Brian Fallow: Jobs defy cooling of economy

New Zealand still has one of the lowest unemployment rates among developed countries, figures out today will show.

Economists are picking 3.9 per cent, the sort of unemployment rate we used to have back before the economic reforms of the 1980s bit.

But the remarkable and sobering thing about that is it comes at a time when the cooling economy has reduced the creation of new jobs to a trickle. The average forecast is for employment to grow 0.3 per cent in the June quarter - about 6000 jobs, on top of a mere 1000 in the March quarter. That is a modest addition to the more than 2 million existing jobs.

An indication of softening demand for workers is the Labour Department's job vacancy monitor. It found job advertisements in June running 8 per cent above the level a year earlier- but that was the lowest annual increase in 18 months and is well down on the 26 per cent recorded in April last year.

It found an 11 per cent decline in advertised vacancies for tradespeople compared with June last year, including a 27 per cent drop in vacancies in the building trades.

These are the sorts of numbers that would gladden the heart of a Reserve Bank governor fretting about wage inflation in an economy whose resources have been stretched tight by three years of strong growth.

The unemployment rate stays so low in this environment partly because the net inflow of migrants, a key influence on the supply of labour, has also dwindled.

The net population gain from migration was 8590 in the year ended June, below the long-term average of about 10,000 and well down on the 43,000 recorded in 2003.

Annualised, the net gain of the past three months is even lower at 7360.

Migration gains of this order do little to lessen the longer-term underlying demographic trends of an ageing population and declining growth in the working-age population.

The International Monetary Fund estimates that the retirement age would have to rise by three years to keep the ratio of the workforce to the total population in 2050 as it was in 2000.

Alternatively, the participation rate - the proportion of the working-age population who are working or actively seeking work - which is already above average for an OECD economy, would need to rise another 6 or 7 percentage points.

Where would the extra workforce come from? The welfare rolls, perhaps?

The low-hanging fruit has long since been plucked from that tree. It would take a cherry-picker to get at the rest.

At the end of June there were 290,000 people drawing income-tested benefits, just over 12 per cent of the population aged between 18 and 64.

For Don Brash, that level is too high in a time of buoyant international conditions.

For Michael Cullen, what counts is that the proportion has fallen from about 16 per cent in the late 1990s.

There are 74,000 fewer people receiving benefits than there were five years ago, a decline of 20 per cent.

For the unemployment benefit in particular, the decline has been dramatic: from 141,000 in June 2000 to 50,000 now, a fall of 65 per cent to a 19-year low.

And 59 per cent of people on the dole have been there for less than a year.

The number of people on the domestic purposes benefit is only a bit lower than five years ago, falling from 108,000 to 105,000, an 11-year low.

Nearly one in four on the DPB have a current earnings declaration, indicating they have had paid work in the last year. Three in five have a youngest child aged 6 or younger.

The OECD says that while the overall participation rate of New Zealand women in the workforce is high by international standards, it has one of the lowest rates of employment among mothers with children under 6 in the OECD. It is not just talking about solo mothers, of course.

On the other hand, we have one of the highest rates of employment of mothers of children between 6 and 14.

The proportion of mothers of young children who work may increase with the new policy of 20 hours free early childhood education a week for 3- and 4-year-olds.

New Zealand parents face considerably higher childcare costs than their counterparts in many other developed countries, the OECD says.

Income-tested childcare subsidies were increased in last year's Budget but it notes that these are whittled away to nothing by the time household income reaches 75 per cent of the average for families with dependent children.

The shrinking of the welfare rolls cannot be entirely attributed to the strong labour market, Cullen told Canterbury Rotarians on Tuesday.

"Moving away from the punitive approach to welfare that prevailed in the 1990s has also been important."

In that decade benefit rates were cut and work-for-the-dole schemes instituted.

"Far from reducing welfare dependency, the number of beneficiaries grew in that period by 20 per cent."

All this suggests hopes of shifting large numbers from the welfare rolls to the workforce are misplaced.

With the population ageing and better-paying Australian employers a cheap plane ride away, a structurally tighter labour market is here to stay.

Smart employers will hoard labour through the cyclical slowdown ahead, for fear of not being able to replace people when things pick up again.

Does this raise the spectre of a return to the bad old days of a vicious inflationary circle, with higher wages pushing up consumer prices, fuelling higher wage claims?

This week's wages data showed unit labour costs rising. The average increase among wage rates that rose in the June quarter was 5 per cent.

But it remains a firm's choice whether to pass increased labour costs on to their customers. In an economy whose growth has slowed to an annualised rate of about 2 per cent, that might be risky.

Yet other business costs, such as energy and imported capital goods, are also rising, putting more pressure on profit margins.

ANZ National Bank economists argue that the system is self-correcting.

"If cost-push pressures from wage demands continue to climb and place pressure on earnings, then employment and investment - the very sources of growth needed to keep the business cycle expanding - could be undermined as firms respond," they say.

The result then would be a deeper trough in the economic cycle, limiting the potential for wage inflation to seep through into consumer prices.