Labour Market Outlook – October 2007

Background

This report provides an outlook for the labour market over the 18 months to March 2009. Our forecasts are detailed in the table on the following page, and a table of comparative forecasts from other agencies is presented in Appendix I. An outline of key current labour market measures is also included as Appendix II.

Summary

Labour market conditions tightened and economic growth exceeded expectations in the first half of 2007. Employment growth was strong in the first two quarters of 2007 leading to a record high participation rate and an equal record low unemployment rate.

Our outlook is for the labour market to ease slightly in the coming two years with a slow down in employment growth and a slight rise in the unemployment rate. Even with some easing, the labour market will remain very tight as we expect the unemployment rate to remain below the 4% mark, labour force participation to stay high and labour productivity to increase slightly.

Continuing strong performance of the economy and tightness in the labour market has led to changes in the composition of the labour force. In particular, part-time employment has grown rapidly over the past year as has employment of females, Maori, and older workers. This changing nature of the labour force confirms the need to focus on government led initiatives such as flexible work, Choices for Living, Caring & Working, and raising the value of work.

Economic growth expected to increase modestly

Economic growth exceeded expectations in the first two quarters of 2007 with strong growth of 1.2% in the March 2007 quarter and 0.7% in the June 2007 quarter. These increases drove growth to 2.2% in the June 2007 year, the highest level of growth in 12 months and a considerable recovery from a 7-year low of 1.6% growth in the December 2006 year.

We expect economic growth to rise modestly in the coming year and reach 2.6% on an annual average basis in the March 2008 year and then ease slightly to 2.0% in the March 2009 year. This is broadly in line with New Zealand Institute of Economic Research (NZIER) Consensus Forecasts.

Growth in GDP over the past year has been driven largely by domestic demand, although some primary exports benefited from healthy commodity prices. In the coming year a small shift towards the external sector is expected to take place as a wider range of primary commodities benefit from a more competitive exchange rate and continued buoyancy in global markets. Domestic demand is expected to slow further supporting a rebalancing of growth in coming quarters. Nevertheless, the service sector, particularly construction and the finance, insurance & business services industries have been and will remain the major contributors to growth.

Employment growth expected to remain subdued

Annual employment growth fell slightly to 1.5% in June 2007, down from 1.7% in the March 2007 year and considerably lower than the 3.1% recorded in the June 2006 year. On a quarterly basis, employment growth was strong at 0.7% in the June 2007 quarter, following a very strong 1.2% rise in the previous quarter. However, most of this growth was accounted for by part-time employment.

Following higher than expected employment growth in the first half of 2007, modest growth is expected in the next three quarters, resulting in annual employment growth of 1.6% in the year to March 2008. This is similar to the 1.7% recorded in March 2007 year. Employment growth is expected to ease further in the March 2009 year to 1.0%.

A moderately positive employment outlook is supported by both the National Bank Business Outlook and the Quarterly Survey of Business Opinion which show employment intentions remain optimistic.

Table 1: Labour Market Outlook projections to March 2009

	Actual		Projections
	Mar 2006	Mar 2007	Mar 2008	Mar 2009
Number of people (000s)
Employment	2,108	2,144	2,177	2,199
Unemployment	85	83	86	88
Labour force	2,193	2,227	2,263	2,288
Working-age population	3,203	3,248	3,288	3,330
Growth (annual % change)
GDP (annual average)	2.7	1.7	2.6	2.0
Employment	2.6	1.7	1.6	1.0
Labour force	2.7	1.6	1.6	1.1
Working-age population	1.4	1.4	1.3	1.3
Rates (%, March quarters)
Unemployment	3.9	3.7	3.8	3.9
Labour force participation	68.5	68.6	68.8	68.7

Note: numbers may not sum to total due to rounding

Part-time employment on the rise

Growth in employment over the past year has been driven almost solely by growth in part-time employment, particularly for females. Part-time employment (fewer than 30 hours a week) increased by a substantial 6.2% over the year to June 2007 while full-time employment increased at just 0.2% over the same period. Growth in part-time employment was driven by significant increases in part-time positions in the retail trade and accommodation, cafes & restaurants industries.

Significant growth in part-time employment may reflect that firms are constrained by a tight labour market and are finding full-time staff hard to find. On the other hand, high growth in part-time relative to full time employment can also be seen as a weakness in the labour market, as firms are now more reluctant to make long-term commitments than before.

