Mar 12: Weak labour market, what’s to be done?

Although today’s labour market release made sense – it didn’t stop it being negative.

We saw the unemployment rate rise – which was statistic payback for the decline in December, that was due to a drop in the participation rate, which was due to a bunch of seasonal hiring not occurring in the December quarter and as a result those potential employees not entering the labour market 😛

Furthermore we saw hours worked remain weak.  This is consistent with the mix of a high exchange rate and low growth in output – with the dollar reducing the relative price of capital to labour.

All very exciting.  So what should we do.  Do we need to “get the exchange rate down”, “increase fiscal spending”, “print money”.

Well, I’d go back to the traditional economic view and ask “is the interest rate appropriate”.  Recent data is suggesting, in combination with moves overseas, that the official cash rate should be cut.  This is not an example of policy failure – it just shows us how exposed and vulnerable New Zealand is to the financial volatility overseas.

Sadly, as a small open economy this is just the way things are – and the best way we can deal with it is to have an inflation targeting central bank, a floating exchange rate, and a government that is willing to run countercyclical fiscal policy (so targets a balanced budget when they forecast the economy will be back at “potential”).  We have all these things, which has really helped us in recent years.

  • Carter

    The chief ANZ economist was madly touting that interest rates should go upa few weeks back. Luckily the officila cash rate remained static.
    I agree governments don’t make good pickers of winners in the economy but that doesn’t mean they can turn their backs on the obvious. Like why would you introduce another tax like the ETS into an economy during a depression?
    Why would you let your 4 state owned power cos run amuck with escalations in the price of power ?(Now we pay twice the KwH price they do in the USA.
    Why continue to gouge so much goverment taxation out of alitre of fuel?
    Why continue to pay benefits for no work at all to people merely because it is fiscally chaepaer than to organise them to do work for the money ?
    Money for nothin. NZ anthem should be that old Straits song. Haaa
    Maybe John Key and Steven Joyce don’t care that youth unemployed and untrained doing nothing will cost this economy much more if they continue with no ideas no strategy.
    I’ve lived here over 50 years and yet NZ still remains a primarily agricultural bumkinland.
    Its entreprenuers happy to sell as soon as an offer comes in from overseas.
    There will be no Nokias or Ikeas here because thed sellout !

    • “The chief ANZ economist was madly touting that interest rates should go up a few weeks back.”

      I believe they were stating two things which were entirely reasonable:

      1. At the current cash rate, there is upward pressure on interest rates due to funding pressures
      2. The cash rate is likely to rise

      This have changed, but their story is pretty consistent 🙂

      “Like why would you introduce another tax like the ETS into an economy during a depression?”

      The ETS was to cover a liability we have agreed to take on – we would have to pay for it one way or another.

      The government doesn’t run the economy, in the slightest.  It is unfortunate that people are unemployed, and massive policy failures are in part to blame – but these are failures overseas, not failures of any of the governments New Zealand has had in recent years.


  • Carter

    ANZ predicting the cash rate was likely to rise is one thing, but they went on a crusade through the media promoting their prediction while other economists were not so brash and said it could go either way.
    You say Matt you’d like to see the official cash rate be reduced which I agree with. the governor didnt want to create any market activity so i believe probably did the right thing as much as you and I would like it lowered. 
    We disagree on the ETS as i see it as an actual economic liability govt have stupidly agreed to
     they should have stalled on it at least and certainly not have been 1st to adopt.
    The unemployment increase is not acceptable among our youth. Government merely borrowing money to dole out to 83000 who are not even in any form of training is a recipe for social disaster which of course will have “an Economic Cost ” far greater later on.
    20,000 places in one of this govts youth training job ntiatives doesnt come any closer to dealing with the numbers than Labours small time apprenticeship training increases of 5000 one year and another few thousand the next.
    No training=no job=countries cost.

  • Carter

    So you say NZ govts have not made policy failures just overseas govts have ! > are you crazy ?

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