There continue to be no massive shocks hitting the New Zealand labour market. The actual state of the labour market and the economy has been obscured by many commentators’ obsession with the unemployment indicator, rather than employment indicators.

There has been a steady decline in employment growth since 2005, and there are now some signs that this decline is bottoming out.

Total employment in March 2009 was 2,173,500, which was 16,600 more than in March 2008. Now, 16,600 is not quite as many as the increase in people available for work, thus the number unemployed increased. However, these figures do not indicate a rapid drop into a black hole.

Annual employment increases have been steadily declining since the increase by 38,000 two-and-a-half years ago, and over the last year have averaged 19,400. The 16,600 is just slightly less.

More recently there have been two parts to the economy: Auckland Region with a fairly strong employment decline, and the rest of the country which continues to grow reasonably well. In the year ended March 2009, employment in Auckland contracted by 30,000 whereas the change for the whole country was +17,000. This means that employment in the rest of the country grew by 47,000 people – strong employment growth indeed. Especially when you realise that the net natural increase in the population is about 30,000.

Clearly, this is further evidence of the existence of two economies: boom-bust Auckland and steady-as-she-goes rest. Perhaps, the Super City tag may need to be re-visited. It is also clear that the engine for the growth of the New Zealand economy lies elsewhere. Without doubt, the new guardians of the Auckland metropolis have some work to do to earn that Super City tag they covet.

Another snippet is that in the finer detail the job losses are mainly contained in some manufacturing previously damaged by the monetary fluctuations (wood-based, machinery etc) and the finance sector that caused it.

There is already growth in food processing and manufacturing; in construction and even in the trades. There is strong growth in business services, presumably to prevent damage from the international ‘flu, and preparing for a recovery. There is also growth in employment in education, which is hopefully being targeted at upgrading skills for an early recovery. Some of the other social and personal services are also growing to carry communities and consumers along with the turbulent times.

What about employment in government administration? Here, the answer is zero-point-zero change. The March HLFS must have been before the effects of the activities of the “mini Razor Gang”. We hope it stays a razor and doesn’t become a hatchet. Otherwise the Government could undo the good work of the rest of the economy and generate a deeper recession. Such a ruthless approach, were it to eventuate, would indeed be repeating the mistakes of the early 1990s.

Looking ahead, the lagged effect of the downturn in economic activity will see employment growth recede further in the coming quarters. Consequently, we forecast job growth to all but stall over the coming year, with only a net 2,500 new positions expected in the year to March 2010. The following year sees a further 6,000 added, before heading back to 20,000 in the March 2012 year.

But we also see a levelling-off in the rise in labour force participation rates. Changes in labour force behaviour have resulted in participation rates rising strongly over the past 15 years. This has been a driving (positive) structural change in the New Zealand labour market. Indeed, arguably, it is the success story for the New Zealand economy over this period. The attraction and retention of previously excluded sections of the community into the workforce has also facilitated an increasingly flexible and dynamic labour market, as well as education and training provision. It is too early to assess whether the recession risks stalling such behavioural changes, but for those interested in long-term economic development the risk is very real.

In the shorter term, participation rates easing back from 68.5% to 67.5%, sees the official unemployment rate remain below the 6% mark. But this means unemployment numbers around the 125,000 mark for the remainder of the forecast horizon.

Migration

The really strong story of the labour market impact on the economy is the change in migrant flows. The net inward flows have been sitting down at about 3,500 to 5,000 from 2007 to December 2008. In the first four months of this year the net flow has lifted to an annual rate of over 9,000 for the year ending April. The indications in the latest months are for flows in the middle of the 20-30,000 range. This increase in the net flow has been brought about by small and steady increases in arrivals, and a move to a fairly steady drop in departures.

This pattern of behaviour change is fairly similar to the changes that began in 1992 and again in 2001. Given the generally docile nature of world economies we do not expect the scale of the inward flow, or the impact on GDP to be as great as it was in 2002/03. Nevertheless this migrant flow does give the economy the opportunity to utilise the people’s capacity, increase their skills where relevant, and contribute to New Zealand getting onto a long-term growth path.

Our forecasts would see inward migrant numbers increase from the 89,000 year ended March 2009 to 95,000 in late 2010 and 2011. The outflow would decline from the 81,000 year ended March 2009 to 67,000 in mid 2010, and increase above 70,000 again in 2011. This implies a net inflow of 15,000 year ended September 2009 and then a steady net inflow in the range 24,000 to 28,000 through 2010 and 2011.

This migrant flow, if complemented with sound investment policies, is sufficient to underpin a modest recovery not the boom-bust type that would fuel house price inflation as in 2002/03. Needless to say, that is a big if.

 - reprinted from BERL Forecasts June 2009