Skills Challenges Report – New Zealand’s skill challenges over the next 10 years
Forecast supply of skills
The following sections of this report are about the future supply of and demand for skills.
Both sections use forecasts that are based on our understanding of the past, and assumptions around the major drivers of change. As the UKCES has noted[27], the rationale behind such forecasts is that a comprehensive, systematic, consistent and transparent set of projections provides useful benchmark information and insights for all the participants in the labour market. But the UKCES cautioned that it is important to appreciate that the purpose of employment projections is not to make precise and detailed forecasts of employment levels. The aim is to provide policy analysts and other labour market participants with useful information about the general nature of changing employment patterns and their implications for skill requirements.
The Department's labour supply model projects labour force status for people in these four qualification groups[28]:
- Degree qualified
- Vocationally qualified (post-school non-degree)
- School qualified
- Not qualified
A key challenge with this forecasting is that we do not always know if people completing a tertiary qualification are doing so for the first time (known as a first-time completer), or are adding to previous tertiary qualifications they hold. The Ministry of Education is constantly improving this data. However, there are still large gaps in how well we can measure this for older people. This particularly affects vocational qualifications, where a large number have been completed by people aged over 40 years during the past 10 years.
A similar difficulty arises for people who leave New Zealand, about whom we know little in terms of their qualifications.
These caveats are largely responsible for the differences in labour supply modelling results between different agencies, and the Department of Labour will be actively working with the Ministry of Education and The Treasury to improve the quality of these estimates in future.
Figure 7 below shows that, over the next 10 years, we expect a strong increase in the number of people holding a tertiary qualification. We expect to see a continuation of the strong growth in the number of degree holders in the labour market that has been occurring since the early 1990s. This growth is projected to occur despite relatively static numbers of new university graduates during the past decade. The growth is attributable to two key drivers:
- Strong gains from immigration
- Well qualified younger cohorts replacing retiring older workers who are less qualified (this is a flow on effect from the early 1990s when increased rates of young people started to gain university degrees)
Figure 7 Share of employment by qualification, 1991-2019
The share of people with a vocational qualification as their highest qualification is projected to remain fairly flat. While there has been strong growth in the number of people completing a vocational qualification over the past 10 years, the vocationally qualified share of employment has actually fallen. This may be because the rise in vocational completions has been from a very low base although there is a lack of data in this area.
51% of people who complete a vocational qualification for the first time do so before they are 30 years old, compared to 84% of degree completers[29]. If this group of vocational graduates were retained in the New Zealand labour market, we would expect the share of vocational graduates to increase over the long term. The factors that contribute to the flat share of vocational graduates are:
- Strong outflows due to emigration (particularly to Australia), and
- Vocationally qualified people have an older profile and retire at higher rates.
However, we note that there is considerable variation in forecasts of growth in vocational qualifications, with The Treasury projecting stronger growth in this area. More work is required to reconcile these different estimates.
Despite the fall in the number of people leaving school with no qualifications, we project that the number of people whose highest qualification is from school will also drop substantially over the next 10 years as more people move on to a tertiary qualification.
Table 8 below presents the levels behind these trends. This table also shows that retirements of people with degrees will occur at around half the rate of other groups, reflecting the much younger age profile of degree holders. Retirements are the net number of people aged 50 years and over who are projected to leave the labour force as they move into age groups with lower participation rates over the next 10 years.
| Number (000s) | Annual Growth | Total Retirements | ||
|---|---|---|---|---|
| 2009 | 2019 | 2009 to 2019 | (000s) | |
| No qualification | 397 | 360 | -1.0% | -90 |
| School qualification | 518 | 460 | -1.3% | -100 |
| Vocational qualification | 839 | 900 | 0.7% | -170 |
| Degree qualification | 478 | 700 | 4.0% | -40 |
| Total | 2233 | 2420 | 0.80% | -410 |
Labour supply pressures build over the longer term
Figure 8 below shows that the labour force participation rate is projected from just under 69% in 2009 to just above 62% in 2061. The figure shows that the steepest part of this fall occurs between 2019 and 2029.
Figure 8: Projected total labour force participation rate, 2009-2061
Based on these projections, we would need to increase the growth of labour productivity from 1.2[30]% to 1.9% per year in order to maintain our recent average growth in GDP per capita of 1.9% per year. If labour productivity growth continues at 1.2% per year, growth in GDP per capita will fall to an average of 1.2% per year over the next 20 years.
Increasing net immigration reduces the effect of population ageing, because immigrants have a younger age profile than the domestic population, but its impact on the overall participation rate is limited.
New Zealand is not alone in looking for solutions to the economic impacts of ageing populations. Other countries in the OECD are facing a similar, or more severe, situation as their population's age.
Future skills shortages may boost capital investment and increase labour productivity
Labour productivity is likely to improve if employers have an incentive to increase their capital investment. This means that workers have better resources (such as smarter software, faster equipment), leading to increased output.
In the future, as the labour supply becomes increasingly constrained, firms may find it harder to find the skills they need, this may mean they will be willing to pay higher wages to attract the right staff. As a result, capital will become cheaper relative to the price of labour.
For firms to remain profitable in the face of rising labour costs, they can be expected to search for productivity improvements through greater capital investment. Evidence of this can be seen in data from 2000-07 in New Zealand. At that time, skill shortages drove wages up, which in turn encouraged an increased level of capital investment.
While the productivity challenges presented above are significant, to some extent, the economy has a built-in self-compensating mechanism. As the labour supply is squeezed, firms become more productive by making greater capital investments, which would not have been profitable when labour was relatively cheap.
However, this effect is not guaranteed. Over the past 10 years New Zealand had reasonably high levels of investment over the boom, with no sign of a consequential lift in labour, capital or multi-factor productivity.While there might be a lagged effect from capital investment, productivity growth is also about improved efficiency in resource use, rather than just increasing capital inputs.
Footnotes
[27] UKCES: Working Futures 2007-2017 Executive Summary (www.ukces.org.uk)
[28] The projections are based on HLFS data and groups qualifications in a slightly different way to those reported from the Census, which are the basis of the labour demand forecasts. This will produce marked differences in the size of each group, but the growth rates should be broadly comparable.
[29] A notable feature of New Zealand’s post-secondary education is that many New Zealanders participate in post-secondary study later in life, and we have one of the highest enrolment rates in the OECD at older ages.
[30] New Zealand’s average labour productivity growth between 1998 and 2008
