A questionable indicator of the labour market (geeky)

The Reserve Bank has long been averse to too much focus on the unemployment rate.  Some of that was political.  Opposition MPs back in the 1990s would try gotcha games, trying to extract estimates of a non-accelerating -inflation rate of unemployment (NAIRU) with the aim of then being able to tar us with lines like “Reserve Bank insists full employment is x per cent unemployment” [at the time x might have been 7 per cent or more] or “Reserve Bank insists on keeping x per cent of New Zealanders unemployed”.   So there was an aversion to using the concept, and most certainly to writing it down.  If you don’t write things down, it is hard to have them OIAed.

But for decades there has been something a lot like a NAIRU embedded in successive versions of the models the Bank uses as a key input to the forecasting process.   But there was still an unease.  Some of it was those old political concerns.  Some of it was the aversion to being pressured into any sort of dual objective model –  even though discretionary monetary policy was only ever introduced to allow short-term macro stabilisation together with medium price stability.

In the last decade or so, it seemed to be some mix of things.   In 2007, the unemployment rate was down at around 3.5 per cent, but the official view at the time was that the overall economy was more or less in balance (as I noted yesterday the output gap estimates then were positive but quite small).  So, the unemployment rate tended to be discounted.   To the extent there were NAIRU estimates implicit in the thinking, they had been trending down for 15 years.  Perhaps, some felt, 3.5 per cent unemployment wasn’t much below a NAIRU at all.

In the years after the 2008/09 recession, there seemed to be two problems.  The first was a quite genuine one.  The HLFS unemployment rate numbers were quite volatile for a while, and while it was clear that the unemployment rate was still quite high, it was hard to have much confidence in each new quarterly observation.    The rise in the unemployment rate in 2012 only further undermined confidence among some of my then colleagues.  The economy seemed to be recovering.

U 2006 to 13

So there had always been a tendency to discount the unemployment rate.  Odd short term developments in the series itself reinforced that, and then as the recovery began to develop the Bank kept convincing itself that the output gap had all but closed.  If the output gap  –  which tended to be central focus for much of the analysis, even though it was something of a black-box, and prone to significant revisions –  had really closed, then surely the labour market must also be more or less in balance?  If the unemployment rate appeared to suggest otherwise, so much the worse for that particular indicator, which many at the Bank had never much liked.    When the Bank started the ill-fated tightening cycle in March 2014, they thought then that excess capacity had already been used up for a couple of years.  This is the output gap chart they ran then.

output gap mar 14 mps

At the time, the unemployment rate was still 5.6 per cent

(Contrast that output gap chart with the one from yesterday’s MPS, which I included in yesterday’s post.  At first glance, they look quite similar, but whereas in 2014 they thought excess capacity had been exhausted in 2011/12, now they think it was only exhausted in 2013/14.)

Various people had various ideas for how best to look at labour market data.  But mostly the unemployment rate was just ignored.

A year or two back, some US researchers had done an interesting exercise, trying to combine formally the information in a whole variety of labour market indicators, to distill an overall picture.  And somewhere along the line, someone got the idea of doing something similar for New Zealand.  And thus was born the Reserve Bank’s Labour Utilisation Composite Index, with the pleasing acronym of LUCI.

One day last April, Reserve Bank Deputy Governor Geoff Bascand gave a major address on monetary policy matters, Inflation pressures through the lens of the labour marketAs I noted at the time, it was little odd for him to be giving the speech –  as his day job was mostly responsibility for notes and coins, and the Bank’s corporate functions.  Then again, his ambition for higher office was pretty apparent, and earlier in his career he had led the Department of Labour’s Labour Market Policy Group.   Geoff on labour market matters should have been worth listening to.

The broad thrust of the speech was that high immigration wasn’t going to put much pressure on demand (contrary to the usual experience, and past Bank research), and that the labour market was pretty much operating at full capacity.  In support of these propositions, the Bank simultaneously released not just the speech, but three new Analytical Notes.    Since I had been harrying the Bank about its change of view of immigration, I focused then on the two immigration research papers, and identified a number of issues with them.     At the end of a long post I noted

There is a more material on other topics in Bascand’s speech, and another whole Analytical Note on other labour market issues which I haven’t read yet. I might come back to them next week.

But I never did.  Other things presumably distracted me, and thus I never got round to reading the Analytical Note introducing LUCI.   I didn’t until yesterday afternoon – I’d heard the Governor, or the Chief Economist, mention it at the press conference, and it was a wet afternoon, so I went and downloaded the paper.

The Reserve Bank has given quite a lot of attention to this brand new indicator.  In the Deputy Governor’s speech, it gets three whole paragraphs

Over the business cycle, a key driver of wage growth is the balance of supply and demand, or labour market ‘slack’. However, the unemployment rate is an inadequate indicator of labour market slack, particularly when the participation rate fluctuates. Researchers at the Bank have recently constructed a labour utilisation composite index, or LUCI, to help address this problem. Such indices combine the information in a large number of labour market variables into a single series of labour market tightness, and are used internationally to help gauge labour market pressures. The New Zealand index uses official statistics such as the HLFS and survey measures of the difficulty of finding labour, such as the QSBO.

By construction, the LUCI has an average value of zero. A LUCI value above zero indicates greater labour market tightness than usual – a value below zero indicates greater labour market slack than usual. Our research shows that, historically, a higher LUCI has been associated with stronger wage growth.

The LUCI suggests there was a large degree of slack in the labour market at the trough of the 2008-09 recession. The LUCI then gradually returned to zero, and has been around that level since early 2014 (figure 7). This movement is consistent with the range of the Bank’s suite of output gap indicators.

This wasn’t just some speculative new tool dreamed up down in the engine room by smart researchers, but still needing road-testing.  The Deputy Governor (presumably with the approval of the Governor and the Chief Economist) seemed sure it was action-ready.

Consistent with that approach, a chart of LUCI has appeared in all but one of the five MPSs since that speech.    Here was LUCI as she appeared yesterday

LUCI may 2017

On the Deputy Governor’s telling

A LUCI value above zero indicates greater labour market tightness than usual – a value below zero indicates greater labour market slack than usual.

In other words, on that particular interpretation, labour market tightness was now more severe than it had been in 2007 (just prior to the recession), and almost as severe as at the peak of the series in around 2004.

And, of course, Geoff Bascand didn’t just make up that interpretation.  It was what the researchers had said in their Analytical Note, almost word for word.   It was also what the footnotes on the LUCI charts in the MPSs said.  At least until yesterday.     In yesterday’s MPS, slipped in so quietly, the interpretation of LUCI had changed rather materially.   The chart was still there, it still looked the same as ever.  But below it, it has these words written

Note: a positive value indicates a tightening in labour market conditions

Lay readers may not immediately notice the difference, but it is substantial.  When the indicator was launched, with some fanfare (there are many clever new indicators, and not many get three paragraphs in a Deputy Governor speech), a positive value was interpreted as the labour market being tighter than usual (thus the pesky single indicator, the unemployment rate could keep on being largely ignored).   But now a positive value simply means that the labour market is a bit tighter than it was last quarter.    If there was lots of slack last quarter, it simply doesn’t matter to the indicator –  all that matters is the direction of change.

