Skills in the Labour Market - November 2006

Last updated 30 November 2006

This report highlights September 2006 quarter information on skill shortages, primarily drawn from 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 have continued to ease from their historic highs of late 2004 and early 2005. The difficulty of finding skilled staff is now at its lowest level since early 1999. A large fall in job vacancies over the last year also points to an improvement in recruitment conditions for employers.

An easing of skill shortages is the result of slowing economic growth which has led to a fall in overall growth in labour demand. Robust growth in labour supply over the last year, driven by a recovery in net migration inflows and record high labour force participation rates, has also contributed to the easing of skill shortages.

Nonetheless, skill shortages remain a major issue in the New Zealand economy. Indicators of shortage are still well above historical averages.

The easing in skill shortages over the last year and a half takes place against the background of persistently low unemployment. This suggests there has been an improvement in the matching between the types of skills required in the labour market and those available.

Table 1 : Key skill shortage indicators

	Jun 06	Sep 06
Skilled staff difficultya	25	21
Unskilled staff difficultya	4	7
Labour constraintb	15	14
Job vacanciesc	-4	-13

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 continue to ease from historic highs

Skill shortages have become less of a constraint for firms during the past year and a half. Firms’ perception of the difficulty of finding skilled staff is now at its lowest level since early 1999.

Despite the fall in the number of firms reporting skill and labour shortages, indicators remain well above the averages of the 1980s and 1990s. The September 2006 quarter QSBO shows:

1. A net 21% of firms had difficulty finding skilled staff (Figure 1). This is 40 percentage points lower than the peak of a net 61% measured in the December 2004 quarter and is also well below the average of the past six years of a net 40%. However, the September 2006 quarter figure is still above the averages of the 1980s (a net 13%) and the 1990s (a net 12%);
2. A net 7% of firms had difficulty finding unskilled labour, up slightly from the June 2006 quarter, but down strongly from a peak of a net 49% in early 2005 (Figure 1). While this is below the average of the past six years (a net 20%), it is high compared to the 1990s where a shortage was measured in only nine quarters;
3. A shortage of labour was the main constraint on expansion for 14% of firms at September 2006 (Figure 2). This figure is down from 20% a year earlier and is now below the average of the past six years of 16%. However, it remains well in excess of an average of 4% over the 1990s.

Figure 1 Difficulty of finding skilled and
unskilled staff, 1986-2006

Source: Quarterly Survey of Business Opinion, NZIER

Data table for Figure 1.

Figure 2: A shortage of labour as main
constraint on expansion, 1986-2006

Source: Quarterly Survey of Business Opinion, NZIER

Data table for Figure 2.

Skill shortages continue to ease in the building sector with a shortage of labour being the main constraint on expansion for only 9% of builders at September 2006. This is down from 46% at December 2004. A net 13% of building firms had difficulty finding skilled staff in the September 2006 quarter, down from a net 54% at December 2004.

Job Vacancy Monitor

National trends show improving recruitment conditions for employers

Recruitment conditions for employers improved further in the September 2006 quarter, according to the JVM. The JVM is a monthly count of advertised vacancies in 25 daily newspapers. It shows advertised job vacancies in the September 2006 quarter were 13% lower than a year earlier. The JVM has now measured an annual fall in vacancies for four consecutive quarters (Figure 3).

Employment growth in excess of advertised vacancy growth can be interpreted as a loosening of the labour market. In the September 2006 quarter, employment growth exceeded job vacancy growth by 15 percentage points suggesting that the labour market has eased considerably in recent months. This gap of 15 percentage points is the largest recorded since the JVM began. The changes in labour market tightness measured by the JVM are remarkably similar to those measured by the QSBO. This issue is explored further in Appendix II.

Figure 3: Annual growth in job vacancies
and employment, 2004-2006

Source: Department of Labour, Statistics New Zealand

Data table for Figure 3.