Growth in part-time employment has been supported by increases in employment of some groups that would traditionally not be as likely to participate in the labour market including full-time mothers, retirees and students. Moreover, employment growth for Europeans has been virtually flat for the last two years with most employment growth recorded by Maori and particularly the “other” ethnic group. Increases in part-time employment, particularly for these groups, may also be influenced by policies such as Choices for Living, Caring and Working and Working for Families.

Growth in part-time employment has helped drive a decrease in average hours worked per week. In the June 2007 quarter average hours worked per week fell to 33.7, the lowest level recorded in the history of the HLFS. This trend is expected to continue as more workers balance work with other activities.

Labour productivity growth expected to improve

Strong employment growth in labour intensive industries during a period of slowing economic growth resulted in a period of relatively low labour productivity growth over the past two years. However, with economic growth projected to be faster than growth in hours worked, we expect labour productivity growth to be above 1% over the next year before easing to around 1%^[1] the following year, which is similar to the average of the past 15 years.

Positive labour productivity growth should be expected with a tight labour market, recent increases in wage costs and a period of sustained investment in plant and machinery.

Net migration expected to decline

Net migration inflows have fallen steadily from 14,800 in the year to November 2006 to 8,700 in the year to August 2007. This decrease has mainly been driven by growing departures, in particular the departure of New Zealanders to Australia.

We expect net migration inflows to fall further in the coming year as the underlying factors driving increased departures, particularly to Australia, are likely to remain in place. In the medium-term we expect net migration to recover to around the long-term average of 10,000.

Strong wage growth to persist

Strong wage growth is likely to continue in the year ahead given the very low unemployment rate and the demand for labour remaining high. Furthermore, employers are continuing to report significant difficulty finding both skilled and unskilled labour. Nevertheless, some easing is expected as a result of the fall in consumer price inflation over the last year.

With skill shortages expected to remain at high levels in the short to medium-term, there is expected to be upward pressure on wages over the next two years. Over the 2008/09 year however, an expected slowdown in economic growth coupled with lower employment growth will act to dampen wage pressures.

Sector outlook

Over the past year, GDP growth has primarily been driven by agriculture, the public sector and the services sector, in particular, financial & business services, communications and retail trade. This pattern is likely to continue over the outlook period, albeit with a slight shift away from domestic demand towards the external sector.

A small shift towards the external sector on the back of more competitive exchange rates, higher dairy prices and buoyant global markets will see renewed employment opportunities arise in agriculture and related manufacturing. This includes not only dairy but also beef and horticulture as well as wood and wood products. Nevertheless, the employment trends in manufacturing as a whole will be at best flat, as we expect further outsourcing of lower value activities in this sector to continue while higher value activities (such as R&D and marketing) are created in the services sectors.

In spite of an expected slowdown in domestic demand relative to the external sector, the industries that are expected to make the largest contributions to economic growth over the next five years typically produce products and services for the domestic market including business services, health, education and government and other personal services and tend to be relatively labour intensive. Their dependence on labour combined with moderately positive growth prospects should lead to further employment growth in these industries.

Labour force participation to stabilise

The labour force participation rate rose to a record high of 68.8% in the June 2007 quarter, continuing a recovery from falls in late 2006. Recent growth in the participation rate has been largely driven by groups who have historically been underrepresented in the labour market, particularly women, ethnic minorities and older workers. While recent increases in participation rates have been high for these groups there are still further gains to be made, particularly for Pacific Peoples and other ethnic groups.

The participation rate is expected to remain relatively stable over the next two years due to a number of offsetting factors. New Zealand’s population is ageing and will continue to do so over the coming decades. An ageing population structure is likely to lead to lower labour force participation as more people near retirement age. This impact has been predicted for the past few years but has not yet materialised due to strong labour market conditions encouraging people to remain in work longer and for new workers to enter the labour force. We expect labour force participation to remain relatively stable in the next two years followed by a gradual easing in the longer term.

Unemployment rate expected to rise slightly from historic low

The unemployment rate fell to 3.6% in the June 2007 quarter, equal to the previous record low. The unemployment rate has been relatively stable since falling below 4.0% in the second half of 2004, with 0.3% being the largest quarterly change.

With employment growth in the coming two years anticipated to be only modest, we expect the unemployment rate to rise marginally over the coming two years. However, with growth in the labour force also expected to slow over the forecast period, the unemployment rate is still expected to remain relatively low at 3.8% in March 2008 and at 3.9% a year later.

