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|
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+|
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.