Some labour market statistics that really should be looked into

There was a curious line in the Labour-New Zealand First agreement, under “Economy”.

Review the official measures for unemployment to ensure they accurately reflect the workforce of the 21st century.

I wasn’t (and still am not) clear what the two parties had in mind.  It got some people rather hot and bothered, with suggestions of political interference to get numbers that happened to suit the government of the day.  That interpretation seemed pretty far-fetched.  Plenty of people –  politicians included –  have views on what Statistics New Zealand should collect and report data on.  And governments have to decide what to fund Statistics New Zealand for –  regional nominal GDP data got added to the mix a while ago, there are now weird (and intrusive) things like the General Social Survey, and on the other hand we still don’t have monthly CPI data, monthly industrial production data (in both cases, unlike almost every other advanced country) or quarterly income-based measures of GDP.   Rather rashly, governments and SNZ appear on course to degrade our travel and immigration data.

So I don’t have a problem if parties to a government want to have a look again at some or other area of our official statistics, and perhaps even get Treasury and MBIE to commission some expert or other to have a fresh look at indicators of unemployment etc.  I’d be even more pleased if such a review led to the allocation of a bit more money to Statistics New Zealand.  But I’m not sure there is much of a problem with the HLFS as it is, even if my confidence in the data have taken a bit of a dip since my household has been in the survey (over the last few quarters).   Oh, and when they made changes to the HLFS last year, and made no attempt to backdate the new employment and hours series, simply leaving a level shift in the official series that was a bit trying too (one always has to remember to make a rough and ready adjustment for the break – I almost forgot to in the charts below).

Is it a bit odd and arbitrary that the headline measure of unemployment doesn’t count you as unemployed if you managed one hour’s paid work in the survey week, even if that was the only hour you managed to get all quarter and you’d really like a 40 hour a week job?    Absolutely it is.    But so long as the headline unemployment measures are used either for cross-country comparisons, or for comparisons within New Zealand over time, precisely where one draws that (inevitably) arbitrary line won’t matter very much.  Other countries also calculate headline unemployment rates that way, and we’ve been using the HLFS since 1986.

It is more of a problem when complacent commentators misuse the measure to go on about how “unemployment” is “only” 4.6 per cent, as if all is rosy.   Of course, even a 5 per cent “true” unemployment rate would mean that over a 40 year working life, the typical person would be unemployed –  on the quite narrow definition –  for two years.  That is a large chunk of time, and (like me) probably few of those commentators ever spent any time unemployed on this measure.

But SNZ does now do quite a reasonable job of providing a richer array of data that enables users –  and media and other commentators –  to get a fuller picture of overall supply/demand imbalances in the labour market.  We have data on the people in part-time work who would like to work more hours.  And data on people who would like a job but have become discouraged by repeated failure, and have given up searching (to the definitions of the HLFS).  Outside the HLFS we have data on those on welfare benefits.  Now there is even an official underutilisation rate, which can also be compared across time and (with more difficulty) across countries.   At 11.8 per cent that is a pretty high number, and probably one that –  were it more widely known –  would trouble many people (as it does me).   These numbers tend not to matter much to macroeconomic commentators, focused mostly on cyclical fluctuations, since the various different series tend to move together and a demand for long-term time series drives people quickly back to the headline measure.  But it doesn’t make the other measures less valuable or important for other purposes.

It is meaningless to say that “the” unemployment rate is 4.6 per cent, but that would have been as true in 1997 as it is 2017.  Then again, it probably isn’t meaningless to say that all the measures of excess labor supply are higher than they were 10 years ago, a period over which demographic trends have probably been working to lower the long-run sustainable rate of unemployment (on whichever measure you choose).

Statistics New Zealand don’t seem any better informed about the review

[Labour market manager] Ramsay said Statistics NZ had no more information about the review apart from what was in the coalition agreement.

“Nothing at this point. No content at all.”

But if there are resources to spend on reviewing and improving labour market statistics, I’d be making a bid for something around wages data.

A repeated theme from the Labour Party during the election campaign was that wage growth has been slow, and that this needed to change.  When the Labour Party leader was, at times, challenged about this claim, her response was that people didn’t “feel” better off.    Now, I’m sure perceptions matter a lot in politics, but ideally perceptions –  and the policies of governments – will be informed and shaped by the data, rather than the other way round.

