Brian Fallow: Unemployment the burning issue

In the construction industry a shortage of tradespeople has turned into a glut. Photo / Sarah Ivey

Raising the skill levels of the workforce is an essential ingredient of any recipe for productivity and income growth.

One of the yardsticks by which to judge the coming Budget is what it does to step up investment in human capital, because a recession, as they say, is a terrible thing to waste.

Tomorrow the statisticians are expected to confirm that the unemployment rate has jumped from a five-year high three months ago to a seven-year high.

Forecasters expect the numbers to get even uglier over the year ahead. The New Zealand Institute of Economic Research, for example, sees the number of people unemployed rising by 50,000 or 50 per cent over the next year.

In responding to this, the Government needs to be clear-headed about what will deliver most bang for the taxpayer's buck - the fiscal constraints are real - and what will best position the economy to grow when the Great Recession is over.

In a paper titled "The Unemployment Challenge" NZIER says that as unemployment mounts the temptation will be to artificially protect jobs. But that is shortsighted, it says. The imperative should be to ensure that New Zealand has the right human capital to prosper when the economy picks up.

It cites international evidence that job subsidies like the nine-day fortnight scheme are not good value for money and are unlikely to make much of a difference to unemployment.

"It risks giving support to marginal firms in declining industries," the institute says.

In practice its effect is more likely to smooth the process of downsizing so that it takes place through attrition rather than layoffs.

Statistics New Zealand, in a background paper for the Job Summit, made the point that even when the labour market is strong there is a lot of job destruction.

In 2007, 213,000 jobs disappeared - 12 per cent of the total - as firms shrank or went out of business. But that was more than offset by 254,000 created in new or expanding firms.

It would be a mistake, however, to dismiss job creation schemes out of hand. The boom/bust cycle in the construction industry has turned a shortage of tradespeople into a glut.

Putting them to work upgrading or expanding the social housing stock and school buildings, or insulating homes, looks like a no-brainer.

Much of the country's plantation forest estate is a legacy of relief schemes in the 1930s. Federated Farmers has suggested that if the Government really wants to encourage afforestation as part of the response to climate change it should just lease land itself and employ people to plant trees on it.

It is not clear, in short, that econometric studies of job creation schemes with their deadweight losses and displacement effects fully capture the co-benefits of well-targeted and timely interventions of this kind.

NZIER says that the most effective and least costly intervention is job search assistance - already provided by WINZ.

"The programme with the highest impact at one and at three years, if measured at becoming independent of Work and Income assistance, is helping job-seekers into self-employment," the institute says.

"But participants in these types of programmes are probably more motivated than others."

There is bound to be a mismatch, NZIER argues, between the skills and location of the unemployment and where job growth occurs when it resumes.

There may not, for example, be as many jobs in manufacturing or residential construction, or in the places where people live now.

Which brings us to training.

"If jobs are drying up the issue will be what is the nature of the assistance post-redundancy," said Council of Trade Unions secretary Peter Conway.

"If it is not to match you with a job, is it to match you with skills training that will help you in the medium term, but also strengthen the economy? But then someone has to pay for it."

Benedikte Jensen, research director of the New Zealand Institute, says that as the Government looks to limit the social costs of rising unemployment it needs to focus spending on the most vulnerable groups, like young people in disadvantaged communities - or face an increase in crime rates.

Youth unemployment generally rises faster in a recession and stays high longer than for other age groups.

In the early 1990s when unemployment hit 11 per cent it was more than twice that among the young and was still high, at 14 per cent, for 15- to 19-year-olds, last year.

"The experience with earlier recessions shows that the quality of skills training determines whether workers make the adjustment through to new jobs as the economy recovers," she said.

"Make-work schemes, boot camps and substandard training options don't help. It needs to be meaningful long-term training that improves qualifications or pathways into increasingly skilled work."

NZIER also puts the emphasis on training. "Unemployment is usually most concentrated among people with limited human capital. But this time round even skilled people may need assistance if they have specialist skills that are ill-suited to those that are going to be in demand in the recovery."

But it cautions that the evidence is that the effectiveness of training programmes is patchy and as they are among the most expensive of policy measures in this area they need to be carefully targeted.

It is noteworthy, but dispiriting, that when the nine-day fortnight programme was initially mooted the intention was to provide workers on the scheme with training on the 10th day. But that was dropped as too hard.

The Government cannot afford to give up on that. Raising the skill levels of the workforce is an essential ingredient of any recipe for productivity and income growth.

Right now employers report that it is easier to find skilled labour than it has been for 30 years. But it was not long ago that skill shortages were acute. Right now the outflow of migrants is easing, as Australia slips into recession and the rest of the world is already in one.

But when recovery comes the income gap with Australia and most of the rest of the OECD will be just as wide.

In that context policies which keep marginal tax rates high are counter-productive.

But so are policies which would make New Zealand workplaces less attractive by attacking, as NZIER suggests, such "costs of employment" as the Holidays Act, health and safety legislation and ACC levies.

Reduced to its simplest, New Zealand's economic problem is that it imports too much of the capital it needs and exports too much labour.

Policies making the second leg of that dismal double even worse would be short-termism of the worst kind.