Recent Labour Market Conditions

Labour market outturns have been lower than both Treasury and other forecaster expectations over the past year. The unemployment rate has remained elevated despite real output increasing solidly, particularly in 2012. In addition, employment fell in three of the four quarters in 2012. This box provides an overview of the recent conditions in the labour market.[2]

Fall in employment concentrated in younger part-time workers...

Total employment fell 32,000 (1.4%) in the year to December 2012, with part-time employment down 34,500 (6.6%) over the same time period. The fall in part-time employment was greatest amongst younger (under 30) female workers, especially those working one to nine hours per week. As the fall in employment was concentrated amongst those working fewer hours, the overall impact on aggregate hours worked in the economy was less, falling only 1.0% from a year ago. The fact that a large proportion of the fall was in younger workers, who are generally at the lower end of the income scale, partly explains why PAYE tax revenue rose more than 5% in the 2012 calendar year, despite the weak headline labour market statistics.

Another factor that could be supporting tax revenue is that the overall labour market may not be as weak as the Household Labour Force Survey (HLFS) suggests. Other indicators of the labour market, such as the Quarterly Employment Survey (QES) and employment conditions surveys, suggest more strength in the labour market than the HLFS. The different coverage of the surveys can explain some of the differences in results, with the QES not covering self-employment or the agricultural sector, both of which showed very weak employment results during 2012. However, despite the wider coverage in the HLFS, issues in the survey itself may also be contributing to the different results; otherwise it is difficult to explain why the headline measures of employment and unemployment remain at odds with other indicators. Overall, it is considered that while the labour market remains subdued, the weakness may be overstated somewhat in the HLFS headline employment and unemployment figures.

...as firms look to control costs and improve productivity...

Similar to many other economies, New Zealand's recovery from the recent recession has been more prolonged than previous recoveries. Previous relationships between business confidence and employment growth have failed to hold over the past year, with indicators pointing to much stronger employment. Businesses may be waiting until they see demand grow more strongly before they gain enough confidence to hire additional workers. In the meantime, firms have focused on controlling costs and improving productivity. Economy-wide estimates of labour productivity (hours-worked basis) were up a very strong 3.3% in 2012 from the previous year, following a 0.1% fall in 2011 (Figure 1.16). Increases in employment tend to lag increases in output by one to two quarters, thus stronger employment growth is expected in the second half of 2013, as well as a moderation in productivity growth.

...leading workers to leave the labour force

The subdued labour market contributed to a fall in the labour force participation rate over 2012, as some workers became discouraged at not being able to find work and left the labour force. The participation rate fell 1.2 percentage points over 2012, with the main change occurring in the December quarter. While several age groups contributed to this fall, the main contributions came from younger people (15- to 19-year-olds particularly) and older people (55+). There is evidence that some younger workers may have given up looking for work and instead enrolled in education. This is part of a trend since 2007 of a falling participation rate for 15- to 19-year-olds, while the proportion in education has increased. The other age group that contributed significantly to the fall in participation - older workers - saw the number of those identifying as retired increase over the year. While this is likely to be part of a longer-term trend as baby boomers retire, the size of the increase suggests that some older workers may have decided to fully retire as they could not find work, thereby leaving the labour force.

Overall, the fall in the participation rate is expected to be temporary rather than structural in nature. The participation rate is expected to rise gradually again over 2013 and 2014, as employment opportunities improve, encouraging people to seek work again (Figure 1.17). In the later period of the forecasts, the participation rate should begin to fall again as there will be a greater number of people in the older age groups that tend to participate less in the labour force.

Figure 1.16 - Economy-wide labour productivity (hours-worked basis)

Sources: Statistics New Zealand, the Treasury

Figure 1.17 - Labour force participation rate

Sources: Statistics New Zealand, the Treasury