In a post a few months ago I illustrated, using national accounts data, that the labour share of income has been trending up in New Zealand over the last 15 years or so.  COE

Over that period, on official data, New Zealand’s experience has been quite different from that of the other Anglo countries (and much of the commentary we read is British or American).  Across the OECD as a whole, the labour share in the median country hasn’t changed in the last 15 years, and New Zealand has had one of the larger increases. [UPDATE: An interesting illustration of how different the Australian experience has been.]

One of the problems in making sense of what is going on is that (a) we don’t have a quarterly income-based measure of GDP, so we fall back on the published wages data, and (b) the published wages data are all over the place.

Still most widely quoted is the very-volatile Quarterly Employment Survey measure of average hourly wage rates, a measure that (by construction) is subject to compositional changes  (if, this quarter, lots more low-skilled get jobs, even at good wage rates for those jobs, average hourly wage rates will fall even though no one is earning less per hour than they were).

Then there is the Labour Cost Index (LCI) which doesn’t purport to be a series of wage rates, but rather a proxy for unit labour costs. In other words, it is an attempt to measure wages adjusted for changes in productivity etc.  It is a smooth series, and is given prominence by SNZ, but it tells us nothing at all about the growth in the hourly earnings of the people who are in employment (adjusted for changes in composition).

And then there is the Analytical Unadjusted Index.  Even the name would deter most casual users.  It is found buried among the Labour Cost Index series, and  –  at least on paper –  looks like the best series we have.  It is constructed from the raw wages data SNZ collects to generate the headline LCI series, and is constructed in a stratifed way, to eliminate (or minimise) distortions arising from compositional changes.

This is what inflation in the Analytical Unadjusted series looks like

analytical unadj nov 17

It is relatively smooth –  conforming to economists’ priors about how labour markets work –  and, of course, (nominal) wage inflation is much lower it was a decade ago.  (Remember that the tick up in the most recent quarter is the impact of the pay-equity settlement.)    Of course, CPI inflation is also a lot lower than it was then.

A couple of months ago, I did a post using the Analytical Unadjusted data, deflating it by core inflation and comparing it with growth in real GDP per hour worked.  Real wage inflation appeared to have been running well ahead of productivity growth (the latter, non-existent, in aggregate, for the last five years).

But in that chart, I didn’t take account of the terms of trade.  A higher terms of trade – and New Zealand’s have done quite well in the last 15 years or so –  lifts the incomes the economy can afford to pay.  A better way to look at things might be to compare nominal wage growth with growth in nominal GDP per hour worked.  There is a lot of short-term variability in nominal GDP growth –  as dairy and oil prices ebb and flow  – but if we look at cumulative growth over fairly long periods we might hope to find something interesting.  Over very long periods of time we might expect hourly wage rates to increase at around the rate of growth in nominal GDP per hour worked.

The Analytical Unadjusted data go back to mid 1990s for the whole economy, and to the late 1990s for the private sector.   Here is what the resulting chart looks like.  Both series –  wage rates and nominal GDP per hour worked – are indexed to 100 when the Analytical Unadjusted data start.  (Recall that we still only have q2 GDP data).   I’m showing the ratio of the two series: when the line is rising, wage rates are rising faster than nominal GDP per hour worked.

wages and nomina GDP phw an unadj.png

For the first seven or eight years, the chart looks much as you’d expect.    There is quarter to quarter volatility in GDP, which is reflected in the ratio, but broadly wages were rising at around the rate of growth of  nominal GDP per hour worked.  Wages outstripped nominal GDP growth in the late boom years –  even as the terms of trade were rising –  and have done so again, in the last five years.   Over the last 15 years, private sector wage rates –  on this measure –  have risen perhaps 12 per cent faster than growth in the value of nominal GDP per hour worked.  (And the tax switch in 2010 will have boosted nominal GDP, without any reason to expect it would change pre-tax wage rates. so the “true” increases in wages relative to underlying GDP is even larger than the chart suggests).