The Bank didn’t draw this to readers’ attention at all.  They didn’t change the heading on the chart either.  It was a bit naughty really.       What it means is that whereas we once had an indicator –  using 16 different variables –  that might have suggested the unemployment was completely misleading as a measure of slack, what we actually have now in LUCI saying similar things to the unemployment rate.  The unemployment has been edging down, and LUCI has been positive.   But that LUCI number is now felt to tell us nothing at all about the absolute level of labour market slack (or even the level relative to a long run of history).

I don’t quite know how the Bank fell into this –  except, perhaps, for the wish (for a labour market measure suggesting the market was at full capacity –  in line with the output gap estimates) getting the better of hard-headed challenge and scrutiny.

The approach they used to construct LUCI was very much the same used to construct the sectoral factor model of core inflation.  In essence (there), get the rates of price increases for all the CPI components, and look for a common theme (or “factor”) that runs through them all.    It seems to work quite well there.  All the variables are expressed the same way (percentage changes).      But LUCI is a bit different.     Here is the list of all the variables used.

LUCI components

They take each variable and standardise it relative to its own mean.

But it is an odd mix of variables.   There are annual percentage changes mixed in with levels.  And some of those levels measures (eg the QSBO ones) are the outcome of questions that are actually technically expressed in change terms.  It is also a mix of quantity measures and price (wage) measures.   When I looked through the list, the first real oddity that struck me was that unemployment itself is not expressed as a percentage rate.  Rather, they take the number of people unemployed and calculate the percentage change.   If, then, every single person was fully employed –  so the labour market was very tight –  this component  (used in calculating LUCI)  would be showing a zero percentage change.  They’ve done the same thing to all the quantity variables, so it should have been obvious from the start that what they were doing (at least for that half of the inputs) was looking at variables that would produce a change indicator, not a levels one.

I understand why they did it.  The unemployment rate trended down for 15 years or so.   The gap between the actual unemployment rate and the average unemployment rate wouldn’t be a very meaningful indicator.   But it meant, almost inevitably, that the new indicator couldn’t be an indicator of absolute labour market tightness, only (at best) an indicator of changes in tightness.

But there are other problems.  Think about what would happen if (to be deliberately extreme) the population doubled, and yet there was no change in “true” labour market tightness.    That isn’t far from the Reserve Bank’s story about the recent immigration shock –  they told us again yesterday that, contrary to past common experience, they think the demand and supply effects have more or less offset each other.

But if the population doubled, and there was no change in “true” labour market slack,  we would still expect to see employment, numbers unemployed, the number of short-term unemployed, numbers underemployed, the number of filled jobs, hours worked, the working age population, the number of job ads, and the number of registered job seekers all increase (that is roughly half the variables in LUCI).   The unemployment rate (%), for example, might stay the same, but both the numerator and the denominator would increase a lot.  Since LUCI uses annual percentage changes, it seems highly likely that such a shock would show up as a big increase in LUCI in the year the population shock happened  (in my extreme examples, the APCs would go to 100 per cent that year), even if there had been little or no actual change in labour market tightness.

It seems astonishing that, for a variable launched by a Deputy Governor in a speech playing down the net demand effects on a large immigration shock, this issue never seems to have occurred to them.

There are other, probably more minor and mundane, problems too.  These ones  probably weren’t foreseeable in April last year, but probably still should have been highlighted as they became apparent.  The revised HLFS was introduced in June last year.  It is pretty clear that the modifications to the questions have led to material step changes in the HLFS measure of hours worked and of employment (you can see the anomalies in the charts in this post from earlier in the week).   (For some reason, they don’t even use the QES measure of hours in LUCI).     Perhaps a distortion of this sort to only two of the component variables won’t have affected the common factor that the model is trying to identify.  But we don’t know.  I hope the Reserve Bank does.   This particular problem will wash out of the data in the next HLFS release (since a year will have passed, and LUCI uses annual percentage changes), but for now it is another reason not to have much confidence in LUCI as any sort of indicator of labour market tightness (level or changes).

I did put some of these points to the Reserve Bank yesterday, mostly just to check that my understanding of the technical points was correct. I had a helpful response this afternoon which essentially establishes that they are (obviously I’m not associating the Bank with the interpretations I’ve put on those technical points).

Overall, it isn’t a case of the Reserve Bank at its best.  I have no problem at all with them doing the research in the first place.  We should always be looking for new or better ways to understand what is going on, and how best to combine sometimes conflicting bits of data.      But it doesn’t have the feel of something that was at all well road-tested before being launched as a major indicator variable.  And then, when they did finally realise that it was much more like an indicator of changes in labour market pressure rather than the level of pressure, that recognition was sneaked through without even an explanatory note, leaving anyone who had taken the earlier use of LUCI at face value none the wiser unless they were a particularly assiduous reader (and I’m usually not, when it comes to changes in footnotes on charts).

We now have a recognition that LUCI isn’t a measure of overall pressure on the labour market.  It may be, loosely speaking, an indicator of changes in labour market pressure, but even then that reading is made more difficult when you get large population shocks (of the sort that NZ is prone to, with quite variable large immigration flows, in a way that many other countries are not), and when the Reserve Bank repeatedly assures us that its overall interpretation is that this particular population shock isn’t putting additional net pressure on demand, and may even be easing capacity pressure in the labour market.

We really should expect better from our central bank.  Speeches like Bascand’s, and documents like the MPS, will have had heavy involvement from all the members of the Governing Committee –  the Governor himself, the incoming acting Governor, the incoming Deputy Chief Executive, and the long-serving Chief Economist.   One can’t help thinking that they’d have been better served taking the unemployment rate –  actually designed directly as a measure of excesss capacity –  and wage developments rather more at face value.   And of recognising that, contrary to LUCI, no serious observer thought that the labour market was at its tightest in 2004.   It isn’t much harder than that.

Reflecting on the macro data

The Reserve Bank’s Monetary Policy Statement (Graeme Wheeler’s second to last) will be out on Thursday.  I’m not in the market economists’ game of trying to tell you what the Bank will do and say (although no one expects they will do anything concrete with the OCR this time).  I’m more interested in questions around what they should do.  In time, what they should do, they usually will do.  But sometimes not until they’ve tried the alternatives.

I wrote about last month’s CPI data a few weeks ago, concluding that there had been a welcome, and expected, increase in core inflation (it is what typically happens if inflation is below target and the OCR is cut fairly substantially) but that

With the unemployment rate still above estimates of the NAIRU, and most indicators of inflation suggesting that core is probably (a) still below target, and (b) not picking up very rapidly, it certainly isn’t time for hawkish talk about near-term OCR increases.

