KEY POINTS:
Two of the key factors determining how fast the economy can expand are growth in the labour force and in capital investment.
The former is looking good and the latter is at least looking better than it was.
Net immigration last year boosted the population by nearly 15,000, up from 6000 in the year to October 2005. About three-quarters of the net gain was people of working age.
And the statisticians give us an update today on the participation rate, which is the proportion of the working-age population who are either employed or are available for work and actively seeking it.
In September it was the highest it has been for 20 years.
Since the millennium the working age population has increased by 12.2 per cent.
But the labour force has grown faster, 16.8 per cent, reflecting a rise in the participation rate from 65.3 per cent (in December 1999) to 68.3 per cent in September last year.
Over the same period employment has grown faster still, 20 per cent.
So most of the jobs growth has been met by population growth and an increasing participation rate, rather than a reduction in unemployment - though that has fallen too, from 118,000 at the end of 1999 to 83,000 last September.
All of which means it is pretty important to understand what has been pushing labour force participation and whether it will keep rising or start falling back.
Dominick Stephens, an economist with Westpac bank, has been looking into just that.
His econometric modelling finds several structural changes in society over the past 20 years that have affected the participation rate:
* Participation by 15 to 24-year-olds has fallen over the past years as people spend longer in the education system.
* For women aged between 25 and 34, participation is higher than in 1986, but is about the same for women aged between 35 and 44. This may reflect a decline in the birthrate and a tendency to have children later. For women in their 30s the number of pre-school-aged children rose, but the proportion not participating in the workforce because of a child fell, suggesting that the participation rate of 30-something mothers has risen.
* The biggest change in the participation rate in the past 20 years has been among women aged between 45 and 60.
"The early baby-boom generation of women ... were more likely to remain in the workforce during their child-bearing years than previous generations, and were much more likely to return to paid work after having children. Subsequent generations have been even more likely to return to paid work," Stephens said.
* Men aged 25 to 54 unsurprisingly have the highest participation rates at over 90 per cent, but it has been coming down.
That might reflect a rise in the number of people on ACC or the sickness benefit over the past 20 years, or an increase in those who are solo parents or house-husbands.
* A big influence on participation rates was the increase in age of eligibility for New Zealand Superannuation from 60 to 65 over the 1992 to 2001 period.
Stephens suggests that, in the case of men at least, that has masked an underlying but international trend towards earlier retirement as wealth levels have risen. If so, the rise in older men's participation rate will prove temporary.
* Finally, there is the impact of an ageing population, resulting in more workers in the lower-participation over 55-age group and fewer in the high-participation 25 to 54-year-old group.
That effect is set to intensify as baby-boomers move into retirement.
Stephens says that over the next 10 years the effect of the ageing of the population, all else being equal, would be to reduce the participation rate by 2.5 percentage points, thereby largely reversing the overall participation rate gains of the past 10 years.
The net effect of all these structural changes is just about a wash: the participation-boosting ones were almost entirely offset by those which have reduced participation rates.
Stephens concludes that the increase in participation rates over the past few years is cyclical, not structural.
It is the steep rise in the number of jobs that has drawn people into the workforce.
The strong increases in participation over the past few years were not necessarily the start of a new trend.
"Rather, strong employment growth can explain most of the rise in participation. The corollary is that should New Zealand enter a period of lower employment growth over the next few years, unemployment would not necessarily rise to the extent projected by official forecasts," Stephens said.
"Similarly, should strong employment growth continue New Zealand will not necessarily run out of workers. It would be possible to sustain 2 per cent employment growth for each of the next five years through rising labour force participation and average migration levels."
How much comfort can we take from this? At some point employment growth will drive wage inflation to levels that force governor Alan Bollard to spear-tackle the economy.
But if the Westpac work is right, that point may be further out than most forecasters think.
Meanwhile Bank of New Zealand chief economist Tony Alexander has been reflecting on the mounting evidence that firms have been responding to the tight labour market by investing more in plant and machinery.
In the September quarter, spending on plant and machinery rose for the first time in a year.
Imports of plant and machinery in the December quarter were up 14 per cent on the same period a year earlier.
And the Institute of Economic Research's most recent quarterly survey of business opinion recorded a net 13 per cent of firms intending to increase spending on plant and machinery. That is the highest reading since 1995 and wellabove the 10-year average of 3 per cent.
Whether this continues depends on business confidence.
In that context the high dollar's impact on the export sector is unhelpful, but then it also makes imported capital equipment cheaper. And some exporters may be boosting capital spending precisely to be able to handle the high dollar, Alexander suggests.
"A potential hike in interest rates would be a negative," he said.
The bottom line is that most of the economy's growth over the past 10 years has been driven by an increase in labour rather than an increase in productivity.
But with the unemployment rate low, the participation rate high, and an income gap with other developed countries which has seen the country lose seven New Zealanders for every 10 immigrants over the past 10 years, that recipe for growth is running out of steam.
So it is heartening to see firms responding, as they need to, by investing more.