I find this picture plausible, and I think I can tell a sensible story about what might have been going on.  But before I tell that story, here’s an alternative chart.    The QES wages data go back further, to 1989.  And here is what the chart of QES ordinary time wages rates looks like relative to growth in nominal GDP per hour worked back to 1989.

wages and nom GDP QES

It is on exactly the same scale as the previous chart.  But on this measure, private sector wages have barely kept pace with nominal GDP per hour worked growth over almost 30 years now (and have been losing ground since end of the 1990s), while public sector wage rates have outperformed (but almost all the out-performance was in the 1990s, under those spendthrifts, Ruth Richardson and Jenny Shipley.

I just don’t believe that the QES picture is portraying an accurate picture of what has been going on in the labour market.  For a start, it is inconsistent with the national accounts (the labour income share chart, which suggests that something turned in labour’s favour 15 years or so ago).  And the labour income share chart looks more consistent with the stratifed Analytical Unadjusted based measure.

To be clear, I’m not suggesting that labour has done particularly well.  The productivity performance of the New Zealand economy has been pretty lousy –  especially in the last five years –  and the unexpected (and outside our control) improvement in the terms of trade only offsets a bit of that gap.   Absolute levels of nominal GDP per hour worked in New Zealand remain very low by advanced country standards and, thus, so do wage rates.   But given the relatively poor performance of the economy as a whole, labour hasn’t done badly at all.  If people have feelings about these things it doesn’t look as though they should be about evil capitalists (or evil governments) rapaciously transferring money to themselves or their rich mates.  Simply that poorly performing economies –  with little or no productivity growth –  shouldn’t expect much wage inflation.  If there is rage, it should be about successive governments of both parties that have done nothing to redress that failure.

There might still be some serious problems with the statistics.  But if the Analytical Unadjusted series is roughly right (even if not many commentators cite it), how might one explain what it shows?  My explanation is pretty simple: the (real) exchange rate, which stepped up sharply about 15 years ago and has never sustainably come down since.    When the exchange rate is high, firms in the tradables sectors make less money than they otherwise would have done.   The usual counter to that is that the terms of trade have risen.  But the increase in the real exchange rate has been considerably more than the higher terms of trade would warrant, and in any case much of the gains in the terms of trade have come in the form of lower real import prices, rather than higher real export prices.

And why has the exchange rate been so high?  Because the economy has been strongly skewed towards the non-tradables sector which –  by definition –  does not face the test of international competition.  Demand for labour in that sector has been strong, on average, over the last 15 years, and it is the non-tradables sector that has, in effect, set the marginal price for labour.  For those firms, in aggregate, the lack of productivity growth doesn’t matter much –  they pass costs on to customers.  But it matters a lot for tradables sector producers, who have to pay the market price for labour, with no ability to pass those costs on (while the exchange rate puts downward pressure on their overall returns).  Another definition of the real exchange rate is the price of non-tradables relative to those of tradables. Consistent with this sort of story, in per capita terms real tradables sector GDP peaked back in 2004 (levels that is, not growth rates).

Perhaps it isn’t the correct story. Perhaps there is some serious problem with the data.  But if the government is serious about the words in the Speech from the Throne

A shift is required to create a more productive economy

one (small) step towards getting there might be set out to resolve the puzzles, and apparent inconsistencies, in our labour market (wages) data.  At present though, the best-constructed series suggests a badly-unbalanced economy.  Workers haven’t done badly given the poor performance of the overall economy, but the foundations haven’t been laid for durable real income growth –  if anything, they’ve been progressively whittled away as the foreign trade share of the economy has eroded.

 

 

 

 

20 thoughts on “Some labour market statistics that really should be looked into

  1. Interesting ! Definitely a good first step to fixing problems with the NZ economy is to collect better data. Sadly I’m not optimistic that Labour has any bold ideas to substantially improve our economic performance. I hope I’m wrong, but I can see things being pretty much the same as under National.

    I wonder if this sentence is missing a word though “Because the economy has been strongly skewed towards the non-tradables sector which – by definition – does [NOT??] face the test of international competition.”

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  2. I can recall watching in 2009 (on TVNZ 7 no less) a rather energised Bill English (https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10610110) proselytising about how he and his government had a plan to catch up (or beat I can’t quite recall) with the Aussies by 2025 through a series of initiatives which in retrospect look to be about as bold as the GST tax changes and partially listing the power companies.

