Closing the gaps

By Donal Curtin

Tuesday 1st June 2004

Employers are screaming for staff, yet we've still got 4.6% unemployment. What gives?

Last month we looked at how low unemployment could, in theory, fall in New Zealand without setting off inflationary alarm bells, and discovered that - as in many other countries in the 1990s - our "roadblock" rate has fallen. We've got unemployment down to 4.6%, and it's been as low as 4.4%, without ill effect: there hasn't been an explosion of wage claims or price rises. And the likely explanation appears to be that our labour market is doing a better job than it used to at matching up people with jobs.

But why are we lumbered with the 4.6% rate we've still got? Explanations broadly come in two flavours - "cyclical" and "structural".

The "cyclical" one is straightforward: this argument goes that there's still unemployment because business activity isn't strong enough to generate enough hiring demand. But that explanation can be quickly knocked on the head. There's ample evidence that employers would dearly like to take on more people, but can't get them.

For example, the NZ Institute of Economic Research has been running its Quarterly Survey of Business Opinion since the 1960s, and in its latest press release they note, "This [March] quarter, 23% of firms reported labour as the single factor most limiting their ability to increase production or activity - the highest percentage since 1974. Labour constraints exist across all sectors. The percentage of firms reporting labour as the most limiting constraint to expansion is at its highest level since the mid 1970s in the building, manufacturing and service sectors".

The ANZ's job ads indicator, which combines both newspaper and internet job ads, is currently up 6.5% on a year ago, providing yet more evidence that labour is in demand.

In passing, this makes Statistics New Zealand's handwringing observation that "paid employment is no longer as accessible as it was", look distinctly odd. All the statistical and anecdotal evidence says there's no shortage of "help wanted" signs in the windows.

So that leaves the "structural" line of explanation - the idea that there is some kind of institutional or behavioural blockage preventing willing employers and willing employees from shaking hands on a deal. Indeed, there are some clear patterns in the unemployment data suggesting "structural" issues. The most notable is the ethnic breakdown of the unemployed. Maori are disproportionately affected: they have a 10% unemployment rate, and Pacific Islanders aren't far behind (8.8%). People of European descent, on the other hand, have a 3.2% rate, which must be close to the "full employment" ideal. There are other patterns in the data, too, notably the higher unemployment rate for the youngest entrants to the labour force (14.3% for 15-19 year olds), but the ethnic split is clearly the most troubling one.

Fortunately, there's an explanation for this that avoids dark alleys of speculation about employer racial discrimination or Maori attitudes to work. In 1999 Simon Chapple, then working in the Labour Market Policy Group of the Department of Labour, published a paper on a parallel topic: strictly speaking he was looking at employment outcomes for Maori, rather than unemployment outcomes, but his explanation looks sensible. Trying to explain why a gap had widened between Maori and non-Maori employment rates, he found ethnicity per se had little or nothing to do with it. Rather, "Maori were located in jobs that received a negative labour demand shock as a consequence of technological changes in the pattern of labour demand, or because of the liberalisation and stabilisation of the New Zealand economy over the 1985-1992 period".

The old, blue collar industries took a dive, and a lot of Maori happened to be employed in them.

As Chapple observes, adjustments to a big labour demand shock take time to achieve. A generation that had the right skills for the meatworks isn't going to be ready overnight for investment banking. It'll come, though - especially as today there are stronger financial incentives to invest in skills; back in the days of wage controls, fixed relativities, and steep progressive rates of income tax, there wasn't a lot of dollar-driven reason to spend the years grinding out a degree. Today, there is. The skills we need are not aligned as closely as they ought to be with the skills on offer (hence a good slab of that remaining 4.6% unemployment), but my bet would be that we're closing the gaps.

One more thing, though. Yes, I rubbished the "cyclical" explanation of unemployment earlier: it's not the issue in the New Zealand economy of 2004. But you may be surprised at the extent to which sustained economic growth will erode high unemployment rates for disadvantaged groups. In the US, where it's safe to say there is a degree of employment discrimination going on, the unemployment rate for black males was 14% in 1992, at the start of the long Clinton boom. By 1999, towards the end of America's longest peacetime expansion, it had fallen to 6%: there were nearly half a million fewer black men on the unemployment rolls.

Feel free to share these statistics with the lamebrains who told the government's Growth and Innovation Advisory Board that they can't see the point of economic growth.

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