Easing in vacancies widespread

Table 2 shows that 13 of the 15 regions recorded a decline in vacancies in the year to the September 2006 quarter. This is in stark contrast to a year ago, where only three regions were experiencing a decline in vacancies.

Among the major regions, Auckland led the decline (-25%) followed by Wellington (-18%) and Canterbury (-11%). Otago was the only region to record growth (12%).

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

Region	Annual Growth
Otago	12%
Taranaki	0%
Gisborne	-1%
Hawke's Bay	-1%
Nelson-Tasman	-1%
Bay of Plenty	-2%
West Coast	-3%
Marlborough	-5%
Northland	-7%
Waikato	-8%
Manawatu-Wanganui	-10%
Canterbury	-11%
New Zealand	-13%
Southland	-14%
Wellington	-18%
Auckland	-25%

Source: JVM, Department of Labour

Decline measured for all skill levels¹

Highly skilled vacancies fell by 7% over the year to the September 2006 quarter after remaining steady in the previous quarter. This is only the third time since the JVM began in 2002 that there has been a fall in highly skilled vacancies. The largest falls within this category were for health professionals (‑23%) and accountants and auditors (-15%), while the only rise was for teaching professionals (1%).

The labour market for skilled occupations continued to ease, recording a 17% fall in vacancies. The fall in skilled vacancies was due to a fall in vacancies for trades workers (-17%) – primarily led by a fall in building and metal & machinery trades workers – and a decline in technicians and associate professionals (-17%).

The biggest contributors to the 14% decline in semi-skilled/elementary vacancies in the year to September 2006 were clerks (-20%), plant and machine operators and assemblers (-16%), and salespersons and demonstrators (-12%).

Comments

Skill shortages continue to ease, but labour market remains tight

Skill shortages have fallen sharply over the past year and a half, although are still relatively high. This trend is confirmed by both the JVM and the QSBO (see Appendix II).

The easing of skill shortages appears to be the result of lower growth in the demand for labour (due to the slowdown in the economy), strong growth in the supply of labour over the last year, and improved matching between the types of skills available in the labour market and those required by employers. It may also demonstrate changes in employer practices as they adjust to structural changes in the labour market.

Economic growth has more than halved from 4.4% in the December 2004 year to 1.9% in the June 2006 year. This has lowered growth in overall labour demand (ie hours worked) from 4.2% in the December 2004 year to 0.5% in the September 2006 year.

Labour supply has been lifted by record high labour force participation rates over the last year, and a recovery in net migration. Although, the labour force participation rate fell to 68.3% at September 2006, it is still the third-highest rate on record, and up from 68.1% a year earlier. The net inflow of permanent/long-term migrants has also risen strongly from 6,000 in the year to October 2005 to 13,200 over the year to September 2006.

A combination of decreased demand and increased supply saw the unemployment rate rise to 3.8% in the September 2006 quarter, up from an equal record low of 3.6% in June 2006.

However, declining demand and an increased supply of labour only partly explains the decreasing skill shortages. The Department believes that the improved matching between the type of skills available in the labour market and those required by employers is an important determinant of easing skill shortages.

Recent evidence suggests there has been an improvement in matching

Figure 4 shows that as the unemployment rate drops, finding staff generally becomes more difficult for firms and vice versa. However, over the past 12 months this relationship has changed. Despite the unemployment rate remaining low, the difficulty of finding labour (both skilled and unskilled) has eased. This suggests that there has been an improvement in the alignment between the types of skills available in the labour market and those required by employers.

