Leading Indicator of Employment: June 2010 Quarter
The Department of Labour has developed a Leading Indicator of Employment (LIoE) for New Zealand which was first published in May 2010. The LIoE is designed to give an advanced signal of turning points in the employment cycle as measured by the Household Labour Force Survey (HLFS). The key point of a LIoE is that it combines information from five different indicators into one overall message about likely future turning points in employment.
- The LIoE continued to improve during the June 2010 quarter and has now recorded four quarters of positive change since it turned in September 2009.
- Even though employment in the HLFS was negative in the June 2010 quarter, this has not technically confirmed a downturn in employment. A downturn in employment is confirmed when there are two consecutive quarters of employment declines. If employment in the September 2010 quarter falls, this would confirm a downturn.
- The LIoE correctly anticipated the upturn in employment in the December 2009 quarter with a lead time of one quarter. It had also given correct advance warning of the recent downturn in employment with a lead time of three quarters.
- As a secondary function, the LIoE can be used to forecast employment growth in the short term. Current results from the forecasting component of the LIoE suggest that employment will grow modestly in a range of 0.4% to 0.7% in the September 2010 quarter and towards the top of this range in the December 2010 and March 2011 quarters.
Figure 1: Employment and Leading Indicator of Employment
Source: Department of Labour, Statistics New Zealand
Note: shaded areas show a downturn in employment
|Sep 2009||Dec 2009||Mar 2010||Jun 2010|
Components of the Leading Indicator of Employment
The overall positive result of the Leading Indicator of Employment in the June 2010 quarter was driven by increases in the ANZ Commodity Price Index and Southern Oscillation Index.
|Component||Quarterly change: March 2010 Quarter||Quarterly change: June 2010 Quarter||Weight
|QSBO (labour limiting factor)||12.0%||-3.3%||22.5%|
|ANZ Commodity Price Index (in NZD)||10.8%||9.5%||18.8%|
|Southern Oscillation Index (level)||-0.1||0.1||17.3%|
|Stock Market Index||-1.1%||-3.9%||19.2%|
1 Components are seasonally adjusted where necessary. The weights in the table are applied to the standardised level of each component series and not to their percentage change. The components and weights will be reviewed when necessary.
The LIoE is an aggregation of five different component series into a single overall composite index. The component series have historically been shown to lead cyclical employment. The LIoE series is designed to give advance warning of turning points in employment (here defined as the number of people in paid work of one hour or more per week, as measured by the HLFS).
The key advantage of the LIoE is that it combines information from five different indicators to produce one overall message about future changes in the employment cycle. The LIoE generally tends to be more reliable than any of its components taken individually. This is because it covers a range of sectors and much of the independent variability of the individual series is smoothed out in the LIoE.
The average lead time of the LIoE (i.e., the time between a peak or trough in the LIoE and the corresponding peak or trough in employment) is variable but generally between one and four quarters. A 'turning point' in the LIoE (or employment) series is confirmed when there are two consecutive quarterly movements in the same direction after a local peak or trough.
As relationships between variables change, the LIoE may adjust and users of the LIoE must be aware that historical relationships between the LIoE and employment can vary from time to time. Judgements about the future changes in employment derived from the LIoE should therefore be qualified appropriately. The LIoE is only one indicator of turning points in the employment cycle and should be used along with other labour market indicators.
The LIoE is available on a quarterly basis.
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