Executive summary

The New Zealand economy experienced a fall in real GDP over the five quarters to March 2009 and further falls are likely in the June and September quarters. It is appropriate to look at past recessions to provide context for the outlook for the labour market.

Key points:

• We consider six recessions, including the current one, since the 1960s. The previous five recessions have shown that:
• On average, unemployment more than doubles during each recession and it increases for around two years. It is evident that, in terms of the rise in unemployment, the longest recessions are not always the most severe.
• When there is a downturn it is usually those with no or low qualifications, youth, Maori, Pacific peoples and those in low income, lower skilled occupations that are the most affected.
• The labour force participation rate tends to fall during downturns as people are discouraged from looking for work and turn to other activities such as study. The average fall is around 1 percentage point. A falling participation rate tends to limit the extent to which the unemployment rate rises.
• Net migration usually declines during a downturn as more New Zealanders go overseas to find work. However, when a domestic downturn coincides with deteriorating global conditions, the opposite may occur, and net migration can rise. The current global downturn has already resulted in net migration rising strongly in New Zealand and it is expected to continue increasing in the short-term.
• Wage growth is usually one of the last indicators to turn during a recession and lags changes in the unemployment rate by 1-2 years. Wage growth is expected to ease over the next two years as the demand for labour falls and unemployment rises.
• The current downturn in the labour market is expected to be significant and lengthy, but based on projections it does not appear to be unusually severe. Even assuming a wide range of forecasts, the rise in unemployment is expected to be less than that recorded in the 1987-91 recession and no more severe than that recorded in the 1966-67 and 1976-78 recessions.
• Uncertainty around the extent of the current labour market downturn is high given that the global economy is going through its most significant and synchronised downturn since World War II. There is also considerable uncertainty about the timing and speed of the recovery.
• One key difference compared with most downturns over the past half century is the labour market is now more flexible, with a higher proportion of part-time workers and more people in temporary employment. This may mean unemployment rises sharply during the current downturn but also falls sharply during the recovery. On the other hand, the greater labour market flexibility may be helping wages and hours worked to adjust more quickly as firms seek to decrease their labour costs. This would reduce the need for firms to lay off workers and result in less upward pressure on the unemployment rate.