Why Key is right, and wrong, about job numbers – and why it matters

Prime Minister John Key’s claim that New Zealand has more employed people than ever is true – so far as it goes.

Mr Key devoted a fair chunk of his post-Budget speech in the House to the issue, noting that, “yes, the unemployment rate in New Zealand is higher than we would like, at 6.7%,” but also saying that “more people have jobs in New Zealand than ever before in our history”.

“More people are employed as a percentage of the population in New Zealand than in Australia … there are a touch over 50,000 people on the unemployment benefit in New Zealand at the moment, which is 14,000 fewer than 18 months ago.”

He also made the – slightly different, and more important – claim that the rate of employment, or the proportion of the eligible workforce actually in work, is at historically high levels.

The first claim, about the actual number of people in work, has been seized on by a few Labour-aligned commentators as being true but largely meaningless, the higher numbers in work being simply a reflection of a larger population.

That is true. The rate of employment, though, is another question entirely – and this is a more interesting and more economically important – story.

New Zealand does have a very high employment rate – better than almost anywhere else.

But the significance of this goes beyond some petty political point-scoring. It has economic implications for growth and also political implications for the government, and these are less favourable.

The proportion of the eligible workforce which actually has work has not fallen much over the past few years. It took a hit, as you would expect, not long after the country went into recession at the end of 2007.

But, as work from Bank of New Zealand economists has shown, the percentage of New Zealanders actually remaining in work – 64.2% of the eligible workforce – is better than almost anywhere.

New Zealand is about the same as Australia, which is not quite the same as what the prime minister said, and Germany has a higher rate.

But everyone else is lower.

“The New Zealand employment rate has settled well above that seen following the 1998 recession and miles above that which was experienced following the early-1990s recession,” Bank of New Zealand senior economist Craig Ebert says.

The country’s early 1990s employment rate – about 55-56% of the working-age population – is about where the rest of the developed world is.

“New Zealand, in contrast now has one of the highest employment rates in the world – testimony to its relatively high participation rate, coupled with a high rate of placement into jobs,” Mr Ebert says.

The reason is, he says, complex, but the country’s regulatory settings are a big factor.

“You’d have to say it’s the policy settings in the labour market, its flexibility and some of the other reforms that have come in and helped that,” he told NBR ONLINE.

“What has stood us in good stead in the recession, and particularly in the global financial crisis, was there were mechanisms in the market which gave the right signals.”

The implications of this though are somewhat sobering.

It means the capacity for a pick up in economic growth is more limited than it would otherwise be.

Normally, there would be a large “spare capacity” of labour to be picked up and help fuel growth as the economy picks up steam.

Not this time, which means inflation is going to become an issue much earlier in the cycle than in previous recoveries.

Nominal wage growth is already hitting to around normal levels, Mr Ebert says.

“If the jobs market was really as slack as the 6.7% jobless rate implied then we’d expect wage growth to be running below average.

“The difference is important, as it gels with our fundamental belief that the New Zealand economy has less slack than most people appreciate.

"And that it won’t take much in the way of expansion before inflation becomes a problem all over again.”

While people might hope for the kind of sharp rebounds in growth New Zealand has seen coming out of the last two downturns, he says, this would “run us into an inflationary brick wall”.

The government appears aware of this.

Economic Development minister Steven Joyce told the Grant Thornton/National Business Review post-Budget breakfast on Friday he expects to see skills shortages emerging over the next 12 to 18 months, and told businesses they need to start planning for this now.