    I’m sure Steven Joyce would point to the Business Growth Agenda but I am sure Australia have much the same sort of programmes so I am unsure how that was ever intended to help NZ leap frog past their performance….

    I hope that this government is bolder and that perhaps some of the mandarins in the civil service (non-tradeables) have lists of ideas that they are keen to deploy and a government that is relatively receptive to listening.

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    • The best thing for New Zealand would be for Australia to discard the Special Visa entries for kiwis. We can then stop looking at providing low cost high quality workers for the Australian economy and inevitably losing our best and brightest to Australia’s benefit.

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      • I think what would happen then is that we would still lose most of the “best and brightest” who leave – who would qualify under Aus general immigration terms – but wouldn’t have an exit valve for the less able.

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      • You know NZ history better than that. NZ keeps shooting itself in the foot when it comes to AU. There were once open borders between AU-NZ. Then Terrence Clark came along in the guise of Mr Asia. As a result AU introduced the need for Passports to get from NZ to AU. That was followed by the Sitveni Rambuka ethnic cleansing Coup in Fiji followed by two Frank Bainimarama ethnic cleansing coups, a lot of which ended up in NZ. Then Helen Clark and NZ gave blanket amnesty to overstayers in NZ

        Then to quote someone else
        “John Howard had Helen Clark on the mat and told her that if any NZ government ever pulled a stunt like that (granting about 9000 criminal overstayers passports, half of whom bolted straight to OZ) again, all deals regarding NZ’ers special rights to live and work there would be stopped”

        That is exactly what has happened – inch-by-inch – and now NZ is trying to scuttle AU’s vowed intention to stop the people smugglers by bringing the product to New Zealand and now Ardern is in AU complaining about reciprocity

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      • In your experience within the civil service is a change of government a good opportunity to get ideas heard and positive change made? (I.e. to educate the minister(s) on the extent of under performance) Or is it generally a case of “yes minister”?

        Or perhaps more worryingly is there not even a widespread acknowledgement within the civil service as to the extent of New Zealands mediocre performance?

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      • Depends entirely on (a) the ministers, and (b) the civil service. There is a reasonable argument to be made that over the last 10-15 years the quality of the public service has been so degraded (and there have been so many attempts to play down our underperformance) that the civil service couldn’t respond even if ministers were seriously curious and willing to act.

        As for this lot of ministers, I’m withholding judgement for now, but I’m not optimistic. Like or loathe the post-84 reforms, but this Cabinet doesn’t generally appear to be of the stature of many of the 84-90 Cabinet. I hope there are exceptions, but time will (probably quite soon) tell.

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      • All the more reason for absolutely accurate and timely data that can’t be fudged and curated and manicured

        and

        Cant be interpreted and re-interpreted

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    • Employers are more prepared to offer a position when you are in Australia and available for an immediate start. They are extremely less likely to offer a position to someone that is offshore in NZ. This would behavioural trait would make it much more difficult to employ a kiwi and human nature is such that if it gets too hard they tend to give up and not pursue it.

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  3. You want better data? You want believable data? You want timely Data?

    In a world I’m more familiar with, where participants do not have the luxury of the “long run” to make decisions, where probability and the massive wet-ware parallel computing are used, great emphasis is placed on “listening to the chatter”. In the long-run you will find if you tune in to the chatter you will find …..

    In AU the unemployment stats were based on a sample size of 40,000 then through austerity that sample size was reduced to 20,000. Enquiries reveal the NZ sample size was 15000. Whether austerity has missed shrinking that number we don’t know. What we do know is about 5 years ago the ABS (AU Bureau of Stats) discovered a massive flaw in their methodology. Never heard any comfort words from NZ Stats. Not a whisper. They must be perfect.

