Employment and Skills

Why has unemployment hardly changed, when employment has jumped?

Monday February 13, 2017 Mark Cox

According to Statistics New Zealand’s Household Labour Force Survey (HLFS), the number of people in New Zealand who are employed has increased by 278,000 during the past five years (December 2011 to December 2016).  But, curiously, during the same period, the number of people who are unemployed has decreased by only 5,000.  This article briefly examines why such a large increase in the former has been matched by such a small decrease in the latter.


Before proceeding, however, it should be noted that the labour market is a complex and dynamic system, and that it is necessary to use a simplified representation of how it works.


The short and simplified answer to the question posed in the headline above is that virtually all of the new jobs in the economy have been taken by new entrants to the labour market, leaving a largely unchanged pool of unemployed labour.  It has sometimes been argued that the large number of migrants coming to New Zealand is to blame, and that the migrants have displaced unemployed people who would otherwise have been able to get the new jobs.  This, though, is only a partial explanation, at best.


During the five years in question, net migration totalled 208,000, but by no means all of these migrants will have entered the labour market.  It is known, for example that around 48,000 of the migrants were less than 20 years or more than 65 years old and, so, might well not have been seeking employment.  In addition, an unknown, but probably reasonably large, number of the migrants between the ages of 20 and 65 will not have been in the labour market because they were non-working spouses or not seeking employment for other reasons.


It is likely, therefore, that only half of those filling the 278,000 new jobs were migrants.  The other half were Kiwis who were not previously in the labour force.  The population of working age in New Zealand has been increasing, but labour force (i.e. the number of people who are employed or seeking work) will tend to grow, even when the population of working age is static, if the economy is buoyant.  Some people will only be encouraged to seek work, if think they have a reasonable chance of finding a job.


But what of the unemployed: why haven’t they been able to take the new jobs that have become available?  One thing to bear in mind when thinking about this question is that the 133,000 to 139,000 people who have been unemployed during the past five years have not been part of a static pool.  Some people remain unemployed for a short period of time, then find work, but are replaced by other unemployed people.  Others remain unemployed for varying longer periods.


On average during the past five years, around half of all unemployed people have remained so for less than three months. This group of people are generally new to the labour market and are seeking their first job, or they are between jobs.  No matter how buoyant the economy, there will always be a sizeable number of people in this group.  They account for what is often referred to as “frictional unemployment”; and the fact that around half of all unemployed people are in this group implies that the unemployment rate is unlikely ever to fall much below half the latest rate of 5.2%.


Of greater concern are the 35%, or so, of the unemployed who have been seeking employment for between 3 and 12 months, and the 15%, or so, who have been seeking work for more than one year.  People in these groups might be living in the wrong place to apply for the new jobs that have been created.  They might have skills that are no longer needed, but they can’t retrain for one reason or another.  They might be too old to be of interest to employers (yes, age discrimination is illegal, but it happens).  Or they might have other issues that would make them unreliable employees.  In effect, people in these groups are not competing or are competing under a handicap for the new jobs; and the longer they remain unemployed, the more difficult it becomes for them to get back into work.


Finally, back to the migrants mentioned earlier.  The extent to which they will have displaced Kiwis in the labour market is debatable, but they will also have generated a significant amount of employment, just by being in the country.  To see this, one only needs to think about how many jobs would be needed to sustain a city with a population of 208,000 people.