Labour Market Adjustment Speed

Interesting Treasury working paper – “New Zealand Labour Market Dynamics: Pre- and Post-global Financial Crisis” – talks about the major structural changes in the New Zealand labour market since the 1980’s reforms.

It looks at what the “natural rate of unemployment” is and how quickly the labour market adjusts to structural changes.

They estimate the average natural rate of unemployment from 1992-2012 to be 4.6% – lower than the average unemployment rate of 6.2%.

This is interesting:

We may accept the stylized fact that the labour market adjustment has been incomplete over the past two decades, which is consistent with search theory (Pissarides, 2000). Our estimated speed of adjustment is a low of 0.10. The smoothed state-space estimate of the speed of adjustment noticeably increases after recessions. It increased during the recession in the aftermath of the Asian financial crisis, and increased by much more during the recent recession in the aftermath of the global financial crisis. These stylized facts are consistent with the Schumpeterian creative-destructive theory, and with New Zealand empirical evidence reported in Carroll et al. (2002), Mills and Timmins (2004), and McMillan (2004).

We have to remember that a lot of people still work for central and local government where they’re shielded from a lot of the changes that have occurred to employment relations in the private sector.

This paper does not look at under-employment to the extent it should – you can’t be thinking about unemployment and labour market structural changes in 2014 without substantial discussion of the part-time and casual employment arrangements which help keep that employment rate at an average 6.2%.

If there really has been slow labour market adjustment, you could tell a story about how higher qualifications are closer to a lottery ticket for many people who could benefit the most from the slight premium earned by degree holders for example.

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