Not everyone agrees of course.  I noticed the BNZ’s economic commentary yesterday which opened with this confident assertion

There is no excuse for the cash rate to be just 1.75% in New Zealand.

I don’t think I’m unduly caricaturing their record to say that, for at least the last decade, the BNZ economics team has never seen an OCR increase they didn’t like, even –  or perhaps especially –  those which had to be quickly reversed.  But mindful that in the story of the boy who cried wolf, the wolf eventually did come, I thought it was worth having a look at the latest wave of data.  Last week, we got the full quarterly set of labour market data (HLFS, QES, and LCI), and the Reserve Bank’s quarterly expectations survey.  To cut a long story short, it doesn’t alter my view.

Take the expectations survey first.   The headline story was one in which the two year ahead expectations of the inflation rate (of a sample of moderately informed observers –  including me) rose quite materially, and now stand at 2.17 per cent (up from around 1.65 per cent in each quarter last year).

infl and expecs

This measure of expectations isn’t typically very volatile, but it is typically somewhat responsive to changes in headline CPI inflation.  We’ve just had quite a large change in headline inflation, so some increase in the expectations measure shouldn’t be surprising. It certainly shouldn’t be concerning.  After all, ideally, the Reserve Bank wants people to believe, and act as if they believe, that on average over time CPI inflation will average around 2 per cent –  the mid-point of the target range, and the explicit focus of the current (but about to expire) PTA.

In fact, no one really knows whether this survey measure captures how people actually think and behave in real transactions in the goods, labour and financial markets.   It might be as good a proxy as we have, but (a) we don’t know, and (b) it still might not be good at all.  Glancing at the time series, there is a tendency for falls and rise to be at least partly reversed quite quickly.

But if inflation expectations are really in some sort of 2 to 2.2 per cent range, I’d welcome that.  With repeated increase in tobacco excises –  not some underlying economic process –  there is a reasonable case, in terms of the PTA, that headline inflation should average a little higher than the mid-point, and than “true” core inflation.  Only if inflation expectations were to rise further from here might I start to get a little disquieted.

In trying to make sense of the inflation expectations numbers, one thing I haven’t seen mentioned is the Labour Party’s monetary policy release.   There was a quite a bit of focus last month on their pledge to add some sort of employment objective to the Reserve Bank Act, and concerned expressed in some quarters that that could lead to higher inflation over time.   If it was a factor, you’d presumably have to take the probability of Labour leading a new government (call it a coin toss at present?) and multiply that by the probability that the change in regime (and perhaps the sort of people a new government might appoint) would make a material difference over time.  I have no evidence one way or the other, but it wouldn’t surprise me if there was a small effect of this sort.   (My own two year ahead expectation in the survey was 1.5 per cent –  around the current rate of inflation in the Bank’s preferred sectoral factor model).

Not many commentators seem to pay much attention to the rest of the expectations survey, even though its strength is partly the range of macro questions that are asked (although I’ve suggested some modifications to the Bank in their review of the survey).

Take GDP for example. There is no sign of respondents expecting real growth to accelerate.  Two years out they expect annual real GDP growth of 2.6 per cent – down on the previous quarter, but not far from the average response over the last couple of years.    But the survey also asks for quarterly GDP predictions for the next couple of quarters, and year-ahead predictions.   That enables one to derive an implied six monthly growth rate for the second half of the coming year.  Here is the gap between the expected growth rates for the first six months and the second six months, going back to just prior to the 2008/09 recession.

expec GDP growthAs we headed into the recession there was a lot of expectation of a strong rebound.  Even up to around 2012, respondents expected growth to accelerate.   For the last few years they haven’t expected any acceleration, and now the expect it to slow.  To be specific, respondents expect 1.6 per cent total growth in the first half of this year, slowing to 1.2 per cent in the second half of this year.     We don’t know quite why –  perhaps they expect immigration numbers to slow –  but it doesn’t speak of a sense that things are getting away on the Reserve Bank.   Similarly, two years out respondents expected that the unemployment rate would still be 4.9 per cent.

Perhaps these respondents will be proved wrong –  they often are, forecasting is like that –  but at the moment it doesn’t look like an imminent risk of core inflation rising much further, or to levels that might prove problematic for a flexible inflation targeter focused on medium-term inflation outcomes around 2 per cent.

What of the actual labour market data?   We have some problems at present because of the breaks in various HLFS series that occurred when the revised survey questions were put in place last year.  I’m still staggered they could have made these changes without running the two sets of questions in parallel for perhaps a year, to allow robust adjustments to be made for the discontinuities.   HLFS hours worked measures, employment measures, and probably participation rate measures all seem to have been affected to some extent.   We are pretty safe in saying that the number of people employed in New Zealand did not grow by 5.7 per cent last year (as the HLFS suggests).

What of the simplest headline number, the unemployment rate?   There isn’t much doubt that the unemployment rate has been falling over the last few years.  It is what one should expect after a serious recession, and with the stimulus to demand provided by low interest rates and large migration inflows (given that immigration typically adds more to demand in the short-term than it does to supply, thus tending to lower unemployment and use up spare resources in the whole economy).

But what should be somewhat disconcerting is that the unemployment rate has (a) gone largely nowhere in the last year, and (b) is still well above pre-recession levels (unlike the situation in many other advanced countries with their own monetary policies).   In the prevous boom, the unemployment rate got down to around 4.9 per cent as early as the start of 2003.     The picture isn’t much different if one looks at the broader (not seasonally adjusted) SNZ underutilisation measure.

U and under U

There still appears to be some progress in using up spare capacity in the labour market, but not very much at all.

What about the rate of job growth.  Fortunately, we have two measures: the (currently hard-to-read) HLFS household survey measure of numbers of people employed, and the QES (partial) survey of employers asking how many jobs are filled.   Unsurprisingly, the trend in the two series are usually pretty similar, even if there is a fair bit of quarter to quarter volatility.

employment

Since we know there are problems in the HLFS, and the QES doesn’t look to be doing something odd, perhaps we are safest in assuming that the number of jobs has been growing at an annual rate of around 2.5 to 3 per cent.   That isn’t bad at all. But SNZ also estimates that the working age population has been growing at around 2.7 per cent per annum.  No wonder the unemployment rate is only inching down.

One can do a similar picture for the annual growth rates in the two (HLFS and QES) hours worked series.

hours qes and hlfs

It was pretty clear that there was around a 2 per cent lift in HLFS hours worked from last June, just on account of the new survey questions.  It seems safer to assume that total hours worked across the economy might have grown by around 3 per cent in the last year.   That is faster than the growth in the working age population, pointing to some increase in effective utilisation, but not a dramatic one.  For what it is worth, in the latest releases, the two hours measures were both quite weak in the March quarter.

