Recent unemployment is entirely cyclical?

The Treasury has just released a crop of Working Papers. Great to see and will read them with interest.

I had a quick read through the first one, which is on “Recent Unemployment Experience in New Zealand

It’s an interesting paper and worth a read. But they reach a surprisingly strong conclusion, where I think a more nuanced interpretation is required:

“… the rate of New Zealand unemployment can be explained entirely by economic growth outcomes, and do not seem to reflect any structural change in the labour market. This suggests that there are not any impediments to the rate of unemployment falling back to levels that existed in the mid- 2000s.”

I am a little surprised at this rather strong conclusion, as this paper did not explore the reasons for job losses.

The 2013 Census shows that jobs losses have been widespread across regions and industries. This was a combination of:

  • structural (eg hollowing out of manufacturing, some of which may never come back)
  • cyclical (eg construction downturn, which is likely to come back).

The recovery since then has also been uneven (services and metro city dominated). This could indicate some difficulty in getting the unemployment rate back to the lows in 2000s – especially as those who lost jobs may not have the skill set to match the skills for the new jobs created in the recovery.

I would suggest the Working Paper is a good start to look at the evolution of the unemployment rate. But they need to do work on understanding the job losses, and which are likely to come back and what skills may be redeployed elsewhere to reach a convincing conclusion.

I am a big fan of these Working Papers and really enjoy reading them. This is not a criticism of the work, rather a suggestion to extend it.

  • http://tvhe.co.nz/ Matt Nolan

    Indeed. A regional analysis would be a neat place to look. My impression is that there may be a structural issue in the labour market somewhere like South Auckland, which is exacerbated by a lack of mobility. Aggregate figures can hide these types of stories.

    • Shamubeel Eaqub

      Agree re South Auckland, but also more broadly across regions. My superficial analysis of the census employment data suggests some big issues in many provinces of NZ, re ‘backward’ looking industries and poor performance within those industries (eg more manufacturing than the norm and worse job losses than in manufacturing than the national average).

      Labour mobility is an important issue. Jacques Poot touches on it in a paper yet to be released, but I would love to see what it shows. For regions like Southland, which have positively surprised on population and employment growth, have done so with international migration, rather than regional migration.

      I am also not sure how to think about labour mobility in the context of an international or at least Australasian labour market. Many people do move, but those who do often choose to to go Australia than another province, given the economic benefits are so much larger.

      • http://tvhe.co.nz/ Matt Nolan

        Interesting. Thinking about it in terms of gravity theory, could it be that Australian cities simply have more of certain “types” of New Zealander’s, and as a result attract those types from New Zealand.

        The large ex-pat communities in Australia are fully blown communities, and may offer more to people who are moving from poorly performing areas than the strongly performing parts of New Zealand. Could it be that Brisbane feels more at like home for people from the rural North Island and South Auckland than Southland or Auckland City do?

        I am looking forward to the paper, this is a really interesting issue!

  • http://brennanmcdonald.com/blog/ Brennan McDonald

    There has been substantial structural change in how jobs are found, kept and lost. This is a technological change / creative destruction story. Slow labour market adjustment times (decades!) are perfectly explainable by lower capital per worker than other countries – NZ firms are smaller and led by technophiles thus less likely to be capable of managing substantial business process changes…even poor housing affordability can be explained by the horrible bookkeeping of your average builder/contractor….I should find Aaron’s post that looked at this…

    • http://tvhe.co.nz/ Matt Nolan

      I think you are putting a bit much weight on certain hypotheses here – the labour market recovery hasn’t significantly lagged the economic recovery in New Zealand.

      Changes in matching, firm structure, and the relative rates of destruction vs creation are major points – don’t get me wrong. But the initial premise of a slow labour market adjustment isn’t a stylized fact for NZ – it is for the US, but we are very very different.

      Yes we have low levels of ICT uptake, but then we also have to ask “why are participation rates in NZ so high”. Low capital per worker doesn’t tell us anything about employment rates in of itself, it only tells us about output per worker and real wage rates.

      We need to be careful tying too much to a single hypothesis such as “NZ management sucks” – our scale, distance from market, and tax structure are also very important factors. And we need a clear idea of “what” is causing a series of stylized facts before we can even say whether something is good or bad – it would not be hard to make a narrative where NZ’s low productivity is actually seen as a policy choice where the low productivity is a “desired” outcome!

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