Figure 4: Unemployment and skill shortages

Source: Quarterly Survey of Business Opinion, NZIER and Household Labour Force Survey, Statistics NZ

Data table for Figure 4

Several factors could account for this improved matching between the demand for and supply of skills over the past year and a half. These include:

1. Immigration policy has become increasingly responsive to the needs of the labour market in recent years. In particular, the significant increase in work permits issued to employers to fill immediate shortages has played an important role;
2. Industry training, which is directly driven by the skill needs of industries, has resulted in a significant upskilling of the workforce. The rapid increase in industry training may reflect an increasing willingness of employers to take on under-qualified staff and train them up for the job, and to provide additional training to existing staff;
3. Active labour market policies implemented by the Ministry of Social Development (such as Industry Partnerships) has helped move unemployed beneficiaries into employment;
4. Sectoral and regional engagements have brought together industry and business organisations, unions, and training and education providers to identify strategies for their further development. Engagements have been conducted with sectors such as food and beverage, roading, horticulture and viticulture, tourism and hospitality, and in regions such as Wanganui. In a number of these engagements, packages of skill-related solutions have been identified for implementation.

Labour Market Outlook

Since our October 2006 Labour Market Outlook, a number of economic data releases have taken place, including Employment/Unemployment data from the Household Labour Force Survey (HLFS), Labour Costs Index (LCI), Quarterly Employment Survey (QES), migration data, the National Bank Business Outlook and Unemployment Beneficiary data from the Ministry of Social Development.

HLFS data for the September 2006 quarter recorded a 0.4% fall in employment and a slight increase in the unemployment rate to 3.8%. In contrast to the HLFS, the QES recorded a slight increase in filled jobs in the September 2006 quarter, which appears to be more in line with current business surveys. The LCI shows that although some of the main wage growth measures have eased, the easing was small and other wage indicators stayed high.

The National Bank Business Outlook shows an improved business environment with a net 1% of firms expected to increase staff numbers in the year ahead when asked in the June 2006 quarter, which compares to a net 6% of firms expecting to decrease staff, when asked in the March 2006 quarter.

Net migration inflows make a significant positive contribution to the New Zealand economy and have risen strongly over the past 11 months from 6,000 in the year to October 2005 to 13,200 in the year to September 2006. Net migration inflows are expected to rise slowly in the coming year. This small rise is based on slightly more arrivals and a relatively steady outlook for departures.

Due to the slowdown in economic growth over the last two years and recent low growth in the demand for labour, skill shortages are expected to ease further in the coming year. 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 a historical basis. Our forecast for the unemployment rate is for it to rise to 4.0% at March 2007 and a period of sustained lower employment growth of around 1% per annum is expected.

APPENDIX I: 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.

APPENDIX II: Job vacancies and skill shortages

Evidence compiled by the Department of Labour suggests the Job Vacancy Monitor (JVM), when viewed with growth in employment, provides a measure of change in labour market tightness. This is supported by the close relationship between the JVM and the QSBO skill shortage indicators. Whereas the JVM measures change over time, the QSBO skill shortage indicator measures the level of labour market tightness.³

In order to compare the two series it is necessary to convert the QSBO measure into a measure of change, which is shown in Figure A1. The figure shows a remarkably close relationship between the change in vacancies (less the change in employment) and the change in the difficulty of finding skilled labour measured in the QSBO (correlation coefficient = 0.93). This indicates that when the QSBO is measuring a rapid tightening or loosening of the labour market, this is mirrored by the JVM measure.

Figure A1: Change in labour market tightness: JVM measure and QSBO

Source: Department of Labour, NZIER

Data table for Figure A1

Endnotes

1 ‘Highly skilled’ includes managers and professionals; ‘skilled’ includes technicians/semi-professionals and trades; and ‘semi-skilled/elementary’ includes all other occupations.

2 Fill rate: the proportion of vacancies included in the Department of Labour’s Survey of Employers who have Recently Advertised that were filled with an adequately qualified and experienced person within 10 weeks of advertising.

3 Technically, QSBO skill shortage indicators are based on a question as to whether finding staff today is more difficult, the same or easier than 3 months ago. However, there is some consensus that the responses are based on employers perception about whether recruiting staff has been difficult or not and that the combined responses provide a measure of the degree of difficulty in finding staff.