Employment declined by 1.1% in the March 2009 quarter and the unemployment rate continued on its upward trend.  However, the increase in the unemployment rate was more muted than we and other commentators had expected.  This was largely because the participation rate fell more strongly than we had envisaged.  Here we take a further look at what drove the larger than expected fall in the participation rate.

It is normal for the participation rate to fall when employment falls

Employment and the participation rate typically move very closely together as shown in figure 1.  It is normal for the participation rate to fall when employment falls.  This is because people who lose their job in hard economic times may not seek further work and instead turn to other activities such as looking after children or studying.  There may also be some discouraged workers who have given up searching for employment and have left the labour force altogether causing the participation rate to decline. But which pattern was predominant in the March 2009 quarter? 

Fig 1: Relationship between employment and labour force participation rate

Data Table for Fig 1

Source: Statistics New Zealand

A significant number of people left the labour force in the March 2009 quarter

Figure 2 shows that of the people that left the labour force over the quarter, most came from the 15-19, 20-24 and 65 years and older age groups.  This is consistent with the view that youth are often the most at risk during a recession.  This is because of their low skill and experience level and also because they are two to three times more likely to be unemployed in general.

For older age groups, it could be that they have opted into early retirement. Cost of living pressures have reduced considerably lately and perhaps there was not so much of a need for older workers to stay in employment in the March 2009 quarter.

Fig 2: Not in the labour force by age: change over December 2008 – March 2009, Seasonally adjusted

Data Table for Fig 2

Source: Statistics New Zealand. Seasonally adjusted by DoL

There has been a notable increase in the number of people not in the labour force that are studying over the last year

Figure 3 shows that despite the long-term upward trend, there has been a marked increase in the last year in the number of people not in the labour force whose main activity is studying.  This is consistent with the idea that when jobs are hard to come by, people will opt into activities such as studying.  On a less positive note, even though the number is small, there has been a tick up in the number of people not in the labour for force that have been discouraged from finding further employment (up from 2,400 in March 2008 to 5,100 in March 2009) .[1]

Fig 3: Not in the labour force by main activity: studying Seasonally adjusted

Data Table for Fig 3

Source: Statistics New Zealand. Seasonally adjusted by DoL.

Employment rates for youth and older workers declined over the March 2009 quarter

On some occasions, labour market analysts prefer to use the employment rate as a better measure of labour market tightness than the unemployment or participation rates (because the boundary between work and not work is clearer than between unemployment and not in the labour force).  The employment rate is the proportion of working age people in work.  Broken down by age, it showed that the employment rate fell in the 15-19, 20-24 and 65 years and older age groups (figures 4 and 5) and is consistent with the considerable increase in people opting out of the labour force in the March quarter from these age groups.

Fig 4: Employment rates for age groups 15-49: Seasonally adjusted

Data Table for Fig 4

Source: Statistics New Zealand. Seasonally adjusted by DoL.

Fig 5: Employment rates for age groups 50 years and over: Seasonally adjusted

Data Table for Fig 5

Source: Statistics New Zealand. Seasonally adjusted by DoL.

Overall, the decline in the participation rate in the March 2009 quarter was largely to be expected, especially given it was at a record high, and the labour market is broadly behaving how you would expect it to in a recession.  Furthermore, the March 2009 quarter HLFS results showed that there is some evidence that people are dropping out of the labour force because they have been discouraged from looking for further employment. However, there is also evidence that a larger proportion of people are taking this time to up skill and take up further study which is very good news for the future of New Zealand’s labour force and the domestic economy.

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[1] Seasonally adjusted numbers from the ‘Not not in the labour force by reason for not seeking work’ series.