    Anyway … if you care to listen to the chatter you will have heard far too much scepticism to dismiss it … as the saying goes where there is smoke look a little closer

    For example

    Revisit Michael Reddell Comment 2 September 2017
    –https://croakingcassandra.com/2017/09/02/unpicking-steven-joyces-press-release/comment-page-1/#comment-18020

    Revisit iconoclast comment 2 September 2017
    https://croakingcassandra.com/2017/09/02/unpicking-steven-joyces-press-release/comment-page-1/#comment-18032

    I’m an expert at this
    I would want a data series derived from monthly PAYE returns … mainly for the movement rather than the absolute … It is accepted that such data would not disclose the number of people seeking work, the number who have given up, or differentiate between full and part time … but it would confirm or deny survey statistics … it would reveal the expansion or contraction of the workforce, remuneration, and it could be done monthly and it could be done at the touch of a button … monthly GST and PAYE data is wasted data – it should be made available

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    • You can get down to a huge amount of detail in PAYE data and cross match that with IRD numbers. Savers that do not work get picked up when they try and pay less tax on their interest earned. No IRD number and you get taxed at a penalty tax rate of 45%.also these days when you want to buy property you need a IRD number.

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  4. What it wouldn’t help with is (a) unemployment statistics, which for many purposes – including monetary policy – are more important than employment, or (b) wage rate data. My point in this post was about the quite different interpretations offered by two sets of wage data.

    SNZ do use a lot of (and are increasing their use of) the administrative data in putting together the national accounts.

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    • I understand the point you are making – you have made it a number of times – the data is too volatile – I have seen too much doubt expressed too often – one can only conclude it is unreliable – yet as you claim – important decisions are being made – I am suggesting that movements in PAYE data should replicate and confirm or deny corresponding movements in STATS data – one way or another – if not why not – be put on enquiry

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      • For employment data, I don’t disagree with you. Where possible, SNZ is actually looking to move away from surveys and use admin data directly. I don’t think that is possible with an imbalance measure like “unemployment”.

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      • Also, in response to the unemployment data, I would like to see WINZ data, published monthly, as to the number of welfare beneficiaries receiving unemployment benefit. It’s possibly not precise because there is a front end delay, but, the movements, increase or decrease would confirm or deny the survey data until they learnt the idiosyncrasies, or simply publish as is

        A background reason for saying that is … in the auditing profession when vouching receivables the auditor will send audit requests to the debtor in the belief the public will identify errors and omissions far quicker than audit sampling of 1% samples … in that way if WINZ was to publish the data the public will be fully informed and any interpretations proffered by the academics will be soon picked up by the public

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  5. The beneficiary numbers certainly used to be available monthly, altho I’m not sure if they still are. There is likely to be some info in the cyclical patterns, but the data aren’t very useful for getting a fix on the absolute rate of unemployment, both because of stand-down provisions and because one can’t get a benefit if a spouse still has a job.

    The survey methos – complemented, as a cross-check by the census – is still in principle the best way of getting at unemployment and underemployment. But, of course, there are always questions about the sample size, whether they are doing the stratification properly, and even the way they collect data. Being in the survey, I was surprised to learn that they were happy for me to answer not just for myself, but for my wife. I think I give them pretty accurate answers, but might be tempted to answer for her even if I really wasn’t sure just to save her the hassle of a separate call from SNZ.

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    • I understand all that

      I’m used to working with the US data and the impact on financial markets and how they react to the data – weekly NJC New Jobless Claims – Monthly ADP Payrolls private employment change (excluding government and rural) – Monthly Non-Farm-Payrolls. In the US, unemployed beneficiaries are tipped off after 6 months and then go on Food Stamps. Somewhere, someone knows how many people are on food stamps but that seems not to be published. A degree of importance is the number of new applicants (NJC) which is published weekly. NZ doesn’t publish anything like this while at the same time telling us and O/S investors we need (want) foreign investment – they’re dreamin’ – as for waiting 5 years for census data – strewth

      WINZ unemployment data can be analysed each month into: (a) the beginning of month number, (b) new applicants, (c) discontinued recipients, (d) stood-down candidates, (e) end-of-month number

      Should be automatic – press of a button

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      • Are we disagreeing about anything? I suspect not. Certainly, neither MBIE nor MSD do a particularly good job of making administrative data readily available, on a timely basis and in accessible formats.

        (As it happens, I was invited to a meeting recently by an MBIE official who was telling me about work they have underway to materially improve their data release/presentation (in this case for immigration data). Long overdue, but it was encouraging that occasionally things improve.

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