(And remember that nothing in the expectations survey data suggested pressures were likely to intensify from here.)

And what of wages?    There is a variety of measures.  The QES measure is quite volatile –  there are issues of changing composition –  and I don’t put much weight on it.  But for what it is worth, average hourly earnings rose 1.6 per cent in the last year on this measure, around the lowest rate of increase seen for decades.    The Labour Cost Index measures should get more focus (but have some challenges of their own).

lci inflation 2Perhaps there is some sign of a possible pick-up in the analytical unadjusted series (which doesn’t try to correct – inadequately –  for productivity changes) but it is a moderately volatile series, and the most recent rate of increase is still below the peak in the last little apparent pick-up a year or two back.

A common response is “ah, but what about the lags?”.  But as we’ve shown, there is little sign of any material tightening occurring in the overall labour market, no sign of expectations that that is about to change, and so little reason to expect much different wage inflation outcomes over the next couple of years from what we’ve seen in the last couple.  At best, there might be some slight pick-up in wage inflation (especially if the increase in inflation expectations is real), but any pick-up is going to be from rates of increase that have, over the last couple of years, been consistent with disconcertingly low rates of core inflation.

So where does it all leave me?  Mostly content that an OCR around 1.75 per cent now is broadly consistent with core inflation not falling further, and perhaps continuing to settle back where it should be –  around 2 per cent.   Of course, there is a huge range of imponderables, domestic and foreign, so no one should be very confident of anything much beyond that.   But it is worth bearing in mind that the unexpectedly strong net migration over the last few years has been a significant source of stimulus to overall domestic demand (including demand for labour).  In the face of typically too-tight monetary policy, it is part of why the unemployment rate finally started gradually coming down again after 2012.

Whatever happens to the cyclical state of the Australian economy, the National government is already putting in place immigration policy changes that should be expected to lead to some reduction in the net inflow of non-citizens, and two of the main opposition parties are campaigning on promises of much sharper reductions than that.   If such policy changes come to pass then, all else equal, the OCR will need to be set lower than otherwise.  It isn’t something that Graeme Wheeler can or should actively factor into this week’s OCR decision, but it may well be something the acting Governor needs to think hard about (if any decisions he makes are in fact lawful) after the election.

The underperforming New Zealand economy

Today’s labour market data seem to point again to the underperformance of the New Zealand economy.  Oh, the headline rates of GDP growth haven’t looked too bad –  although they are quite modest in comparison with previous New Zealand growth cycles –  and employment growth has been strong.  But to what end?  Labour productivity looks still to be shockingly weak, yet another year ends with the unemployment rate well above Treasury estimates of NAIRU, and even as core inflation has picked up somewhat (yesterday’s post) wage inflation seems to be about as subdued as ever.  There seems to be something quite wrong with the economic strategy that presides over such outcomes –  and no sign from the major opposition parties that they have anything materially better or different to offer.

Hours worked, as captured in the HLFS, have increased strongly in the last five quarters, up by 6 per cent (adjusting for the break in the series, because of new methodology in the June quarter last year).  There have only been a couple of periods in the 30 year history of the series that have seen growth in hours worked that rapid.

We don’t have GDP data for the December quarter yet, and of course earlier quarters are always subject to revision.  But for the four quarters we do have, real GDP (averaging expenditure and production measures) rose by 4.0 per cent.   In other words, unless quarterly GDP growth for the December quarter is at least 1.9 per cent, we’ll again have had no productivity growth at all during that five quarters of rapid growth in hours worked.  Few commentators I’ve seen think GDP growth was anything like that strong  –  something a bit over 1 per cent seems closer to expectations.  If so, we’ll have had really rapid increases in hours worked and employment, but the economy will have got less productive at the same time.  (And recall that we’ve now had five years of no productivity growth).

In the past, periods when growth in hours worked have been very strong haven’t always seen rapid productivity growth.  There can be good reasons for that, if (on average) lower productivity workers are being reabsorbed into employment for example.  In the early-mid 1990s we had a couple of years of very rapid growth in hours worked, and over that period productivity growth, although positive, was pretty weak.     But over that couple of years the unemployment rate fell from around 10 per cent to around 6 per cent, and the employment rate also rose by around 4 percentage points.

Here is the unemployment rate (four quarter moving average to smooth through some of the quarterly noise, down and up)

u-rate-dec-16  The unemployment is still slowly trending downwards, but the pace is quite excruciatingly slow.  Over the five years in which there has been no productivity growth, the average unemployment rate has fallen from around 6 per cent to around 5 per cent, and over that period Treasury estimates that the natural rate of unemployment (determined by things like demographics, welfare provisions and labour market regulation) has been falling –  and is now around 4 per cent.

So we’ve had:

  • no productivity growth (perhaps even a contraction over the last year)
  • high and only slowly falling unemployment (and for those inclined to glibly respond that 5 per cent unemployment isn’t high, recall that that numbers mean that any one time one in 20 of those people available for wanting, wanting to work and making active efforts to find work can’t find a job).

And what of wage increases?  Unsurprisingly perhaps, there has been little sign of any recovery nominal wage inflation.    A standard response is that wages will inevitably lag improvements in the labour market, but….the unemployment rate has now been falling slowly for five years or so.

There is a variety of different wage inflation measures.   Here are two from the Labour Cost Index –  both the headline published series, which tries to adjust for productivity growth, and the Analytical Unadjusted index which is more like a raw measure of wage inflation.   In both cases, I’ve shown the data for the private sector.

lci

Of course, if one believes this data (in particular the red line) there must have been some continuing productivity growth in New Zealand, even if at a slower rate than previously.  Quite why SNZ finds (implied) productivity growth here, and not in national accounts (real GDP per hour worked) is a bit of a mystery.

The other measure of wage increases if from the QES. In this case, the annual rate of increase in private sector ordinary time hourly wages.

qes-wages

There is some volatility in this series, and I’m not sure I’d want to put much at all on the reported sharp fall-off in hourly wage inflation over the last year, but…….there is certainly no sign of an increase in wage inflation.

It is always easy to look around and find countries that have done worse than New Zealand –  several of the euro area countries spring readily to mind.    But our performance, and the gains for our people, are nothing much to celebrate.  And while, for example, there has been a global slowdown in productivity growth since the mid 2000s, New Zealand’s productivity levels are so far below those of the more strongly performing OECD countries, that there was no necessary reason why we needed to share in the slowdown.  It should, if anything, have been an opportunity for some convergence.  But there has been no sign at all of that.

I don’t find that particularly surprising –  an economic strategy that appears to involve attracting ever more people to one of the most isolated corners on earth, in an era in which connections, contacts, and proximity seem to matter more than ever, all while producing a very high real exchange rate (again resurgent in recent weeks/months), and the highest real interest rates in the advanced world, is simply a recipe for continued long-term underperformance.  One would like to think that the government –  and the Opposition which seems to support very similar policies –  has been surprised. They can’t, surely, have planned on such a bad performance.  But persistent bad outcomes, of the sort New Zealand continues to see, should be prompting some serious policy rethinks, not just more PR about how rapidly employment numbers are growing.

