Matt Nolan

June Labour market preview: Employment and hours

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Next week we have the labour market data – an incredibly important data set when trying to figure out what happened over the June quarter.

While most other economists will be talking about their picks for unemployment etc (Note: Unemployment in the 4’s will be a concern), I thought I would discuss some of the things we should keep an eye on whenwe all try to analyse the data next week 🙂

On that note, the Economists View blog discussed some of the issues that have seen employment and unemployment act relatively sluggishly in the face of both economic slowdowns and accelerations over the last decade.

Fundamentally, this article states that although employment and unemployment haven’t fallen sharply as the economy slows – the problem of “underemployment” has worsened.

This means that there are people who want to work more hours out there – but they can’t get the work.  Compare this to unemployment, which is people who want to work, but can’t find a job.  The argument is that firms are less willing to fully sack people, because of the higher level of human capital investment that needs to be made in modern times.  However, as firms can be flexible with hours, when the heat comes on they merely cut down the number of hours each employee works.

If we feel that this is also a good description of where the NZ economy has moved, we will want to keep an eye on what happens to the QES hours worked series on Monday!

This point matters for two reasons.  First is the fact that their is a social cost from periods of falling labour utilitsation.  If we don’t see unemployment rise by much we might assume that this cost is currently not important – however, that ignores that many of the same social issues that stem from unemployment also stem from “underemployment”.  As a result, if unemployment rises to 6%, society may be worse off than it was back in the 90’s when unemployment was somewhere around 10%.

Furthermore this point matters from a demand side perspective – if peoples hours are getting cut, so are their incomes, which will hurt “aggregate demand”.  A sharp fall off in hours worked would convince the RBNZ to move forward with its easing program, even if unemployment remains small.

Ultimately, we have to realise that we can’t just take one stat from the three employment releases (QES, LCI, HLFS) and state that it gives us the full picture of where the labour market will head.  A good analysis will pay special attention to hours worked and the participation rate, as well as the traditional unemployment measure.

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  • But could this reflect workers choosing to work less and value their time more? In my opinion 40 hours a week is “overemployment.”

    Why work 40 hours at a warehouse when you can work 30, still get by and save (albeit buying a little less crap), and spend 10 hours being creative?

    I know a lot of people with degrees working jobs that just don’t pay them what their time is worth. So they cover their basic needs and do something else the rest of the time (like write a blog).

  • “Why work 40 hours at a warehouse when you can work 30, still get by and save (albeit buying a little less crap), and spend 10 hours being creative?”

    The individual is in the best place to decide this. I realise that there is difficultly when we are only given discrete choices (eg work 0 or 40 hours), as your “best choice” is not avaliable. However, if you choose to work 40 hours instead of zero you are saying you prefer it.

    “I know a lot of people with degrees working jobs that just don’t pay them what their time is worth”

    Here it depends what you mean by worth. If the person is working they must be paying him/her at above his/her reservation level – so it is worthwhile for them. If you are making some sort of normative judgment that they are not getting a fair piece of the value they create from their work then there must be some reason for it (eg the employer has too much power in the bargaining process) – however it is still better than the next best alternative.

    The way society is at the moment I think that the choice to work is relatively “voluntary”, and if people are willing to take lower pay they can often get more flexible hours. As a result, I’m think that current labour market arrangements are relatively optimal.

    As a result, any fall in hours worked will more likely imply a change in labour demand, instead of a change in the fundamental preferences by workers. If labour hours rise all the economists will start saying that people “have to work” in order to pay their bills – although this may be the case at some level, it would also imply that labour demand is not waning, which when looking at inflation etc is the more important point to focus on. Hopefully the inflation adjustment of benefits etc will be sufficient to help the poorest people maintain the type of standard of living that we as a society believe that everyone should have at minimum.

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