Some Anglo labour markets

Having suggested yesterday that it might be time to think about cutting the OCR, or at least firmly committing to not raising it unless or until core inflation has already risen close to 2 per cent,  I was reflecting a bit on the handful of countries in which the central bank has raised policy interest rates, in particular Canada, the UK, and the United States.

In the UK case, one could almost discount the single increase, which really only reversed the cut put in place in the climate of heightened uncertainty after the Brexit referendum.   But in Canada and the United States there have been several increases –  in Canada, the policy rate is now 1.25 per cent, up from a low of 0.5 per cent, and in the United States, the Federal funds rate target is 1.25 percentage points off the lows.    In Canada’s case, there has even been signs of a sustained increase in core inflation, although in neither country is core inflation yet at target.

One material difference, if one contrasts New Zealand and Australia on the one hand, and the UK, Canada, and the United States on the other, is spare capacity in the labour market.  Since institutional features (labour regulations, welfare entitlements etc) vary from country to country –  affecting the “natural” rate of unemployment – one can’t take much from simple cross-country comparisons of unemployment rates.   But I’d noticed a headline suggesting Canada’s unemployment rate –  at 5.7 per cent –  was the lowest it had been in decades, and wondered how that comparison looked for the other countries.

Current unemployment rate Minimum since 1986
Australia 5.5 4.1
Canada 5.7 5.7
New Zealand 4.6 3.3
United Kingdom 4.2 4.2
United States 4.1 3.9

Like Canada, the UK also now has an unemployment rate that is the lowest in decades (I started the comparison from 1986 when the New Zealand HLFS started).   The United States unemployment rate is getting close to to the multi-decade low.   But in both Australia and New Zealand, the unemployment rates are well above the 30+ years lows.  Perhaps not very surprisingly, core inflation is weak in both countries  – the December quarter data for Australia are out tomorrow, but in September, the trimmed mean inflation rate was 1.8 per cent, against a target midpoint of 2.5 per cent.

Why these five countries?   Mostly, because all five have (a) data going back thirty years or more, and (b) have had floating exchange rates pretty consistently (the UK had three years in the European Monetary System).   Countries that had fixed exchange rates in the past often had bigger fluctuations in their unemployment rates.

Of course, even this comparison could be overly simplistic.  After all, labour market regulation etc can, and does, change over time, as do things like welfare benefit/work test regimes.  But over 30 years, both the New Zealand and Australian labour markets are generally regarded as having had more policy liberalisation than many other advanced countries.  Our minimum wage policy may be a partial exception, although even there we aren’t alone –  the UK, for example, has moved from having no national minimum wage to an increasingly binding (high) one.

And one area suggesting that our “natural” rate of unemployment (or NAIRU) might have been trending down more than in other countries, is the increased participation in the labour force of people 65 and over.  The OECD data only start in 2000, but here is how things have changed.

Labour force participation rate, age 65+
2000 2016
Australia 6.0 12.6
Canada 6.0 13.7
New Zealand 7.7 23.4
United Kingdom 5.3 10.7
United States 12.9 19.3

New Zealand’s participation rate for old people has increased far more than those of these other Anglo countries. And since the unemployment rate for this age group in New Zealand is a mere 1.2 per cent, almost arithmetically a rising share of the labour force made up of an age group with a very low unemployment rate will tend to lower the average unemployment rate, and the NAIRU.    Our NZS system is structured to provide a near-universal modest welfare benefit, but impose no penalty on those who continue to work.   If an old person loses their job, they face less immediate pressure to find a new one (than, say, a 21 year old), and it isn’t surprising then that the unemployment rate for that age group –  a rising share of the labour force –  is so low.

I wouldn’t want to base any strong conclusions on these simple comparisons, but when you hear talk of some other central banks modestly raising interest rates, remember that conditions aren’t the same from the country to country, and that in New Zealand (and Australia) not only is core inflation persistently low, but there is little sign of any intense pressure on capacity in the labour market.

12 thoughts on “Some Anglo labour markets

  1. Even though the OCR has been at the low end of 1.75%. Real interest rates for borrowers have been around 4.5% for 1 year fixed. Floating interest rates typically used by small businesses secured off residential loans still around 5.75%. In reality interest rates have not been low for the average borrower.

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  2. Yet we keep hearing how employers can’t get workers. In my opinion employers are often too fussy and wanting workers with just the right skills and experience (on paper anyway) rather than compromise or do any training. Many don’t seem to realise that scanning CVs and interviewing is a terrible way to select staff! So we end up bringing in immigrants for jobs that can easily be filled by Kiwis – like half the job pubic service jobs in Wellington now seem to be filled by immigrants!

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    • I think its more to do with the price that employers faced with a low inflation environment are prepared to pay workers in order to make a profit margin. Kiwis will only work when they can get a significant premium above the unemployment welfare rate compared to foreign workers that do not have that safety net base requirement.

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    • Teachers for example. In today’s Herald a letter claims schools have more than half their teachers trained overseas and there is a lead article about agencies offering $5,000 relocation grant for teachers from overseas. I know NZ trained teachers are popular overseas. Maybe our government should go the whole hog and close down teacher training and recruit all our teachers from abroad. Alternatively and it may be bad economics, I prefer the concept of training our own teachers and then paying them sufficient to stay in New Zealand (or at least return).