 

Weak productivity growth: can composition effects explain it?

One of the charts I’ve run a few times in the last few months has had a bit of extra coverage in the last few days.

real-gdp-phw-to-q2-2016

It is a pretty straightforward chart (although it would be a little easier if SNZ followed the practice of the ABS and reported the series routinely, rather than leaving it for people to calculate).  I simply averaged the expenditure and production measures of real GDP, and divided the results by the total number of hours worked (from the HLFS).  And real GDP per hour worked itself is a pretty standard measure of labour productivity.

The interest, of course, has been in the now four years or so of no growth in labour productivity.  On the face of it, it is a pretty poor performance and tends to act as something of a counterpoint to a focus by the government (and its business and media cheerleaders) on headline GDP numbers –  which are high largely because the population has been growing so rapidly, rather than because resources are being used more productively.  Productivity is, in the long run, almost everything when it comes to improving material living standards.

I would add a few caveats around the chart, some of which I’ve made here before.  The first is that the very final observation should be heavily discounted or ignored.  SNZ introduced a revised HLFS methodology in June, which has resulted in a step up in the number of hours recorded (perhaps by around 1 to 1.5 percentage points).  At some point that might be reflected in a slightly higher level of GDP, but for the moment there is just an inconsistency.  (And, of course, there is always some quarter to quarter volatility in the data too.)

The second caveat is the old warning that when a number looks particularly interesting it might well be wrong.  Four years of no productivity growth at all is not unprecedented here or abroad (on current data, for example, GDP per hour worked in the UK now is only around 2007 levels) but….these series are prone to revision, and while they could be revised either up or down, it shouldn’t greatly surprise us if the picture for 2012 to 2016 looks a bit different when we review the data a few years hence.

The big revisions tend to happen as a result of the annual national accounts.  Statistics New Zealand gets a lot more detailed data, produces full annual data once a year (including revisions to earlier years), and then updates the quarterly series that have already been published.  The annual data for the year to March 2016 are out later this month, and the revised quarterlies will presumably be available with the September quarter GDP release next month.  Expect changes (including in the chart above).

But for now, the data is as it is.  Bernard Hickey gave the chart some prominence, with the editorial comment “We’re just pumping more low wage workers in the economy and working more hours”, and observing “Jobs soaked up by net migration & more >65 yrs working”

That prompted Eric Crampton of the New Zealand Initiative, writing on his Offsetting Behaviour blog,  to produce a post asking whether compositional changes in the labour force might account for some or all of the weak productivity growth in recent years.  As he quite rightly notes, if a lot of very unskilled people started working lots more hours (in total), while higher skilled people worked the same number of hours, at the same real output, average real GDP per hour worked would fall even though no one individually was less productive.

First, Eric noted that the number of people on welfare benefits has fallen quite a bit over the last few years.  If –  as seems reasonable –  those people had been of below average productivity, that might tend to lower overall productivity somewhat.

But here is my problem with that story.

working-age-benefits

Working age beneficiary numbers have certainly fallen over the last few years, but they rose a lot during the recession.  There is seasonality in the data so I’ve only shown one observation per annum (June), but in June this year the share of the population of working age on welfare benefits was almost exactly equal to the share as the recession was getting underway in 2008.  People moving on and off benefits might affect average labour productivity to some extent, but absent any sign of an upward surge in productivity over, say, 2008 to 2010 it is difficult to believe this effect explains much of the recent absence of productivity growth.  (And, of course, the decline in beneficiary numbers doesn’t appear to have been in the faster than in the five years leading up to 2008).

Eric also includes a graph showing changing employment rates for different age cohorts, observing

The youngest workers are least productive. They hugely dropped out of the labour market with the changes to the youth minimum wage, but that decline’s since reversed a bit. There’s been a long trend growth in hours worked among older workers, but typical wage patterns over the lifecycle have wages flattening out from the early 50s or thereabouts. Big increases in employment rates among cohorts with lower than average productivity, or at points in the life cycle where wage profiles (and presumably productivity) flatten out, will both flatten or worsen GDP per hour worked.

What to make of that?  Here is a chart of the changes in employment rates for each age group, both since 2012 (when productivity seems to have gone sideways) and since 2007, just before the last recession –  and it isn’t a misprint/error; we’ve had no change in the employment rate over the full period from 2007 to 2016.

employment-rates-by-age

Over the last four years, the least productive age group (15 to 24) had the largest increase in employment rates,  and the 65+ employment rate has kept on growing quite a bit.  But….employment rates for 25 to 44 years olds increased quite a lot too (more than the over 65s).    And if we take the full period (Sept 07 to Sept 16), we’ve had a big drop in the employment rate for the lowest productivity age group.  That fall was, of course, concentrated in the first half of the period, but there was no obvious corresponding surge in average productivity at that time (granting that one never knows the c0unterfactual).

And by New Zealand standards, there is nothing very obviously unusual going in the 65+ employment rates.  Between 2007 and 2016 the 65+ employment rate rose by 8.7 percentage points. In the previous nine years, it has risen by 8.1 percentage points.

Perhaps one could dig deeper (if the data existed) and the impression might change, but it isn’t obvious that the changing age composition of the workforce can explain four years of no labour productivity growth.

Sometimes people suggest that perhaps our labour market is performing so much better than those of other advanced countries which might in turn explain the poor productivity growth.   But here is a chart showing employment rates for New Zealand, Australia, and the median OECD country.

oecd-empl-rates

There might be something in the story relative to Australia over the last few years.  But comparing New Zealand with the OECD median, our employment rate fell about as much as that median did during the recession, and has rebounded only slightly more since.  Compare New Zealand and the typical employment rate just prior to the recession and almost half of OECD countries have had more of an increase than (the slight rise) New Zealand has had.

Eric also suggests that we need to think about the role of immigration

And, obviously, net migration’s increased over the last few years. New workers getting settled in New Zealand might take a bit to find their feet as well, while still being better off than they were before.

Just two thoughts.  First, around half the huge swing upwards in net inward migration has been the result of the sharp decline in the number of New Zealanders leaving.  They won’t have taken “a bit of time to find their feet”.    Second, for the other migrants, there might be something to the story (although there hasn’t been much variability in the number of actual residence approvals) through, for example, the increased number of foreign students working and people on working holiday visas.  But….the New Zealand Initiative and other business lobby groups can’t really have it both ways. They often tell us it is imperative that we have the sort of immigration policy we have now, because (for example) New Zealanders just can’t, or won’t, do the work (at a price firms can afford). There is a strong hint in that sort of argumentation that immigrants are on average actually quite highly productive relative to natives (even though the data show that for most immigrant groups it can take decades for the earnings to reach those of similarly qualified, similarly experienced New Zealanders).