Due to the low number of workers unemployed, the participation rate has a large impact on the unemployment rate. It is therefore possible that the unemployment rate may differ from expectations if the participation rate is different than expected. A participation rate that is 0.2 percentage points higher (ie 69.0% for the year to March 2008 instead of 68.8% as per our forecast) could see the unemployment rate rise to 4.0% instead of our current forecast of 3.8%. Similarly, if the participation rate is 0.2 percentage points lower (ie 68.6% for the year to March 2008) the unemployment rate could decrease to 3.5%.

On balance, labour market to remain tight

Labour market and economic conditions recovered in the first half of 2007 following an easing over late 2006. In the June 2007 quarter, considerable employment growth was recorded while participation increased to a record high and the unemployment rate reached an equal record low.

Our outlook is for the labour market to ease in the next two years with only modest employment growth expected. Nevertheless, we expect the unemployment rate to remain below the 4% mark, labour force participation to stay high and labour productivity growth to be robust.

Appendix I: Economic projections of major forecasting agencies

Table A1: Economic projections of major forecasting agencies

Forecasts	Date		Economic growth
			Annual average % change
Years to March			2007 actual	2008 forecast	2009 forecast
Department of Labour	Oct-07		1.7	2.6	2.0
ANZ	Oct-07		2.51	1.51	1.71,2
Bank of New Zealand	Sep-07		1.7	2.8	1.8
BERL	Sep-07		1.7	2.6	2.5
NZIER	Sep-07		1.7	1.3	1.5
Treasury	May-07		1.7	2.6	1.6
Reserve Bank	Sep-07		1.7	2.9	2.9
Westpac	Oct-07		1.7	3.3	3.3
Consensus forecasts7		Sep-07	1.7	2.4	2.0

 

Table A2: Economic projections of major forecasting agencies

Forecasts	Date		Employment growth
			Annual % change
Years to March			2007 actual	2008 forecast	2009 forecast
Department of Labour	Oct-07		1.7	1.6	1.0
ANZ	Oct-07		1.7	1.0	1.22
Bank of New Zealand	Sep-07		1.7	1.5	0.9
BERL	Sep-07		1.73	1.03	1.23
NZIER	Sep-07		1.5	0.5	0.4
Treasury	May-07		1.86	0.86	1.06
Reserve Bank	Sep-07		1.7	1.8	0.3
Westpac	Oct-07		1.7	2.3	1.5
Consensus forecasts7		Sep-07	1.7	1.2	0.7

 

Table A3: Economic projections of major forecasting agencies

Forecasts	Date		Unemployment rate
			%, March quarter
Years to March			2007 actual	2008 forecast	2009 forecast
Department of Labour	Oct-07		3.7	3.8	3.9
ANZ	Oct-07		3.7	3.9	4.22
Bank of New Zealand	Sep-07		3.7	3.4	3.6
BERL	Sep-07		3.7	3.8	3.9
NZIER	Sep-07		3.7	4.2	4.5
Treasury	May-06		3.7	3.7	4.0
Reserve Bank	Sep-07		3.7	3.7	4.0
Westpac	Oct-07		3.7	3.2	2.9
Consensus forecasts7		Sep-07	3.7	3.9	4.2

Notes:
(1) Annual % change
(2) As at December 2008
(3) Annual % change, Full-time equivalent (FTE)
(4) Annual average % change
(5) Annual average for the year to March
(6) Annual average % change, FTE.
(7) NZIER Consensus Forecasts (average of 10 forecasting agencies, 7 of which are listed above).

Appendix II: Key Labour Market Measures

Key Labour Market Measures, June 2007 Quarter

Variable	Current Observation	Last Observation	Change
Total NZ Population	4,228,000
Working Age Population	3,254,600	3,247,500	Up
Employed	2,158,000	2,144,000	Up
Labour Force	2,239,000	2,227,000	Up
Unemployed	81,000	83,000	Down
Not in the Labour Force	1,015,000	1,019,000	Down
Net Migration	10,100	12,100	Down
Natural Increase	33,200	32,000	Up
Labour as main constraint on expansion	19%	22%	Down
Work-related Injuries	242,600	242,700	Down
Annual Wage Growth	3.2%	3.1%	Up
Work Stoppages	42	49	Down
GDP	2.2%	1.7%	Up
Labour Productivity	1.5%	1.1%	Up
Labour Utilisation	0.7%	0.6%	Up

View this table as a diagram.

Endnotes

1 These figures relate to the whole economy and so differ from productivity figures released by Statistics NZ which relate only to the measured sector.