Labour market outlook – April 2007

Background

This report provides an outlook for the labour market over the two years to March 2009. Our forecasts are detailed in the table on the following page, and a table of comparative forecasts is presented in the Appendix.

Summary

Labour market conditions eased somewhat over the second half of 2006 in response to the slowing of economic growth to a 7-year low in the year to September 2006. However, while employment declined over the second half of 2006, a reduction in the labour force participation rate ensured the unemployment rate remained low at 3.7%.

Our outlook is for the labour market to continue to show the effects of the recent economic downturn in the short-term before improving slightly later in the year. In the medium-term we expect the unemployment rate to remain around the 4% mark, labour force participation to stay high, labour productivity to increase slightly and a small easing in net migration.

The continuing strong performance of the economy will lead to further pressures on some aspects of the labour market including wages, skills and the supply of labour. This creates continued challenges and opportunities to improve the skills and capabilities of new entrants to the labour market and low skilled workers generally.

Economic growth expected to increase

Economic growth appears to have recovered from a 7-year low of 1.4% growth in the September 2006 year, with growth of 1.5% in the December 2006 year. Nonetheless, this is down from 2.2% in the December 2005 year. New Zealand Institute of Economic Research (NZIER) Consensus Forecasts show economic growth is expected to rise further in the March 2007 year and reach 2.4% on an annual average basis in the March 2008 year and 2.9% in the March 2009 year.

In previous outlooks we anticipated more GDP growth to come from the export sector. However, this has not yet occurred, with growth in GDP in the year to December 2006 being mostly driven by domestic demand. Although primary exports benefited from healthy commodity prices, the strong exchange rate has limited competitiveness for exports.

Apart from construction, non-tradable sectors such as financial & business services, communications and retail trade as well as fiscal policy drove GDP growth over the 2006 year and this pattern is likely to continue over the outlook period. According to NZIER, the agriculture and fishing industries are expected to grow slightly below average over the next five years, while above average growth is forecast in the forestry and wood manufacturing industries. All other manufacturing industries are expected to grow by well below average over the next five years.

Employment growth expected to rise over the next year

Annual employment growth fell to 1.4% in December 2006, the lowest annual figure since June 2000. On a quarterly basis, employment growth declined by 0.1% in the December 2006 quarter, following a 0.5% fall in the previous quarter. This is the first time in nearly 10 years that employment has declined in two consecutive quarters.

Employment growth is expected to pick up over the next year but will remain low compared to growth over the last five years. Due to a decline in employment over the second half of 2006, annual employment growth will slow to 0.7% in the March 2007 year. This easing in annual employment growth is in line with the slowdown in the wider economy since mid-2005. As economic growth strengthens, employment growth is expected to rise to around 1.5% per annum in March 2008 and 2009.

Table 1: Labour Market Outlook projections to March 2009

	Actual	Projections
	Mar 2006	Mar 2007	Mar 2008	Mar 2009
Number of people (000s)
Employment	2,109	2,123	2,155	2,188
Unemployment	86	85	90	87
Labour force	2,195	2,208	2,245	2,275
Working-age population	3,202	3,248	3,291	3,335
Growth (annual % change)
Employment	2.6	0.7	1.5	1.5
Labour force	2.8	0.6	1.6	1.3
Working-age population	1.4	1.4	1.3	1.3
Rates (%, March quarters)
Unemployment	3.9	3.8	4.0	3.8
Labour force participation	68.5	68.0	68.2	68.2

Note: numbers may not sum to total due to rounding

A more positive employment outlook is supported by the National Bank Business Outlook for February 2007. It shows a net 9% of firms are expecting a rise in staff numbers in the year ahead, up strongly from a net 9% expecting a fall in staff numbers at February 2006. In addition, employment intentions in the Quarterly Survey of Business Opinion were at the highest level in two years in the December 2006 quarter.

The industries that have made a positive contribution to economic growth over the past three years tend to be the most labour intensive. These industries include construction and services such as finance & business, health, education, wholesale and retail. The dependence on labour in these industries partly explains why growth in employment has been high relative to economic growth (ie growth in labour productivity has been modest). This trend is expected to continue in the near future albeit at a more modest pace.

Employment has fallen in the last three years in the export sector, including agriculture, forestry, fishing, and manufacturing. The share of employment in these sectors fell to a record low of 20.2% in the year to December 2006 and this trend is expected to continue given the industry outlook outlined above.

Labour productivity growth expected to improve

Strong employment growth in labour intensive industries during a period of slowing economic growth has resulted in low labour productivity growth. This can be explained by the lag in the labour market adjusting to lower economic growth which in turn is due to firms filling longstanding vacancies or labour hoarding.

In terms of hours worked, economy-wide labour productivity growth between 1.0% and 1.5% per annum is expected over the next two years¹ . The tight labour market, recent increases in wage costs and recent increases in investment in plant and machinery will require employers to continue seeking productivity gains.

The export sector tends to be the most productive in terms of measured output per worker. The modest recovery forecast for exports due to high commodity prices will help lift labour productivity, however, the strong exchange rate will limit further shifts towards external sectors, particularly towards manufacturing.

Net migration expected to remain relatively steady

Net migration inflows rose strongly from 6,000 in the year to October 2005 to 14,800 in the year to November 2006. However, over the past three months, net migration inflows have fallen to 13,200. This decrease has mainly been driven by growing departures although there has also been a small fall in arrivals.

Net migration inflows are expected to fall slightly in the coming year before steadying at around 11,000-12,000 in the following year.

Wage growth forecast to remain high

Wage growth is likely to stay high in the year ahead given low unemployment and a recovery in the demand for labour. Nevertheless, some easing is expected given the recent fall in consumer price inflation and a lag from the fall in skill shortages between late 2004 and 2006.