I wouldn’t rule out the possibility that the compositional effects resulting from immigration are part of the explanation for the latest productivity slowdown (although we didn’t see something similar when Australia had its huge surge) but….if the Initiative is right about the general economic payoff to high immigration, we should be expecting a pretty big lift in average labour productivity (the more so to make up for four years of no growth) really quite soon.

One other lens on the composition issue is offered by our own official annual productivity data (for the “measured sector” rather than for the whole economy).   SNZ produces both labour productivity and multi-factor productivity estimates, and they also produce both series using both total hours worked and an estimate that attempts to adjust for the changing composition of the labour force.   The latter isn’t precise by any means, and won’t pick up all the sorts of issues that have been touched on in this post, or Eric’s, but they are just another angle on the question.  The MFP numbers are valuable because they help get round the question of whether, say, labour productivity is just poor because firms have substituted away from capital towards abundant labour.  Any such substitution would be less troubling if the result was showing strong MFP growth.

Unfortunately, the most recent data are for the year to March 2015.  In the labour productivity data, SNZ weren’t detecting any sign that a worsening average quality of the labour force was explaining the productivity slowdown – they reported much the same improvement in the average quality of the labour force as in earlier years.  And here is the MFP chart.

mfp-measured-sector

On this measure, of labour-quality adjusted MFP, there has been no productivity growth at all since around 2006.    There is some modest growth over 2012 to 2015 (a bit over 1 per cent over three years).

Where does all this leave us?

I remain a bit uneasy about the prospects the data could be revised, but then data revisions are always a risk.  But if the average real GDP per hour worked data are roughly right – and there really has been no average labour productivity growth for perhaps four years now –  I think we should be more inclined to believe that it is telling us something about overall economic underperformance, than that it is simply, or even largely, reflecting compositional changes in the labour force. To repeat:

  • the share of working age welfare benefit recipients has fallen gradually over the last few years, but then it rose in the previous few years, and there was no obvious associated productivity surge,
  • over the last few years the employment rates of the low productivity young age groups have risen, but not noticeably faster than those for, say, the rather large 25 to 44 age group.  Over 65s employment rates are rising more than those for other age groups, but that change has been underway for many years.  There was no obvious associated productivity surge (at least in the reported data) when youth employment rates dropped sharply.
  • there is nothing in cross-country comparative data suggesting employment rate changes here have been unusual, in ways that might help account for unusually weak productivity growth here.
  • compositional effects resulting from increased immigration of non-citizens (especially  working students and working holidaymakers) could be part of the story (averaging down real GDP per hour worked, even if no one individually is less productive), although it would be worth testing that story against other episodes in other countries.  If higher immigration is playing a role in dampening productivity growth, I suspect it isn’t mostly a compositional story, but one about overall pressures on domestic resources, which have contributed to holding up real interest rates (relative to those in other countries) and the real exchange rate.
  • and overall MFP growth –  whether SNZ estimated for the measured sector, with some labour composition effects accounted for, or the Conference Board’s estimates that I showed the other day – also seems to have been weak to non-existent.

 

 

Revising the unemployment rate

Last week, Statistics New Zealand published the backdated results from their revamp of the HLFS.  It didn’t get very much coverage, apart perhaps from the headline result, in which the estimate for the unemployment rate for the March 2016 quarter is now 5.2 per cent, down from 5.7 per cent previously.

The change arises mostly because Statistics New Zealand has reclassified those searching for a job by checking websites as not unemployed –  to be “unemployed” for these statistical purposes one has to be out of work, available to start work, and actively seeking work.  Previously, those using just newspaper adverts were classified as  passively seeking work, while people using other search mechanisms were treated as actively seeking work, and thus included with the officially unemployed.  20 years ago web-based advertising  was either non-existent or almost relevant, and now to a large extent it dominates the market.  Fortunately, SNZ had enough data to produce backdated estimates on the new definition back to 2007 (any differences prior to that appear to be very small).

The change brings the New Zealand definition of unemployment into line with the recommendations of the ILO, and seems sensible on its own merits –  there isn’t any good reason to treat newspaper and web searches differently for these purposes.

The headline difference in the unemployment rate is quite large.  But all the gap opened up some years ago.

hlfs revisions

And here is the difference in the two series.

hlfs revisions 2

So, in essence, the data for the last six years aren’t materially affected by the revision and the new methodology: the new series is lower than the old series throughout, but by a fairly constant margin.  The unemployment rate didn’t fall much from the recessionary peak on the old methodology and didn’t fall much on the new methodology.  For example, on the old method the unemployment rate was 6.1 per cent in December 2013, just before the ill-fated tightening cycle began.  Since then, on the old methodology the unemployment rate has fallen by 0.4 percentage points.  On the new methodology, it was 5.7 per cent in December 2o13, and has fallen by 0.5 percentage points to 5.2 per cent.

But the new series does throw up a couple of questions.  The first is about international comparability.  As I noted, the SNZ release noted that the new methodology was more consistent with ILO recommendations.  That is good on its own terms.  But I was curious as to whether other countries were following ILO recommendations (yet) in this area.  I’ve known of other cases –  household debt was an example –  where we improved New Zealand data, drawing more into line with international standards, only to find that the international comparability wasn’t really improved because most other countries we were interested in weren’t yet following international guidelines.

So I asked SNZ whether they had any sense of how other countries were doing on this particular issue.   I got a full and prompt response from the manager of their Labour and Income Statistics area.   The short answer was that some countries seem to comply in this area, and others don’t.  Perhaps fortunately for us, both Australia and the US appear to treat looking at (newspaper and online) adverts the same way we do –  passively seeking work, rather than actively seeking work.    But, on the other hand, Eurostat treats looking at adverts as actively seeking work.  It is a reminder that simple levels comparisons of unemployment rates across countries often doesn’t involve (strictly) comparing apples with apples.  Comparing changes within over time within individual countries should still be valid.

The other question is how to think about the normal/natural/non-inflationary rate of unemployment.  At 5.2 per cent, our unemployment rate is still a long way above the pre-recessionary lows  (3.3 per cent) –  by contrast in the US and the UK, the recessionary increase in the unemployment rate has been fully unwound.  But the gap between 5.2 per cent and 3.3 per cent is materially less than that between 5.7 per cent and 3.4 per cent (on the old methodology).  Since most everyone thought that the unemployment rate prior to the recession was below the natural or non-inflationary level, does this new data raise questions as to whether the current unemployment rate might be not far from the NAIRU?

I don’t think there is any easy answer to that question.  Only time will tell.  As happened in the US and the UK we –  and the Reserve Bank –  need to see what happens, to wage and price inflation, as the unemployment rate gets down to the mid to low 4s (one hopes the Reserve Bank allows us the chance to see).  But don’t rule out the possibility that the NAIRU itself has been falling –  as it was widely perceived to have done in both the US and New Zealand in the 1990s and 2000s.

