Brian Gaynor: Surge in jobless hitting younger Kiwis hardest

Photo / Martin Sykes

The dramatic increase in the December 2009 quarter seasonally adjusted unemployment rate, from 6.5 per cent in the September quarter to 7.3 per cent, is a timely reminder that the economic recovery is weak.

The latest figure compares with an unemployment low of just 3.5 per cent in the December 2007 quarter and in the two years since then the total number of unemployed, before seasonal adjustments, has more than doubled from 75,800 to 158,900.

The recession has been particularly savage on young workers with 18.4 per cent of the 15 to 24 age group now unemployed.

High youth unemployment is a characteristic of this recession with a 44.5 per cent jobless rate among 15 to 24 year olds in Spain, 31.5 per cent in Ireland and 26.2 per cent in Italy.

What do the latest figures tell us about the economy and its likely performance over the remainder of the year?

The first point to note about the latest employment figures is that they are derived from the Household Labour Force Survey. This is a sample of about 15,000 private householders and 30,000 individuals each quarter.

This survey is subject to sampling errors. For example the total number of unemployed in the December 2009 quarter is subject to a sampling error of plus or minus 9700.

This means that the true number of unemployed people lies between 149,200 and 168,600 rather than the official 158,900 figure.

Most of the job losses in the past year have been in the private sector with 28,000 jobs lost in manufacturing and 24,100 in the retail trade and accommodation.

However, employment continues to rise in a number of government related sectors, particularly health care and social assistance where 14,900 new jobs were created in the 2009 calendar year.

The second point to note is that the unemployment rate in the Household survey is totally different from the number receiving the unemployment benefit.

For example, at the end of December the total number of unemployed was 158,900 yet there were only 66,328 receiving the unemployment benefit.

A number of observations can be made about these figures:

* There are far more people unemployed now than are receiving the benefit whereas 10 years ago there were 161,128 individuals on the benefit compared with 120,100 officially unemployed (see table).

* An additional 5668 went on the unemployment benefit in the December quarter compared with a 14,300 rise in the number of officially unemployed.

The smaller growth in the benefit number is a positive indicator because individuals usually only apply for this government handout when they are desperate and believe they have no hope of getting a job.

There is also a big difference between the young and old unemployment rates and between those with or without higher educational qualifications.

The ageing of the post World War II baby boomers has had a dramatic impact on the workforce with the number of individuals in the 55 to 64 age group either working or unemployed surging by 162,600 over the past decade, from 192,500 in December 1999 to 355,100 in the latest survey.

This age group is having no problem finding work as the unemployment rate in the 55 to 64 age classification has fallen from 4.5 per cent in December 1999 to just 3.4 per cent in the latest survey.

Meanwhile, the number of individuals in the 15 to 24 age group either working or unemployed has increased by a much more modest 54,600 since the end of 1999, from 341,300 to 395,900, but this group's unemployment rate has soared from 12.6 per cent to 18.4 per cent.

Employers are showing a clear preference for experience over youth. This will be a serious problem for the New Zealand economy when the baby boomers finally retire, particularly if a large number of young people have emigrated to Australia because jobs are easier to find there.

Developments in Australia are important to us because there are no restrictions on labour moving back and forth across the Tasman.

In this regard the following observations can be made about the Australian labour market:

* The unemployment rate amongst the 15-24 age group has declined from 13.3 per cent in December 1999 to 11.4 per cent in December 2009 whereas in New Zealand it has risen from 12.6 per cent to 18.4 per cent over the same period.

* Australia has created 15.8 per cent more jobs in this age group over the past decade whereas we have added an additional 12.4 per cent.

* The Australian economy has created 22.8 per cent more total jobs since December 1999 whereas we have added 20.8 per cent.

The Australian Government, which is far more forward looking than ours, released a major report this week called "The 2010 Intergenerational Report". This looks at the country between now and 2050.

It noted that the country's population was expected to grow from 22.2 million to 35.9 million by 2050.

One of the biggest challenges will be the ageing population with the number of working people to each person aged 65 years or over ratio expected to fall from 7.5 in 1970 to 5 today to just 2.7 in 2050.

The Intergenerational Report believes that the growth in Australian living standards over the next 40 years will be mainly driven by increases in labour productivity and net migration of between 150,000 and 200,000 persons per annum.

Unless we create more high paying jobs for our 15 to 24 age group the flow of people crossing the Tasman will increase. If this occurs we will be helping to alleviate Australia's ageing population crisis but will be exacerbating the same problem here.

With this in mind the creation of a large number of high paying jobs for young adults must be one of the major priorities for any New Zealand government.

Another point worth noting is that the unemployment rate amongst New Zealanders with no educational qualifications is now 11.6 per cent but only 4.3 per cent for those with school and higher qualifications.

The latest unemployment figures clearly indicate that the domestic economy recovery will be slow and relatively weak. Businesses are laying off workers, or not taking on new employees, because of a lack of confidence regarding the future demand for their products or services.

This lack of confidence supports the view held by some economists that the recent rebound is mainly due to restocking rather than a sustained increase in demand.

The weak labour market, which includes low wage inflation, a reduction in hours worked and rising unemployment, indicates than the Reserve Bank is unlikely to raise interest rates before June at the earliest compared to previous concerns that the official cash rate (OCR) could be raised as early as April.

This is obviously good news for house owners but the key factors impacting on the residential property market in the medium and long-term will be employment growth, income growth and net migration.

The big concern for New Zealand is that we are not creating enough high paying jobs, particularly for young adults. This is an important issue because Australia has a clear objective to create more high paying employment and have net migration target of 150,000 to 200,000 per annum.

This could encourage more and more young New Zealanders to cross the Tasman, a development which would not be positive for the domestic economy, including the residential housing market, in the longer term.

* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.