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Special Topic 1: A jobless recovery?

One of the reasons economists and policymakers care about economic growth is that it is a source of jobs.  When unemployment is high for a sustained period, such as at present, it is common to see statements that unemployment is structural rather than cyclical; a variant of this is to say the economy is experiencing a “jobless recovery” – such a situation would be a concern.  The aim of this special topic is to see if the current relationship between employment and GDP in New Zealand is atypical in the historical context; if so, this may imply unemployment is more structural. 

Economists observe a relationship between unemployment and output...

The relationship between output and unemployment is called Okun's Law – although it is really more of a rule of thumb.  There are a number of variants of this law but we will focus on one, the relationship between the output gap (actual output less potential output) and the employment gap (actual employment less trend employment). [1] 

Figure 5: Output and the employment gap
Figure 5: Output and the employment gap.
Source: the Treasury

Figure 5 plots the relationship between the employment gap and the lag of the output gap for New Zealand for the period 1979 to 2012 and shows there is a strong positive relationship.  We lag the output gap because it is commonly accepted the labour market lags output.

... and there are reasons the relationship maybe time-varying

Given firms tend to over-hire in the later stages of expansions, one would expect a change in output to have an increasing employment response at the end an expansion.  Conversely, during a recession labour hoarding means that the employment response to the negative output gap is low (i.e., employment does not fall as much as output). In the recovery phase we see low (positive) employment growth relative to (positive) output growth as firms use existing staff to expand output rather than hire new staff (Figure 6).

Figure 6: Output and the employment gap
Figure 6: Output and the employment gap.
Source: the Treasury

Figure 7 shows that generally the last cycle (1999-2007) matches our stylised facts with the employment response low during the recession and then rising post recession, reaching its apex at the end of the expansion in 2007. [2]

Figure 7: The coefficient of the employment gap to a 1% change in the output gap [3]
Figure 7: The coefficient of the employment gap to a 1% change in the output gap.
Source: the Treasury

There is little evidence something structural is at play...

If there was some structural change in the New Zealand labour market at present we would expect the employment response to GDP to be unusually high (a larger negative employment gap for a given negative output gap).  However Figure 7 shows that the employment response in the 2008/09 recession was similar to the previous recession and its path post recession is also similar – an indication that the current relationship is not abnormal and therefore evidence against the structural hypothesis.  The conclusion that the elevated level of unemployment is related to the slow output recovery rather than something structural in the labour market is consistent with Craigie et al (2012). [4]

Figure 8: Difficulty finding labour
Figure 8: Difficulty finding labour.
Source: NZIER

Another indicator we can look at is the QSBO survey of the difficulty firms have in finding skilled and unskilled labour (Figure 8).  After being elevated in 2009 (relatively easy to find labour), both these indices are returning to somewhere near average, i.e. firms are finding it harder to find labour.  This dynamic is exactly what you would expect to see in a normal recovery.  In a “jobless recovery” it would remain easy to find labour and therefore the index would remain high.

Notes

  • [1] We report only the employment gap for brevity - our conclusions are the same for the unemployment gap or employment growth.  Trend employment is calculated by HP filtering (λ=100) the employment series; the output gap series is based on Treasury’s measure used in its forecasts.
  • [2]We do not report any further back in history as the analysis is complicated by structural reforms in the 1980s and early 1990s.
  • [3]This is estimated on annual data using the Kalman filter where: employment gap = α+ βoutput gap(-1)+ηt is the signal equation and βt= βt-1+εt is the state equation.
  • [4]“Not a jobless recovery, just a slow one”, RBNZ Analytical Note 2012/6.

 

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