One reason why it might fall is the growing importance of old people in the labour market. Of all the OECD countries, New Zealand has seen the largest increase in the participation rate of older people (65+) in the 20 years since 1995 –  rising from 6 per cent to 21 per cent. .And we now have the fifth highest participation rate for the over 65s among the OECD countries.

over 65 participation ratesAnd the unemployment rate among older people is very low indeed   – before the recession and now both around 1.5 per cent.  That makes sense –  older people have New Zealand Superannuation to fall back on, with no work test, so there is typically no urgency to find another job (to be “actively seeking”).  But it is a very different –  and less cyclical –  unemployment rate than that for the rest of the workforce.

And here is the share of the over 65s in the labour force.  Even just over the last decade, the share has increased from 2.6 per cent to 5.8 per cent of the total labour force.

over 65s share

With such a low unemployment rate among this (rapidly growing) part of the workforce, the overall unemployment rate (actual and natural) should be trending lower over time, all else equal.

How material  this proves to be remains to be seen.  But a line I often used to use in debates about unemployment is that if everyone spent a year officially unemployed (available and actively seeking work) in a 45 year working life, that would produce an unemployment rate of only around 2.2 per cent.  For many people, a full year officially unemployed is a very long time –  more than a few people are probably like me, having spent over 30 years in the labour force and not a day officially unemployed.  We need to be guided constantly by the data, but we shouldn’t rule out the possibility that the NAIRU could keep falling quite a long way (and perhaps especially while the NZS age remains at 65).

This is my last post for a week or so.  The school holidays start tomorrow and we’ll be away for a while. I should be back writing here on 18 July –  I might even still find something to say about the speech on housing (and housing finance) Deputy Governor Grant Spencer is due to deliver this evening.

 

 

 

Technology, Bill Gross, and prime-age employment

Bill Gross, the renowned US bond manager, puts out a monthly Investment Outlook opinion piece, a public outlet for some of his ideas and concerns.  I used to read them quite regularly, and although I don’t do so these days, somewhere I saw a reference to the latest issue, and so dug it out.

His focus this month is on the advance of technology and the possible threat to the future employment opportunities of people in advanced countries.  Among his possible solutions is a Universal Basic Income –  as he notes (and despite the recent flurry of interest on the left in New Zealand) it has also had significant support on the right, especially in the US.

The centerpiece of his discussion is this chart

Chart I: Advance of the Robots, Retreat of Labor

Bill Gross March 2016 Chart
Source: U.S. Bureau of Labor Statistics

As he describes it:

As visual proof of this structural change, look at Chart I showing U.S. employment/population ratios over the past several decades. See a trend there? 78% of the eligible workforce between 25 and 54 years old is now working as opposed to 82% at the peak in 2000. That seems small but it’s really huge. We’re talking 6 million fewer jobs. Do you think it’s because Millenials just like to live with their parents and play video games all day? I think not. Technology and robotization are changing the world for the better but those trends are not creating many quality jobs. Our new age economy – especially that of developed nations with aging demographics – is gradually putting more and more people out of work.

It is certainly a rather bleak picture, for the United States.  But it isn’t remotely representative of the experience across the advanced world.

The OECD only has detailed annual labour market data to 2014.    In the US, as Gross illustrates, the employment to population rate in 2014 for the 25 to 54 age group was 3.0 percentage points lower than it had been in 1990.   A handful of countries had done even worse – Estonia, Finland, Greece and Sweden (three of them countries with little or no macro policy flexibility, now inside the euro).  But the median OECD country (for which there was data right through the period) had employment to population rates 2.6 percentage points higher in 2014 –  when most Western economies weren’t exactly buoyant –  than in 1990.  New Zealand did better than the median, being 5.8 percentage points higher than in 1990.

employment to popn change

In fact, in eight of the 34 OECD countries, employment to population ratios for 25 to 54 year olds in 2014 were at the highest levels they had been in the last 25 years.  On the other hand, 14 countries had employment to population ratios for this age group that were more than 3 percentage points below the 25 year peak.  Perhaps unsurprisingly, 12 of them were euro-area countries, plus the United States and Sweden.

But employment to population ratios are quite substantially affected by the economic cycle.  Participation rates  –  those employed and those actively seeking work – are less severely affected.

participation rate 2104 less post 1990 peak

The participation rates for these prime-age people in 2014 were higher than they had been in 25 years for fully a third of the OECD countries (11 of 34, including New Zealand).  And another 13 countries had participation rates in 2014 within 1 percentage point of the peak (participation rates are somewhat cyclical, and in few countries was 2014 a year of intense cyclical pressure on labour resources).  The US was among a very small handful of countries where the participation rate was still well below the previous peak.

And here is how the US experience compares (and contrasts over the last 15 or more years) with that of the median OECD country, in a chart going back to 1980.

e to popn since 1980

Looking at the participation rate, the contrast is even more striking and appears to have begun earlier.

partic rate since 1980

Quite what is going on in the United States is an interesting question, but it looks to have been quite idiosyncratic.

Perhaps the answer lies in technological developments.  In much of the economy, the US represented the technological frontier for several decades.  But as an explanation it doesn’t really ring true when the US experience is contrasted with that of a bunch of similarly high-productivity (GDP per hour worked) northern European countries.

And perhaps there is a future to worry about in which there won’t be jobs for many of those who want them.  But it does seem to have been a recurrent worry, going back at least as far as the Industrial Revolution, and –  so far at least –  the concern hasn’t come to anything very much for the economy as a whole.  Productivity gains enable society to have more for the same, or fewer, inputs: labour once used to, say, connect telephone calls now does other stuff.  In general, therefore, productivity gains are something to celebrate, and if anything the concern in the last decade or so has been how weak underlying productivity growth appears to have been.

Of course, at least when the public sector is concerned, genuine productivity gains resulting from the application of technology don’t always free up any labour anyway.   My local community newspaper reports this week that the Wellington City Council libraries are introducing a new RFID self-service book-issuing system, which will “be quick and make using the library simpler”.  What’s not to like about that?  Cost savings should  flow from that, I thought, which should be welcomed by the ratepayers.  But no.  Instead:

The council’s community facilities leader, councilor Sarah Free, said the upgrade would offer users the best of modern technology.  … “I’m pleased to say there will be no staff reductions as a result of this upgrade”.

Perhaps there really is a revealed need for additional staff who will “focus on helping people find specialized resources or use library services”.  It feels a bit like gold-plating to me –  a council always keen to spend money, and rarely to save it – but in a sense in just illustrates the way in which the nature of jobs changes as technology advances without –  as yet –  any sign that it leaves large chunks of the population, who want to work, unable to find work.

 

 

Why isn’t the high unemployment rate bothering more people?

