Workforce reaching 'maximum sustainable employment'

Thursday, 8 July 2021

Finance Minister Grant Robertson weighs in after a hospitality union said there is no skilled labour shortage, it's just that the hospitality industry isn't paying workers enough.

ANALYSIS: Economists say the labour market is at maximum employment, or very close to it. But where does that leave the 100,000 people still on social welfare benefits?

ASB and ANZ economists have published updates this week saying that the country’s labour market is at capacity.

ANZ said it was “hard to escape the conclusion that New Zealand’s economy is already at or above maximum sustainable employment”. Surveys showed businesses rated trouble finding staff as their most significant concern, and that worry was increasing.

“Difficulty finding skilled and unskilled labour both hit record highs in [the second quarter of] 2021.”

* Unemployment data could push Reserve Bank 'back to square one'

The bank’s chief economist, Sharon Zollner, said the ratio of job advertisements to people looking for jobs was the highest ever.

But how can we be at capacity when in March there were 122,871 people on the work-ready benefit type, Jobseeker Support, up from 64,000 in March 2016?

While you might think of a workforce at capacity as being one where no-one is out of work, economists have a different view.

It’s the “sustainable” bit that matters.

When labour markets get very stretched, it puts pressure on businesses to pay more in wages, which can push up inflation.

The Reserve Bank has supporting “maximum sustainable employment” as part of its remit.

It refers to the unemployment rate that is consistent with its 2 per cent inflation target as “Nairu”, the non-accelerating inflation rate of unemployment. A report from 2018 put this at 4.7 per cent, but economists said it was now potentially higher than that, due to the disruption caused by the Covid-19 pandemic.

Zollner said the Reserve Bank did not talk about Nairu much any more because it could be incorrectly interpreted as a level of unemployment it “wanted”. It was instead a measure of the rate of unemployment that allowed for smooth growth – a dramatically lower unemployment rate could lead to a boom-and-bust scenario, or inflation issues that had worse unemployment outcomes in future.

“The Nairu could easily fall over the next decade if the economy eventually settles down to some post-Covid norm. But in gaps terms – the deviation of unemployment from Nairu, which is what matters for inflation, we only see things tightening from here, unless something comes out of left field and changes the economic outlook abruptly. This is the key reason for our assessment that wage inflation will be very strong over 2021,” ANZ economists said.

ASB chief economist Nick Tuffley said the Nairu rate had probably already been reached, but the unemployment rate was likely to fall a bit further through 2022.

Would we ever get to zero unemployment?

Econ Talks: Skills shortages emerge as net migration remains low, with more government policy changes to come. (Published June 4, 2021)

Inflation worries aside, it is unlikely the country could ever get to “full” employment.

Zollner said that while it was possible the next update on August 4 could show unemployment “a lot lower” than the current 4.7 per cent, there was also the potential for a significant mismatch being to blame for the pressure in the labour market rather than total absence of workers.

People might be in the wrong place or lack the right skills for an employer. That was probably more of an issue while borders were closed, she said.

Tuffley agreed: “You can also have a mismatch in where people are who are available to work [live] and where the work is. A lot of job losses have been concentrated in tourism and we have a lot of sectors like construction [and] agriculture that are pretty stretched. But it’s a challenge to have someone leave Queenstown and go to Hawke’s Bay to pick fruit.”

He said there would also always be an element of unemployment as people moved between jobs.

Zollner said if no benefits were available, workforce participation would increase. “That’s the poor country model – work or die.”

But that was not where most liberal democracies wanted to position themselves, she said.

Infometrics chief economist Gareth Kiernan said it could be possible for another 20,000 people to shift out of unemployment into the workforce and an extra 35,000 who were not participating to join the labour market.

Before the global financial crisis, the unemployment rate dropped to 3.4 per cent. But at that level, it brought other problems.

“Employers were really struggling to find people who were suitable for roles and work-ready,” Kiernan said.

“There’s an element of people who have very little work experience and don't know what it means to turn up for a job regularly and on time, without being stoned or having a hangover … In some cases you’re working with an intergenerational problem of people growing up in a family where being unemployed was the norm. It’s very hard to turn that sort of thing around.”

Economist Rosie Collins, of Sense Partners, said no-one could ever be thought of as truly “unemployable”.

“It’s much more about building the right skills for the jobs and ensuring labour market policies are in place to create as many opportunities as possible to help people into the labour force.

“Reducing wage scarring is also important. Generally the longer someone stays out of work, the harder it is to re-enter, and you tend to earn less when you do. That makes active labour market policies quite important, something we’re not so flash at by OECD standards. They could be an important opportunity for New Zealand as we age.”