ECONOMICS: Policies Shift As Jobs Shrink

Unemployment would continue to rise this year, Employment Minister Paula Bennett said after the March-quarter household labour force survey showed the latest rise in unemployment. Thus “the focus of this Government remains job creation and growth”.
This is fundamental shift from year ago, when the Reserve Bank had yet to begin its interest rate cuts and the policy focus was fixed on lowering inflation.
The shift to an emphasis on employment growth showed up in policy advice from think tanks such as the New Zealand Institute. few days before the release of the labour force data, it was insisting an environment of rising unemployment should influence the Government’s policy choices.
The Institute’s prescription: the economy needed positioning to come out of the recession strongly in an attempt to restart employment growth and raise the country’s long-run growth potential. Investment should be channelled into areas that will boost export competitiveness; the country’s presence in overseas markets should be expanded.
The policy focus hence should be on the quality and the quantity of job growth – investing in areas that will boost employment and support higher growth path in the future. This advice reiterated what the Institute had said in report in February, when policy makers (as an extreme scenario) were urged to brace and plan for the prospect of double-digit unemployment over the next two years.
The dramatic fall in the country’s manufacturing output announced early in May reinforced portents of collapse in demand for workers in the first part of this year. Predictions for the unemployment rate by December next year, accordingly, were gradually rising: eight percent had become mainstream by May, up from predictions around six to seven percent few months previously.
Another dose of policy advice came from the Institute of Economic Research, which warned against job subsidies but recommended (for reasons of cost-effectiveness) job-search assistance.
Training programmes had the potential to deliver long-term benefits but were expensive, the NZIER said; they should be targeted carefully to meet the specific needs of the individual and the local labour market. Training initiatives must also be mindful of the longer-term objective of raising productivity.
Reducing the cost of employment was another area for attention, because unemployment persists when wages and conditions do not adjust quickly enough to the new market environment. The NZIER saw scope for employment laws to be changed, to remove the bias toward multi-employer collective agreements, for example. These “create impediments to firms adjusting to local circumstances”.
Job subsidies, however, “are very expensive way of getting only small reduction in unemployment”. It is hard to accurately work out which jobs are genuinely created, and which jobs would have been filled or created anyway. And job subsidies might prop up the “‘wrong” jobs. This would undermine necessary structural change and long-term job and income growth.
The urge to direct government policy towards dealing with rising unemployment had not been so apparent year ago, when the Reserve Bank’s June Monetary Policy Statement considerably changed its earlier forecasts of labour-market behaviour (although, fair to say, its projections showed unemployment of just six percent in 2011). At that time, rising unemployment projections were considered an acceptable price to pay for controlling inflation and the RBNZ showed no inclination to lower interest rates.
In contrast, in monthly analysis of economic indicators released few weeks before Budget Day, the Treasury said demand and output had contracted further in the March quarter. Household spending, business investment and exports all were likely to have been cut back further, real GDP fell by around one percent and demand for labour had weakened.
True, economy-wide employment had continued to rise, even as hours worked fell and unemployment had risen. But the Treasury thought the employment cycle had turned and that the March labour market statistics (released few days later) would show fall in employment and rise in the unemployment rate to above five percent.
Not quite. The unemployment rate was just five percent, although Social Development Minister Paula Bennett said there was continuing trend upward. The Government was planning for doubling (to 80,000) of unemployment beneficiary numbers by early next year.
The number of people employed decreased in the March quarter, down by 24,000 (1.1 percent) to 2,182,000, with falls in both full-time and part-time employment. On an annual basis, however, the number of people employed increased by 17,000 (0.8 percent). Sure, the rate of increase in employment on this annual measure was slowing, but employment in Auckland slumped 30,000, which meant it was 46,000 higher in the rest of the country than year earlier.
This perhaps explains why people in some parts of the country were asking: recession, what recession?

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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