Skills in the Labour Market - May 2006

Last updated 01 June 2006

This report summarises March 2006 quarter information on skill shortages, primarily focused on the Quarterly Survey of Business Opinion (QSBO) from the New Zealand Institute of Economic Research (NZIER) and the Job Vacancy Monitor (JVM) from the Department of Labour.

Executive summary

Skill shortage indicators appear to have fallen sharply in the year to March 2006. Although the fall in these indicators was the largest in 15 years, it was from such a high level that labour market conditions are still tight.

An improvement in recruitment conditions for employers is supported by an 8% fall in job vacancies over the past year. All three major skill levels had a fall in vacancies over the year to March 2006. The Auckland region drove the fall in job vacancies.

Skill shortages have eased – and are expected to do so further – as growth in the economy has slowed and labour supply has expanded strongly. The supply of labour has been boosted by a recovery of net migration inflows and a large rise in labour force participation to a record high rate.

Table 1: Key skill shortage indicators

	Dec 05	Mar 06
Skilled staff difficulty a	33	26
Unskilled staff difficultya	17	9
Labour constraint b	19	19
Job vacancies c	-4	-8

a net % of firms reporting difficulty finding staff

b % of firms with labour as main constraint

c annual % change in job vacancies

Quarterly Survey of Business Opinion

Skill shortages still present despite largest fall in 15 years

There is growing evidence of skill shortages becoming less of an issue in the overall economy. Firms’ perception of the difficulty of finding staff is now at its lowest level since 2001. The fall in skill shortage indicators over the past year is the largest since 1991.

Despite the fall, skill shortages remain at above average levels because they had been so elevated to begin with. In early-2005, the difficulty of finding staff was at a record high, and the proportion of firms identifying a shortage of labour as their main constraint was the highest since 1974.

The skill shortage indicators from the March 2006 quarter QSBO show:

1. A net 26% of firms had difficulty finding skilled staff in the March 2006 quarter (Figure 1). This is down from a net 60% a year earlier, but is just above the 15-year average (1991-2005) of a net 25%.
2. A net 9% of firms had difficulty finding unskilled staff, down from a net 49% a year earlier (Figure 1). Since 1991, on average a small net balance of firms found it easy to recruit unskilled staff.
3. A shortage of labour was the main constraint on expansion for almost one in five firms (19%) at March 2006 (Figure 2). This compares to a 30-year high of 26% a year ago but a 15-year average of 8%.

Figure 1 Difficulty of finding skilled and
unskilled staff, 1991-2006

Source: Quarterly Survey of Business Opinion, NZIER

Figure 2: A shortage of labour as main
constraint on expansion, 1991-2006

Source: Quarterly Survey of Business Opinion, NZIER

Building sector skill shortages appear to have eased the most over the last year (Figure 2). Building sits below the national average on all three skill shortage indicators for the first time since 2000. Merchants reported the highest difficulty of finding staff and service firms face the largest labour constraint of the four main sectors.

Shortages have abated considerably across all four broad regions in the past year, although may be more severe in some areas within these regions.

The fall in skill shortage indicators has been consistent with a fall in hiring activity. A net 4% of firms had a fall in their employment in the March 2006 quarter and a net 2% of firms expected a fall in the June 2006 quarter.

Department of Labour Job Vacancy Monitor

National trends show improving recruitment conditions for employers

Recruitment conditions for employers continued to improve in the March quarter, according to the JVM. The JVM is a monthly count of advertised vacancies in 25 daily newspapers. It shows that job vacancies in the March 2006 quarter were 8% lower than a year earlier. This is the second quarter in a row that the JVM has measured a fall in vacancies. Job vacancy growth has trended down since the June 2004 quarter, when growth peaked at 23% (Figure 3).

Figure 3: Annual growth in job vacancies
and employment, 2004-2005

Source: Department of Labour, Statistics New Zealand

Employment growth in excess of growth in vacancies is interpreted as a loosening of the labour market (see Appendix). In the March 2006 quarter, employment growth exceeded job vacancy growth by 11 percentage points suggesting the market has eased considerably in recent months.

Despite the recent easing of the labour market, the number of advertised vacancies remains high and indicates that the market is still tight and recruitment conditions are difficult. In the March 2006 quarter, there were 26% more vacancies than in the same period in 2003.

Auckland behind overall fall in vacancies

Table 2 shows that even though 8 of the 15 regions in New Zealand measured vacancy growth in the year to March 2006, nationally there was an 8% decline.

