Jobs data points to a divided NZ and we need to take notice
Rising rate of unemployment will require policy responses that unite
There were some bad omens in the labour market statistics if we look beyond the headlines. The key focus of commentary on recent labour market figures centred on the unemployment rate rising, perhaps slightly more than expected, with further rises expected over 2024.
Wage growth — one influence on inflation — moderated a tad, a consequence of capacity pressures easing in the labour market, but remains elevated and inconsistent with 2 per cent inflation.
That’s all broadly in line with the Reserve Bank’s February forecast, and little new news.
I’ve said several times I think one of New Zealand’s biggest challenges is division and I note the head boy at Rotorua Boys’ High School recently called out Kiwis over divisiveness. We should take notice when kids, or should I say a young adult, start calling New Zealand out.
Division is both economically and socially corrosive. It makes economic resets more difficult to navigate. We have a lot of it, on multiple levels. Rural versus urban, young versus old, the treaty debate, wealth inequality, debates over capital gains tax, landlords versus renters . . . it goes on.
Division drives growth on the political periphery, at the expense of the centre, and we are seeing that in political polls.
Digging deeper
The unemployment rate for Pasifika has gone from 5.9 per cent to 9.4 per cent in a year, with 7,000 more Pasifika people unemployed. The under-utilisation rate (those unemployed or underemployed who want to work more hours) for Pasifika has gone from 12.7 per cent to 17.5 per cent. They are sharp moves.
The unemployment rate for Mā ori has moved up 1.1 percentage points in a year, the same as for Europeans, but the unemployment rate is 8.9 per cent versus 4 per cent.
There are 11,000 more people aged 15-19 unemployed compared to a year ago, with the unemployment rate for them going from 16.9 per cent to 23.1 per cent. That is 41,400 people. The under-utilisation rate for that age group is almost 50 per cent.
The unemployment rate for 20- to 24-year-olds has jumped from 6 per cent to 9.8 per cent in the past year. There are an additional 13,500 people aged 15-24 not in employment, education, or training compared to a year ago. That risks becoming a structural problem and needs quick intervention. Female unemployment is rising faster than male unemployment. The construction sector has shed 10,000 jobs in the past year. That is just the start.
These trends are nothing new when the labour market goes from being strong to weak. Across cycles we see the same pattern where some portion of society or sector bears a greater share of the adjustment.
The difference this time round is the backdrop: division.
Lessons from the previous cycles
The unemployment rate rose around 3 percentage points during the global financial crisis (GFC) and inflationinduced domestic recession cycle of 2008 and 2009. It peaked at just over 6 per cent.
The unemployment rate for Mā ori and Pasifika rose to more than 14 per cent and 13per cent respectively, basically doubling. The New Zealandwide unemployment rate did the same, only it was coming from a lower starting position.
The unemployment rate for those aged 20-24 hit double digits after the GFC and it did not consistently turn single digit until 2015. The unemployment rate for those aged 16-19 rose to more than 25 per cent.
We are already knocking on the door of those levels and the labour market cycle is only just beginning.
The Reserve Bank is projecting the unemployment rate will rise to 5.1 per cent. The Treasury’s expectation is similar. That is another 0.8 percentage points of a labour force approaching 3.1 million, or close to another 30,000 jobs lost.
Where’s the peak?
Will unemployment peak at just over 5 per cent, though — a rise of 2 per cent? That rise is in line with the Asian Crisis late 1990s cycle but below the 3 percentage points rise in the unemployment rate during the GFC/ tight monetary conditions-induced cycle of 2008/09.
Both the Treasury and Reserve Bank recently pointed out the productive capacity of the economy is weaker than previously thought. Multifactor productivity dropped 2.2 per cent in the year ended March 2023 and we know employment and hours worked are far exceeding growth in the past 12 months. That will turn as cost-cutting intensifies.
Fixing the productive capacity of the economy implies a more elongated economic adjustment than the two previous cycles; three if you include the sharp 2000 recession.
The final word
I am sceptical unemployment will peak at just over 5 per cent. The economy needs sustained economic weakness to get inflation to target, with the latest non-tradable inflation read of 5.8 per cent very broad-based, and we have a structural repair job across the economy at the same time.
According to the household labour force survey, the number of people employed in construction is 40,000 above pre-Covid levels, 60 per cent higher than a decade ago, and the construction downturn is only going to intensify over 2024.
Public administration and safety employment has risen 70 per cent in a decade and 30 per cent (45,000) in five years. Public sector cuts have only just started.
Higher unemployment will require policy responses that support those in need and invest more in skills, training and education.
The greatest challenge of rising unemployment, though, will be the pressure it puts on an already divided society and economy. This Government is going to have to find some policies that unite, because the business cycle is going against it and that risks fuelling even greater division and extremism.