Labour market

Statistics New Zealand provides a wide range of statistics related to the labour market. These statistics can provide us with information about changes in households’ purchasing power and the costs of doing business, as well as about the potential for future economic growth.

The labour force

The labour force is the sum of those employed and those unemployed. Employed people may work part time (fewer than 30 hours per week), or full time. Growth in full time employment tends to mirror the economic cycle: increasing during periods of economic growth, and easing in a downturn. As businesses become more confident that a pick-up in economic activity will continue, they are more likely to commit to full time positions. Declines in employment are usually slower and less pronounced than positive growth, as it can be more costly for firms to lay off trained workers completely than to retain them (perhaps on reduced hours) through a downturn.

Statistics New Zealand defines the unemployed as those who are without paid work and are actively seeking work. The unemployment rate is the number of people unemployed as a percentage of the labour force.

We can think of unemployment as consisting of three broad categories: cyclical, frictional and structural. Cyclical unemployment occurs as a result of a downturn in the business cycle, when firms lay off workers as a result of reduced demand. Frictional unemployment refers to those who are moving between jobs, and will begin a new job relatively quickly. And structural unemployment results from people being in the wrong place (geographic mismatch) or not having the skills which employers want (skill mismatch). Reducing structural unemployment is important for achieving a long-term reduction in the overall unemployment rate.

The participation rate is the labour force expressed as a percentage of the working age population (those aged 15 years and over). People exit the labour force for a variety of reasons, including retirement, study and raising a family. There is a cyclical component to labour force participation. In times of economic prosperity people are likely to find it easier to get jobs, and feel encouraged to enter the labour market (so the participation rate goes up). On the other hand, when growth is sluggish and unemployment high, people may feel discouraged and exit the labour market altogether – the so-called ‘discouraged worker’ effect.

The participation rate is also influenced by the demographic composition of the population and social norms. Women’s participation in the labour market has risen significantly over the last few decades due to changing attitudes, including the trend towards having fewer children and childbearing later in life. The ageing of the population will influence labour force participation.

Population growth affects the potential size of the labour force. New Zealand’s natural rate of population increase (the excess of births over deaths) has been slowing. As the effects of demographic change, particularly population ageing, begin to show, this slowing population growth will limit the employment growth that is achievable.

Hours worked

The number of hours worked is positively related to GDP growth. The relationship is stronger than that between employment and GDP, as it can be less costly for firms to vary the hours worked by their staff, than to lay off trained workers in a downturn and train new employees when the economy picks up. Dividing GDP by hours worked gives us a measure of labour productivity. A rise in productivity increases that level of output that can be produced with the same level of inputs (in the case of labour productivity, the number of hours worked). Productivity gains boost economic growth, and hence a country’s standard of living.

Wages

Growth in labour productivity places upward pressure on workers’ wages, as their value to firms has increased. Another factor contributing to wage inflation is growth in consumer prices. When consumer price inflation outstrips nominal wage growth, real consumer wages fall and households’ spending power is reduced. The expected growth in real wages is therefore an indication of future consumption growth. When real wages are declining, we can expect workers to seek wage rises, to compensate them for lost purchasing power. This can, in turn, increase inflation further, by increasing firms’ production costs.

Shortages of labour, particularly skilled labour, can exert upward pressure on wages, as firms have to pay more to attract the labour they require. Firms’ difficulty finding skilled labour is a useful indicator of future wage growth.

Adjusting nominal wages by capital goods prices gives real producer wages. When real producer wages are falling, labour becomes more attractive to firms. This can provide impetus for employment growth. Likewise, rising labour costs can dampen firms’ demand for labour. As labour becomes a relatively more expensive input to production, firms may substitute capital for labour. This means that expected wage growth is an important factor in anticipating future employment growth.