Pickup will slowly cut jobless ranks

There are 168,000 people officially unemployed, the most since 1993. Ask the Government what it is doing about it and the standard response is that it is businesses that create jobs and the best thing it can do is foster the confidence for them to start hiring again.

Business confidence is at a 10-year high, according to this week's National Bank survey, yet the unemployment rate is also at a 10-year high of 7.3 per cent.

So how come? First there is the "last cab off the rank" effect. The labour market is slow to respond to both upturns and downturns in the economy.

When employment peaked in December 2008 the economy had been shrinking all year. By the same token it came out of recession, technically speaking, nearly a year ago, but unemployment is still rising.

Second there is labour hoarding. The recession followed four years when the unemployment rate was below 4 per cent - low by the standards of the past 20 years - and skilled workers in particular were hard to find.

So when faced with a slump in demand employers have preferred, when they can, to cut hours rather than the number of people on the payroll.

Economists expect that as business picks up firms will restore hours worked to more normal levels before they increase staff numbers.

The National Bank survey this month found a net 9 per cent of firms expect to increase employment over the next 12 months. That is the highest that indicator has been for three years.

But the bank's chief economist, Cameron Bagrie, says firms' responses are better correlated to hours worked than a head count. "We think the unemployment rate is at, or pretty close to, its peak, but the real issue is how fast it comes down the other side.

" Hours worked per person are down to 33 [a week], just about a record low, so there is a fair bit of capacity there to increase hours," he said."There is still a lot of caution out there. Going round the traps the feeling I'm getting is that most people are moving forward now, but it is pretty gradual and modest."

The view from the other side of the market is also hardly rosy. Westpac's survey of how employees see the labour market was more positive by the end of 2009 than it had been at any stage earlier in the year, but still well below the long-run average for the survey. There were more optimists than pessimists, but only just. Perhaps the most timely indicator is the Department of Labour's tally of job advertisements online.

Online job ads halved between March 2008 and the middle of last year.

Since then they have been creeping higher. Over the six months to January 2010 there was a 9 per cent increase in skilled vacancies, but that would only claw back a tenth of the decline over the previous nine months.

"Job prospects for many are improving," the department concludes. "However unemployment has not yet peaked."

To keep pace with growth in the labour force the economy needs to create around 8000 jobs every three months.

Instead, in the last quarter of 2009 it lost a further 2000. But that was far fewer than the 17,000 jobs lost on average in the three preceding quarters, and was seen as a sign that at least the contraction in employment is close to bottoming out.

Meanwhile the ranks of people chasing what jobs there are have been swollen by a net population gain from migration of 21,300 in 2009. That was 17,400 more than in 2008, an increase explained by a 17,400 drop in the net loss of people to Australia.

Economists expect the outflow to Australia to pick up again in the year ahead, though. Its unemployment rate, at 5.5 per cent, is now well below New Zealand's 7.3 per cent.

In the end it is New Zealand's economic growth, not Australia's, which will drive the reduction in unemployment. The forecasters' average pick is growth of 2.8 per cent over the coming year and 3 per cent the year after.

That is in line with the average growth rate of 2.8 per cent over the past 10 years but it is sluggish compared with the rebound from previous recessions. Households are starting with high levels of debt, the legacy of the last boom, and are focused on reducing it. This is not good for businesses chasing the consumer's dollar.

At the same time there is a lot of uncertainty about how strong the world economy will prove to be when the plaster cast of the extraordinary monetary and fiscal measure authorities took to combat the financial crisis is removed.

At home the Reserve Bank says it expects to start raising interest rates around the middle of the year. And the Budget will be about reining in spending and tax changes intended to encourage us to save more, spend less.