What is net replacement demand?

Net replacement demand is defined as the number of job openings that arise from individuals leaving an occupation, net of jobs taken by individuals re-entering an occupation. Labour demand arising from the need to replace the present workforce is equally or more significant than the demand created by an expanding industry or occupation. Net replacement demand complements estimates of additional employment growth and provides a more accurate picture of overall future labour demand.

Rationale

Net replacement demand develops a better understanding about the current and future supply of skills required in the labour market. Furthermore, net replacement demand could give an indication of occupations that may experience recruitment and retention difficulties. This could become important as a useful diagnostic measure, as New Zealand has experienced a significant level of skill shortage in certain occupations.

Net replacement demand information is able to inform the reader about an aspect of the dynamics of an occupation. In a sense, it is just one piece of the puzzle in trying to understand the demand for and the supply of skills in an occupation. Further work is needed in not only understanding the inflows into and outflows out of the occupations by studying where these inflows are coming from and outflows are going to.

Methodology

The methodology used follows that of Shah and Burke (2001) used at the Centre for the Economics of Education (CEET) where a cohort component method was applied. Historical net replacements rates (3 of them) were estimated for 96 occupations at the three digit NZSCO level in New Zealand between 1991 and 2006 and one estimated for five digit occupations for 2001-2006. Historical net replacement demand assessment methodology and the rates developed could be used as the basis to forecast net replacement demand rates over the medium term future.

Outputs

The results show that the average net replacement rate across all occupations in New Zealand was in the order of 1.4% for three digit and 1.7% for five digit occupations during 2001-06. The 5-digit rates varied between 0.1 (eg, microbiologists) and 10 (eg, checkout operators).

Average net replacement demand rates for occupations compared internationally with that of those derived in the U.S (2.4%), Australia (2.0%) and the Netherlands (3.8%) suggest somewhat higher rates than in New Zealand. Variations in estimates between countries could be explained by differences in the level of occupational mobility of the respective workforces as well as the age and gender structure of the workforce. Social and economic policies and differences in each countries’ retirement schemes and social assistance policies in terms of eligibility for retirement benefits give rise to differing net replacement demand rates.