Frequently Asked Questions
What is the Leading Indicator of Employment?
The LEI is a data series, produced by the Department of Labour that offers an advanced signal of turning points in the employment cycle as measured by the Household Labour Force Survey (HLFS).
Why was the LEI developed?
Monitoring and developing an outlook of employment in New Zealand is seen as an important tool for the Department of Labour (the Department) as part of its labour market monitoring functions. It was suggested that The Department develop, establish and maintain a Lead Employment Indicator for New Zealand as it could enhance the it’s capability to monitor labour market development and develop employment outlooks.
What is the benefit of the LEI?
The LEI combines information from five different components into a single indicator in order to predict future turning points in employment.
How reliable is the LEI? How accurate is the LEI?
The LEI has done well at providing advance signals of cyclical changes in employment in New Zealand. It gave signals of the 1987 and 1990 downturns with a lead of two quarters, the 1997 downturn with a lead of five quarters, and a four quarter advance warning of the short-lived two quarter downturn in employment over the last two quarters of 2006. The LEI gave a signal of the most recent downturn in employment with a lead of three quarters while the most recent upturn was advanced by one quarter.
There is a risk of an occasional false signal of a turning point in employment. The LIoE gave a false signal of a downturn in employment in 2000, and again in 2002/3.
How are the components that go into the indicator chosen?
The selection of the five components is described in the report by Claus (2006)1. The selection of the components was on based on their:
- degree to which they are affected by the same shocks that affect employment;
- degree to which the component series leads employment;
- statistical significance;
- timing and stability of publication; and
- forecasting performance.
In total 97 component series were tested. The final component series were selected by first including series broadly covering different sectors of the New Zealand economy and then replacing them with different series or dropping them if they did not add information.
The component series are permanent and long-term arrivals, the proportion of businesses reporting labour as a limiting factor for future growth as reported in the Quarterly Survey of Business Opinion (QSBO), the New Zealand share price index, the Southern Oscillation Index and the ANZ commodity price index.
Permanent migration is an important indicator of domestic economic activity in New Zealand and hence employment. The QSBO information on labour constraint helps indicate future hiring activities, share price indices are a measure of financial wealth and associated demand pressures while the ANZ commodity price Index is an indicator of world demand. The Southern Oscillation Index measures changes in weather patterns - with adverse weather conditions putting downward pressure on agricultural output and employment.
Why use PLT arrivals and not net migration?
People that arrive to New Zealand have different characteristics to people leaving the country. People arriving in New Zealand may have higher employment rates than those people leaving the country. Additionally, immigrants have different earning and spending patterns than emigrants, in particular in respect of demand for housing.
What is the Southern Oscillation Index and why include it in the LEI?
The Southern Oscillation Index is based on the difference in air pressure between Darwin in Australia and Tahiti in French Polynesia. An index is calculated by comparing monthly data to the long-term average.
Sustained positive values correspond to La Niña conditions, which have a weak impact on climate in New Zealand (more rain in the northeast of the North Island caused by more north-easterly winds). El Niño conditions are often indicated by sustained negative values, which are usually accompanied by more wind from the west that can lead to more rain in the west and drought in the east.
A lower index is expected to have a negative influence on employment because El Niño conditions can have a strong negative impact on agricultural output and employment.
Why use labour as a limiting factor and not other labour market indicators from the Quarterly Survey of Business Opinion?
Other labour market indicators from the QSBO were tested for inclusion in the LEI, but the performance of the LEI did not improve.
How often will the LEI be updated?
The LEI will be updated quarterly. The LEI component series and weights will be reviewed on an annual basis for consistency and reliability.
1 Claus, E. (2006), ‘Two Leading indexes of New Zealand employment’, Report prepared for the New Zealand Department of Labour, Centre for Applied Macroeconomic Analysis, Australian National University.