Table 2 : Annual growth in vacancies by region, March 2006 quarter

Region	Annual Growth
Gisborne	21%
Waikato	18%
Wellington	12%
Marlborough	8%
Manawatu-Wanganui	8%
Otago	3%
West Coast	2%
Taranaki	1%
Southland	0%
Canterbury	0%
Hawke's Bay	0%
Northland	-5%
New Zealand	-8%
Bay of Plenty	-8%
Nelson-Tasman	-30%
Auckland	-32%

Source: JVM, Department of Labour

The national decline was led by a rapid fall in advertised vacancies in Auckland (-32% in the year to March 2006). A sharp fall in vacancy growth in Nelson-Tasman (-30%) also contributed to the national decline.

Decline measured at all skill levels

A decline in vacancies was recorded for each of the three major skill levels in the year to March 2006. This is the first time this has occurred since the inception of the JVM. Highly skilled vacancies fell by 7%, skilled by 15% and semi-skilled/elementary by 6%.

The March 2006 quarter was the first quarter to record an annual decline in vacancies for highly skilled occupations. The largest falls in this category were for accountants and auditors (-19%) and health professionals (-18%).

The labour market for skilled occupations has been easing for four quarters. The fall in skilled vacancies has been led by: sales representatives (-25%), metal trades (-29%) and building trades (-21%).

Semi-skilled/elementary vacancies recorded a decline in the year to March 2006 after recording a decrease in vacancies for the first time in the December 2005 quarter. The biggest contributors to the decline were plant and machine operators and assemblers (-20%) and restaurant service workers (-13%).

Comments

Skill shortages continue to ease back, but pressures will remain

The New Zealand labour market has performed strongly over the past six years of high economic growth. The tightening of the labour market over this period saw unemployment fall to the lowest rate in 20 years and skill shortages rise to the highest level in 30 years.

The QSBO and JVM both suggest skill shortages have fallen sharply over the past year as the demand for labour eased with the slowing economy. Skill shortages are procyclical, becoming increasingly apparent in times of strong economic growth and abating during slowdowns.

More recently, a large rise in the supply of labour may have contributed to the easing of skill shortages. The labour force participation rate jumped up to a record high of 68.5% at March 2006 and net migration gains recovered over the past six months. These factors contributed to a rise in the unemployment rate to 3.9% at March 2006, the highest since June 2004.

Skill shortages may ease somewhat further in the year ahead in response to the slowdown of economic growth. However, they are unlikely to lessen significantly. The unemployment rate has risen recently and is likely to rise further, but it is expected to remain low on an historical basis.

APPENDIX: AN INTRODUCTION TO SKILL SHORTAGES

A skill shortage exists when a lack of skilled labour is constraining the expansion of an organisation or business at the going market wage. A skill shortage is a mismatch between the supply of people with particular skills and the demand for people with those skills. If there are skill shortages, the output of New Zealand will be less than it would otherwise be.

‘Skill shortages’ is a catch-all term used to describe a range of situations in which an employer finds it difficult to find an appropriately skilled person. Skill shortages may arise in a number of circumstances, such as:

1. A genuine skill shortage occurs when employers have considerable difficulty filling job vacancies simply because there are insufficient job seekers with the required skills. For example, construction would suffer from a skill shortage of carpenters if experienced carpenters were needed but there were insufficient carpenters with these skills who were currently unemployed and looking for a job.
2. Recruitment & retention difficulties occur when there is a considerable supply of individuals with the required skills in the potential labour market but they are unwilling to take up employment at current levels of remuneration and conditions of employment. Retention problems are often a major contributor to this condition.

Economic theory suggests wages should adjust to make the supply and demand for skilled labour equal when skill shortages occur. If there is a lack of skilled labour, then there should be increased competition between firms for the skilled labour, which in turn means that the wages for the skilled workers will be bid up until demand for skilled labour equals supply. This increase in wages encourages more people to train and this should in turn help to alleviate the skill shortage.

The main reasons why skill shortages may persist in the medium term are: imperfect information in the labour market (employers and employees do not know exactly what skills are available or required); employment relationships are long-term; the long-term nature of occupational choice; wage stickiness (both parties will adjust their expectations about wages slowly in response to market conditions); the importance of external factors in wage and employment decisions (skill shortages are only one of many factors); and ongoing shocks to the labour market.

Both the government and the private sector have a role to play in the alleviation of skill shortages. The education and training system is a key means for relieving skill shortages. Firms also have a role to play in the provision of skills for their business. To attract and maintain a highly skilled staff, employers need to offer appropriate wages and fund appropriate levels of training. However, in spite of government and private sector activities, it is expected that skill shortages will occur from time to time.

The difference between employment growth and vacancy growth reflects the extra advertising required by employers for a given rate of employment growth. The high advertised vacancy growth in 2004 was driven by employers needing to advertise a higher proportion of their vacancies as a consequence of not being able to fill them through word of mouth and having to repeat advertisements for vacancies which were difficult to fill.