Complex trade-offs of full employment
In theory New Zealand has hit full employment. At 3.9 per cent, the unemployment rate is the lowest in 10 years and below the Government’s 4 per cent target. But what does that really mean? Not everyone has a job and many of those in work still struggle with job security and low wages.
Full employment — or the more technical term “maximum sustainable employment” — is essentially the lowest level of unemployment an economy can cope with before it starts cause problems with labour shortages curbing growth, and wage growth pushing inflation too high.
That makes it an important value judgment. It is a call that will be in the spotlight as the Reserve Bank looks to include it explicitly in its monetary policy settings next year.
Early last year Labour promised to reduce unemployment to 4 per cent in its first term.
The economy has achieved that sooner than expected but without much uplift in wage growth. Perhaps that means the 4 per cent target is now too high. But what about business owners who are complaining of skills shortages and rising costs.
Overall, low unemployment was a good problem to have, said NZIER principal economist Christina Leung.
Although labour shortages were starting to constrain growth and add costs in some sectors, it was preferable to a situation where there wasn’t enough demand and people were losing their jobs, she said.
Meanwhile, we were seeing the casualisation of the workforce with the rise of contract work and jobs like Uber driving, Leung said. “This flexibility is a double-edged sword,” she said. It was great for people like students, who weren’t so worried about job security, and it allowed employers to take more risks in hiring staff. “However, for workers seeking certainty of income, that casualisation is not as favourable,” she said.
There were solutions to labour shortages such as immigration, upskilling, or finding more workers in under-represented demographics such as older people. But this required longer-term thinking about what skills New Zealand required. Finance minister Grant Robertson has recognised this and put a lot of emphasis on a long-term strategy with the establishment of the Future of Work Commission.
But the Reserve Bank now faces an interesting call next year on where it sees the maximum sustainable rate of employment sitting in the context of its inflation challenges. When employment was added to the Reserve Bank’s monetary policy considerations it was generally assumed it would put extra downward pressure on rates. But if the job market gets much tighter then, in theory, employment considerations could start to put upward pressure on interest rates. It seems unlikely (and undesirable) we’d see the Reserve Bank enacting policy to create unemployment. In the end the concept of full employment is a choice — a trade-off based on how much inflation pressure the Bank is prepared to tolerate. There is no doubt the tight labour market in some sectors is creating problems and risks. It’s a complex dilemma.
“Maximum sustainable employment is determined by a wide range of economic factors beyond monetary policy,” Reserve Bank Governor Adrian Orr said when the new Policy Targets Agreement was announced in March. He and his team have clearly given this a lot of thought. Next year we will see how they put it into practice. And no doubt we’ll all watch closely for signs of that long-overdue wage growth.