There is a risk that skill shortages will deepen in the year ahead as relevant indicators in the Quarterly Survey of Business Opinion turned and rose slightly in the December 2006 quarter. A deepening of skill shortages, along with rising job prospects, may keep upward pressure on wages in the next two years.

Labour force participation to remain high

The labour force participation rate fell to 67.9% in the December 2006 quarter, down from an all-time high of 68.7% in the June 2006 quarter. The fall in the participation rate over this period was driven almost solely by a decrease in female participation.

There are a number of factors which may have contributed to the fall in the labour force participation rate. Amendments to Working for Families in April 2006 may have provided some disincentives for females participating in the labour force. However, the participation rate can to some degree be pro-cyclical² and the fall in female participation was likely also due to a decrease in employment prospects as the labour market eased.

The recent decreases in the participation rate are not expected to continue in the near future. The participation rate is expected to rise slightly in the March 2007 quarter to 68.0% and then remain relatively stable over the following two years.

The participation rate is expected to remain relatively stable due to a number of offsetting factors. Wage and employment growth are both expected to remain high in the medium-term which should encourage people to enter or remain in the labour force. However, at the same time the ageing population structure will have a downward impact on the participation rate. In the medium-term the combination of these factors should lead to relatively stable participation rates.

Due to the low number of workers unemployed, the participation rate has a large impact on the unemployment rate. Therefore, there is a risk that the unemployment rate may differ from expectations if the participation rate rises or falls. A participation rate that is 0.2 percentage points higher (ie 68.2% for the year to March 2007 instead of 68.0% as per our forecast) would see the unemployment rate rise to 4.1% instead of our current forecast of 3.8%. Similarly, if the participation rate is 0.2 percentage points lower (ie 67.8% for the year to March 2007 instead of 68.0% as per our forecast) the unemployment rate would decrease to 3.5%.

Unemployment rate expected to rise slightly from historic low

The unemployment rate decreased from 3.8% to 3.7% in the December 2006 quarter. This is only slightly above the historical low of 3.6%. The unemployment rate has been relatively stable since falling below 4.0% in the second half of 2004.

With employment growth expected to be only modest, the unemployment rate is expected to rise somewhat over the next two years. Bearing in mind the risks regarding the participation rates, the unemployment rate is still expected to remain low on a historical basis at 4.0% in the March 2008 quarter and 3.8% a year later. Even with this increase, the expected unemployment rate would still be similar to that experienced in the tight labour market of late 2003.

Labour market to remain tight

Economic and employment growth eased in 2006 with economic growth reaching a 7-year low in September 2006 and employment growth decreasing in two consecutive quarters for the first time in nearly 10 years. However, the easing was not as severe as initial predictions and there are already signs of recovery from a soft landing.

The relatively soft landing coupled with our expectations for economic and employment growth to increase, indicate that the labour market will remain tight in the coming two years. Over this time we expect skill shortages to persist and there to be continued pressure on the demand for labour and wages.

Appendix: Economic projections of major forecasting agencies

Table A1: Economic projections of major forecasting agencies

Forecasts	Date		Economic growth
			Annual average % change
Years to March			2006 actual	2007 forecast	2008 forecast
Department of Labour	Mar-07		2.0	1.7	2.5
ANZ	Feb-07		2.0	1.6	1.1
Bank of New Zealand	Mar-07		2.0	1.8	2.7
BERL	Mar-07		2.0	2.1	2.7
NZIER	Mar-07		2.0	1.4	1.9
Treasury	Dec-06		2.0	1.8	2.3
Reserve Bank	Mar-07		2.0	1.8	3.1
Westpac	Mar-07		2.0	1.8	2.0
Consensus forecasts4		Mar-07	2.0	1.8	2.4

 

Table A2: Economic projections of major forecasting agencies

Forecasts	Date		Employment growth
			Annual % change
Years to March			2006 actual	2007 forecast	2008 forecast
Department of Labour	Mar-07		2.6	0.7	0.5
ANZ	Feb-07		2.6	0.6	0.3
Bank of New Zealand	Mar-07		2.6	0.8	1.7
BERL	Mar-07		2.62	1.42	2.22
NZIER	Mar-07		2.6	1.6	1.1
Treasury	Dec-06		2.73	1.93	-0.23
Reserve Bank	Mar-07		2.6	0.9	0.6
Westpac	Mar-07		2.6	1.1	0.8
Consensus forecasts4		Mar-07	2.6	0.9	0.9

 

Table A3: Economic projections of major forecasting agencies

Forecasts	Date		Unemployment rate
			%, March quarter
Years to March			2006 actual	2007 forecast	2008 forecast
Department of Labour	Mar-07		3.8	4.0	3.8
ANZ	Feb-07		3.9	3.8	4.0
Bank of New Zealand	Mar-07		3.9	3.8	3.9
BERL	Mar-07		3.9	4.2	4.3
NZIER	Mar-07		3.9	4.1	4.3
Treasury	Dec-06		3.9	4.1	4.3
Reserve Bank	Mar-07		3.9	3.9	4.2
Westpac	Mar-07		3.9	3.8	3.8
Consensus forecasts4		Mar-07	3.9	4.0	4.3

Notes:
(1) As at December 2007
(2) Annual % change, Full-time equivalent (FTE).
(3) Annual average % change, FTE.
(4) NZIER Consensus Forecasts (average of 10 forecasting agencies, 7 of which are listed above).

Endnotes

1 These figures relate to the whole economy and so differ from productivity figures recently released by Statistics NZ which relate only to the measured sector.

2 The participation rate tends to follow economic and labour market cycles. When the labour market is tight people are more likely to be able to find jobs and so enter the labour market. When job prospects are not as good and unemployment is high, people may feel discouraged and so exit the labour market.