Persistently high unemployment doesn’t mean the government should spend more

With the unemployment rate coming in at 6.8% in the June quarter, the unemployment rate has been “persistently high”.  There are three broad mechanisms we can “blame”this on:

  1. A “supply shock” across the economy (eg high fuel prices, financial crisis)
  2. A requirement for a reorganisation in the skills needed in the labour market (eg the permanent part of the drop in demand for NZ retail, NZ manufacturing)
  3. A “lack of demand” (insufficient monetary policy loosening).

We can all paint our own pictures that appropriate blame between these factors – but ultimately I’m not going to do that.

Instead I will point out that there is no where here that arbitrary government spending helps – and then I will point out three ways that government policy can “automatically lean” against these problems.

You see, an increase in government spending based on debt stimulates “demand” insofar as monetary authorities do not respond to it.  They do not help to buffer NZ from supply shocks by creating new goods and services, they just work on that “demand side”.  So as long as our central bank is doing a good job (and our central bank is doing a pretty good job for all intents and purposes), there is nothing the government can add here.

However, what things can the government have in place that help out:

  • A safety net that helps to limit the welfare cost of losing your job
  • Countercyclical investment:  So the government invests in infrastructure when it is cheap and easy to finance – they stick to a “long-term plan” of infrastructure … just time more of it to happen during lean times.
  • Training and skill guidance:  When there is a “reallocation”, wages will go up more in some sectors than others to signal there is scarcity – however in the modern economy people need a skill set to do this, and investing in this is a risky endeavor.  During a slow down this problem is especially acute – as firms are unwilling to invest in building employees skills.  As a result, if the government is going to spend, this seems like an appropriate place.  Such a view should be seen as structural policy, and any help during a recession would be automatic rather than legislated at the time.

Lets not be like policy makers in other countries where we fight over budgets without thinking about “why” the policies will work.  Lets take this framework and run with it – like we suggested on this blog in 2009 (*, *) … 😉

3 replies
  1. JC
    JC says:

    I see in the survey that youth unemployment went down and that the biggest factor in the overall rise was the loss of female jobs (15800) in Canterbury.. mainly health, education and social services. That youth drop likely indicates an improvement in confidence in some sectors.. and maybe that youth have spruced up their act as potential employees.

    Also, Canty employers have employed 800 unemployed in anticipation of the rebuild with another 1000 jobs being offered in October.

    Looks to me like things are going about right without too much Govt interference.


    • Matt Nolan
      Matt Nolan says:

      These quarterly movements are incredibly uncertain – I’m not a fan of “explaining” through the quarterly numbers too much, as its essentially lies since most of the movement will reverse out the next quarter. Remember this is a sample, not a population.

      Yes the Canterbury numbers have increased more slowly over time than many would expect, and yes youth unemployment is down from a random high level a year ago – but neither change is “significant” in the sense we can confidently say that it wasn’t actually zero and our figure is wrong :/

      A single quarter’s data is given too much credence by people, as they want answers that do not exist – we need a pre-existing story of what is going on, based on all the other economic indicators, before we can even interpret the labour market data!

  2. Eric Crampton
    Eric Crampton says:

    Earthquake would have hit at just the right time, idle resources sitting round and all. Shame so many of them are still sitting idle. (grumble moan)

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