can do found themselves on the dole.
There are people approaching retirement seeking work, overlooked by an ageist job market.
Then there will only be left those who truly are unemployable
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.