      The same letter claimed over half our staff in hospitals are from overseas too. This has certainly been my experience in Auckland – but you have to be careful judging – a young trainee nurse looked Korean and had a Korean name so wanting to know the best local Korean restaurants I asked her for advice and she said “I’m new to Auckland” so politely asking her where she was from and she replied “Christchurch” – more kiwi than I.

      More relevant to the article I’m surprised NZ’s unemployment rate is so high. Every newspaper says the economy is booming yet we have more unemployed than the UK which after Brexit is surprising.

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      • Apparently, there is a London location allowance for teachers since the 1920s so a Auckland based location allowance is not at all unusual.

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      • GGS – at my ‘aerobics for geriatrics’ class last week a lady told me she would be returning to teaching this year because my grandson’s school simply couldn’t find teachers. Extrapolating from this anecdote and tending to believe what the media is reporting it does seem to be a serious problem. I doubt if a majority of schools have more than half their teachers with foreign qualifications but this does seem to be a trend. The Herald article states the new overseas relocation grant is for overseas teachers and expat Kiwi teachers. The government has budgeted $2 million for this year.

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      • Our above 65 workers has an advantage over the 21 year old worker in that the Universal super has no clawback on extra income from continuing to work whereas the social welfare net for the unemployed is removed once work is available. The idea of a basic Universal wage that applies to both the above 65 and everyone else would even out the playing field. The problem is where is the funds going to come from for the government to be able to afford to pay a Universal basic wage to everyone. TOP and Gareth Morgan has not made very clear how they expect to fund that Universal basic wage policy.

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    • I disagree, altho much depends on how one frames the issue (as an organising framework I think it is useful, but it is very difficult to give robust empirical form to it).

      That said, what seems to bother Syll is this
      “The real damage done is that policymakers that take decisions based on NRH models systematically implement austerity measures and kill off economic expansion. The unnecessary and costly unemployment that this self-inflicted and flawed illusion eventuates, is something its New Classical and ‘New Keynesian’ advocates should always be kept accountable for.”

      If there has been a problem in NZ in recent years, it certainly isn’t this one. The unemployment rate has not been below anyone’s imprecise NAIRU estimate at any time this decade.

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      • “as an organising framework I think it is useful”

        Minimum standard for useful should be its a measure of labour under-utilization, not unemployment. Otherwise two economies with very different labour under-utilization rates but the same unemployment rates will apparently have the same inflationary impulses. There have been significant shifts in part-time employment in economies like NZ’s over several decades. I expect this makes it un-usable in models however.

        “but it is very difficult to give robust empirical form to it”

        Presumably means you agree there is no convincing empirical evidence that the NAIRU is a thing. Its entire existence is an invention dependent on the assumptions put into abstract economic models which produce it.

        “The unemployment rate has not been below anyone’s imprecise NAIRU estimate at any time this decade.”

        Could of course mean that the killing off of economic expansion has been systematic for over a decade in NZ. We don’t know the RBNZ does not publish their estimates or clearly indicate how much impact this has on their decision making. You yourself suggested several instances of the reserve bank taking overly rapid hikes in the OCR and killing off expansions.

        I also recall Michael Cullen fielding parliamentary questions from the opposition about the NAIRU and its relation to NZ’s unemployment rate around when the 3.3 rate was actually hit. This does indicate its built into NZ’s system of economic management.

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      • There are definitely NAIRU like concepts at use in NZ, although at the RB they tended to put more weight on output gap concepts – same basic theoretical foundation, and almost as hard to estimate empirically. The RB had NAIRU estimates in their models – I knew the numbers – but they didn’t have any direct influence on policymaking.

        I guess my key point about the useful of NAIRUs or estimates of potential output is that I am confident in the basic idea that at some point too much demand will spill into higher inflation, and expectations of higher inflation. Quite where that point is is hard to pin down, and can only be estimated for particular countries at specific times, in light of the specific institutional/regulatory features of the respective economy. As i noted, Canada has had consistently higher U rates than NZ, but that tells you nothing about appropriate mon pol in the two countries: there is likely to be some more information in the fact that U in Canada is the lowest for decades, and here it is still well above the 2007 lows.

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      • Going back to this

        “as an organising framework I think it is useful”

        incidentally there is a similar but much more equitable framework available if the government is offering a job guarantee. The reserve bank or treasury or government can use the NAIBER (stands for Non-Accelerating Inflation Buffer Stock Employment Ratio) rather than the NAIRU as a target. This is the ratio of job-guarantee workers to total workers and should indicate if the private sector is demanding more or less of the work force themselves at present and so wage pressures (a job-guarantee is a fixed price offer, the minimum wage, so doesn’t impact of wage pressures itself). This should alleviate some of the problems of economic institutions imposing deprivation on people in the NZ economy and encourage the economy not to suffer some of the inflationary bottlenecks of people going from unemployed to employed as the economy picks up.

        If its just useful as a framework then this would be a more equitable version of a similar framework to use.

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