As readers know, I have been putting a lot of weight on the unemployment rate. It isn’t a perfect measure of excess capacity, but it has lingered at uncomfortably high levels since the recession. Very uncomfortable for those who are unemployed, no doubt. But particularly when inflation has been persistently well below the agreed target midpoint, those unemployment numbers should also have been very disconcerting for people with responsibility for short-term economic management.
The Reserve Bank Governor began an OCR tightening cycle at the start of last year, and was still talking about further OCR increases as late as last December.
The red line in this chart is what the Reserve Bank thought was going to happen to the unemployment rate last March – the numbers from the March 2014 MPS projection. The blue line, by contrast, is what actually happened.
The first OCR increase was announced in March 2014. It takes a little while for monetary policy changes (even expected ones) to have much of an effect on the economy. By the September quarter of 2014, the unemployment rate had reached what now appears to have been a trough. Even by them, the unemployment rate hadn’t been falling as fast as the Reserve Bank expected. And since then, the divergence has grown materially. The Bank had expected the unemployment rate would be 4.9 per cent by now. In fact, SNZ tell us, it is 5.9 per cent. That is a difference of around 25000 people. And unemployment doesn’t just affect the people who are unemployed, but their spouses and families as well.
Is it all down to the Reserve Bank’s misjudgement? Probably not – and there is noise in the series – but monetary policy is our principal macroeconomic stabilisation tool. Mistakes on this scale, when there was no pressure to tighten in the first place, have to be sheeted home to those responsible. That is, very largely, the Governor.
Optimists have told stories about the unemployment rate holding up mainly because of rising participation rates. But participation rates have been rising in much of the OECD, and since September New Zealand’s participation rate has risen by only 0.2 percentage points. It doesn’t explain the difference. The Reserve Bank seems to credit surprisingly high immigration with boosting unemployment, in defiance of all the evidence (and its own research) that shocks to population affect demand more than they do supply in the short-term.
The HLFS is a sample survey, and occassionally it does seem to give slightly rogue steers (notably the increase in the unemployment rate in 2012), but this time it doesn’t seem inconsistent with most of the rest of the labour market data, and in particular the absence of any resurgence in wage inflation. The uncomfortable truth seems to be that after rising more than 3 percentage points during the recession, the unemployment rate at 5.9 per cent is only about 0.5 percentage points below the average level for 2009 to 2012.
This is no small failing. Among all the OECD countries, the only ones whose current unemployment rates are higher, relative to pre-recession lows, are a group of countries in the euro-area with no ability to adjust monetary policy at all.
Sometimes a rise in unemployment is unavoidable. And forecasting is a mug’s game. But with what was always an anaemic recovery (by historical standards), with very weak price and wage inflation, and no external constraints (eg ZLB) on macroeconomic policy, there was no pressure on the Reserve Bank to tighten when it did. They could have held their hand, and let the numbers unemployed continue to fall. But they didn’t.
As I noted last week, I wonder how Graeme Wheeler explains this to the, now, 148000 unemployed people when he meets any of them? I really do.
In Fran O’Sullivan’s column in today’s Herald there is a report of the recent Minter Ellison Rudd Watts’ 2015 Corporate Governance Symposium in Auckland on Monday, attended by, inter alia, a number of “leading independent directors and chairs”. Participants were addressed by various independent directors, and O’Sullivan notes:
It was said that while the regulatory and social pressure on major organisations mounts, the 24-hour news cycle is shrinking to 24 minutes and accountability is increasing.
Where, the unemployed might wonder, is the accountability for the Governor?