At 6 per cent, our unemployment rate is no longer low.  And yet it seems to excite little interest, whether from  the media, economic commentators, the Reserve Bank, or the government.

I’ve argued that the Reserve Bank’s unnecessarily tight monetary policy over recent years (as revealed by core inflation outcomes) has contributed to the high unemployment rate.  Within a standard model, this shouldn’t be a remotely controversial claim. If, as the Bank reckons, inflation expectations are in line with the target, then actual core inflation outcomes persistently below target will have reflected less utilisation of productive capacity (labour and perhaps capital) than would have been possible.  Put that way, it sounds bloodless and technocratic, but real people are affected here –  people unable to get a job at all, or to get as many hours as they would like.  Lower policy interest rates would have stimulated some more domestic demand, and would have lowered the exchange rate, stimulating some more external demand.  And core inflation would have come out nearer the target.

I’m not going to repeat the debate as to whether, with the information they had at the time, the Reserve Bank could reasonably have run a different stance.  I think so, and said so in writing within the Bank at the time.  But the point here simply is that, at least with hindsight, monetary policy was persistently too tight, and there has been an output and unemployment cost to that –  in a recovery that was, in any case, probably the most anaemic New Zealand has had for a very long time.  And the cost goes on –  even now, the unemployment rate is rising, not falling.

But how do we compare?  I downloaded the OECD data on unemployment rates for the 19 OECD monetary zones (ie 18 countries with their own monetary policy, plus the euro area).

Despite having some of the more flexible labour market institutions among advanced countries, New Zealand’s unemployment rate, at 6 per cent, is currently a bit above the 5.5 per cent median for this group of countries.

And over the last year, only four of these countries have had an increase in their unemployment rate at all.  New Zealand’s increase  has been second only to that in Norway.  The last year has been tough for Norway, with the collapse in oil prices.  The central bank has cut interest rates, by 75 basis points. But they are somewhat constrained.  The inflation target in Norway is 2.5 per cent, and core inflation is at least that high.  The central bank lists four core inflation measures on its website: one is at 2.4 per cent, one at 2.5 per cent, and the others at 2.8 per cent and 3.1 per cent.  Each of those measures is higher than they were a year ago.  Without looking into Norway in more depth, the rise in the unemployment rate (which is still only 4.5 per cent) doesn’t look like something that monetary policy can usefully do much about.  New Zealand is different.

U change since sept 14

New Zealand also shows up at less attractive ends of the charts if we look at how the unemployment rate has changed since either the peak reached in the recessions from 2008 on, or from the trough in the boom years.  On the latter measure, the only area that has seen more of an increase in the unemployment rate is the euro area as a whole (which has pretty much exhausted the limits of conventional monetary policy).  And it is not as if our boom was extraordinarily large –  using OECD estimates, our peak output gap in the boom years (3.2 per cent) was bang on the median for this group of countries.

U chg since recession

U chg since 05-08

So New Zealand’s outcomes look pretty bad.  Relatively high unemployment now in cross-country comparisons, rising unemployment, and by some margin that largest increase in the unemployment rate since the boom years of any country that still has conventional monetary policy capacity left.  It should be a fairly damning indictment.

Of course, Australia also shows up towards the upper end of each of these charts.  Each of the RBA’s core inflation measures is now below their target, although (a) by less than core inflation is below target in New Zealand, and (b) this gap between outcomes and target has only really emerged in the last few quarters.  By contrast, core inflation in New Zealand has been clearly below the target midpoint for more than five years.   I suspect the Reserve Bank of Australia should also be cutting their policy rate further, but at present any error there looks less egregious than the error in New Zealand.

(Defenders of the Reserve Bank could, of course, reasonably point out that the Bank has cut by 100 basis points this year, and that monetary policy works with a lag.  However, since the Bank forecast yesterday that the unemployment rate will still be 6 per cent in March 2017, and inflation then is forecast to be only 1.5 per cent –  even with a material acceleration of growth –  that point is not particularly telling on this occasion.  It simply means that this year’s cuts have stopped the situation getting even worse.)

I’m not entirely sure why the unemployment outcomes seem to be getting no traction in the New Zealand debate.  Perhaps there is something in the insider/outsider story –  neither the bureaucrats making policy nor the market economists commenting on it are unemployed.  And perhaps many of them are, like me, of an age that the 11 per cent unemployment rates in the early 1990s shaped their perspective?  And having spent much of his career abroad, mixing mostly with international agency elites, the Governor may also have a rather limited degree of identification with the New Zealanders at the bottom end who are paying the unemployment price. But none of this seems particularly compelling.

As is widely recognised, the main Opposition political party has been failing, and isn’t helped by having a finance spokesperson who seems to struggle to get to grips with the issues, and to communicate them in a way that either resonates outside central Wellington, or in the House.  And yet, the unemployment rate would seem to be a natural issue for the Labour Party, with its strong union base, and voter base among the relatively less well-off sections of the community.

I suspect the Minister of Finance isn’t very happy with the Bank’s handling of things –  he has hinted as much in several public comments earlier in the year.  But what is in for him to make more of the Reserve Bank’s failing?  The government’s popularity ratings remain high, and the media and business elite continue to retail a narrative in which New Zealand’s economy is doing just fine –  despite near-zero per capita GDP growth, almost non-existent productivity growth (and high unemployment).

Which leaves me wondering whether elite opinion support for large scale immigration –  repeated yesterday by the Reserve Bank Governor –  is part of the story.  The Reserve Bank reckons that the high rate of immigration has raised the unemployment rate and lowered wage inflation –  it is there in the text of the MPS yesterday.  I reckon they are wrong on that: the demand effects of immigration surprises have almost always outweighed the supply effects, and so surprisingly high immigration has, if anything, tended to hold the unemployment rate down in the short-term (in the long-term it is the labour market institutions that determine it).  If you really strongly believe in the benefits of high rates of immigration to New Zealand –  and that has been the elite view, against the evidence of a steady trend decline in New Zealand, for a century or more – but think it is raising the unemployment rate in the short-term, then you might be reluctant to express any serious unease about the high and rising unemployment rate, lest it cast doubt on your preferred immigration policy.  If there is anything to that interpretation, I’m sure it is subconscious rather than conscious.  And I’m not sure if it explains anything either.

This is one of those times when central bank independence is not really serving the interests of New Zealanders.  The logic of the argument was that independent central banks would protect us from high inflation. Now it is working the other way round.   If the Minister of Finance were making the OCR decisions, the political pressure to do something about rising unemployment –  at a time of very low inflation –  would probably be more focused and intense.  The Minister of Finance has to face questions in the House every day, and make himself regularly available to the media and voters.  By contrast, the Governor hides away behind a cloak of technocratic expertise, and a Board which sees its role as to protect and promote the Bank.  That means no effective accountability (remember, real accountability means real consequences for real people).