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Friday, July 22, 2022

Oliver Hartwich: DISASTER - The truth behind New Zealand's full employment


What does an unemployment rate of 3.2 per cent have in common with apples rotting on the trees in orchards?

Both are signs of an overheated labour market.

There is one market that seems to do well despite the New Zealand economy likely to slip into recession, house prices collapsing, and cost-of-living pressures mounting. That is the labour market.

There is a job – or two – for everyone in New Zealand. By normal standards, New Zealand has full employment, and then some. It is a jobseekers’ paradise with employers queuing up for candidates.

This seemingly positive story, however, has several irritating origins and many unpleasant consequences. Unpacking these issues reveals that tight labour markets are a cause for concern, not celebration

The government and the Reserve Bank are two important drivers of labour demand.

In 2021, New Zealand’s public sector employed around 436,700 people, 18.9 per cent of the country’s total workforce. Five years earlier, there were only 384,000 public sector employees.

During that period there was thus a 13.7 per cent increase in employment in the public sector, compared to an 8.9 per cent rise in private sector employment.

But it is not just the government employing more people, both relative to the private sector and in absolute numbers. The Reserve Bank’s loose monetary policy has also contributed to growing labour demand.

Over the Covid crisis, the New Zealand’s central bank increased the monetary base from NZ$14.5 billion in February 2020 to NZ$53.9 billion today. This monetary stimulus worked its way through the economy. In its latest release, the Monetary Policy Committee stated that “spending and investment demand continues to outstrip supply capacity” and therefore, consequently, “employment remains above its maximum sustainable level.”

It was an implicit acknowledgment from the Reserve Bank of having overstimulated the economy – and the labour market with it.

So, as far as labour demand is concerned, both the government and the Reserve Bank have played a role in shifting it upwards. All other things being equal, this would have increased employment and wages.

But the government has not just altered the demand side of the labour market. It has had a big impact on labour supply as well.

Again, Covid played a big role. For two years, New Zealand kept its borders shut. This made it hard for New Zealanders overseas to return home. It also made it near impossible for new migrants to move to New Zealand.

In the twelve months before March 2020, New Zealand recorded a net migration intake of 91,680 people. Since March 2021, the net intake has been negative. The latest available data for February 2022 show a twelve-months net loss of 7,600 people.

Within these figures, there are international students no longer coming to New Zealand. In previous times, such students would have worked in hospitality or stacked supermarket shelves. More importantly, when they graduated, many joined our skilled workforce.

The figures also reflect potential migrants whose visa applications have not been processed because of backlogs at Immigration New Zealand.

They also reflect that New Zealand is no longer regarded as a desirable destination for migrants. If nurses cannot easily gain residence in New Zealand, but they can in other countries, why would they move to New Zealand?

Still another way the government reduced labour supply was through the social security system.

There are reasons to believe the government made it easier to remain on benefits by reducing work incentives.

At least that would explain why, from March 2017 to March 2022, the number of people on benefits increased from 278,200 to 348,300 – and the number of people on the jobseeker support, from 119,400 to 177,600.

In sum, it appears as if government has shifted the labour supply curve downwards while simultaneously shifting the labour demand curve upwards.

In basic economics, what one would expect in such circumstances is a higher quantity (i.e. people employed) and a higher price (i.e. higher wages). And that is indeed the unsurprising outcome: unemployment is down, while wages are increasing. That said, real wages may still fall because of inflation.

Anecdotal stories abound of employees flipping jobs every few months, typically pocketing a five-digit increase in pay. Or, as the New Zealand Herald recently put it, “$90k is the new $70k”.

The Reserve Bank is working hard to contain the damage it has done by increasing its official cash rate. However, even with such increases, it will struggle to bring the labour market back under control.

A recent MYOB poll revealed that one in five Kiwis are considering leaving New Zealand for greener pastures. Even if only a fraction of them actually depart, it will punch another hole into the labour market’s supply side.

Meanwhile, the 2022 Expat Insider Rankings revealed that New Zealand is no longer regarded as a dream destination for international migrants. It is now ranked the second-worst destination for living and working abroad. Again, this does not bode well for the supply side of New Zealand’s labour market.

New Zealand could find itself in a situation in which, even in the face of a serious economic recession, the labour market could remain tight. With migrants avoiding the country and Kiwis leaving it, labour shortages will continue to plague New Zealand businesses. They will also hamper any prospect of economic recovery.

Meanwhile, many more apples will rot in New Zealand orchards. Many more hospital operations will be postponed. And many more hotel rooms will not be made. New Zealand has crippled its labour market.

Only economic illiterates would celebrate this disaster as full employment.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.

3 comments:

Anonymous said...

I like the last comment.
" Only economic illiterates would celebrate full employment"

Would those illiterates happen to be running the country and currently employed by the Labour Party?

Terry Morrissey said...

Shifting the unemployed into public sector employees is a very cunning move. It also shows why the public sector is showing less efficiency. Take a line out of WINZ and shove them into Kianga Ora. Take the next line and shove them into Waka Kotahi. No qualifications required. Upgrade their offices. Problem solved.

Unknown said...


Definitely leaving, in September. We returned to NZ from 4 years of exceedingly good earnings and bonuses (logistics, and project management) thinking it was the right thing, the best thing to do. Arrived in 2nd lockdown lunacy and soon after realised how wrong we'd been. We both have jobs that are in demand but our health choices mean we can't or the materials aren't there to do the job?! We are Europe bound with plenty of cash, a home already purchased in an amazing place that isn't living with a covid hangover.