Moving Towards Lower Unemployment

There are two main types of unemployment : cyclical and structural. Cyclical unemployment is caused by a downturn in the business cycle. Structural unemployment is caused by changes in the structure of the economy

An example of cyclical unemployment is a retailer laying off workers because of lower consumer spending. An example of structural unemployment is a manufacturer laying off workers because a new production process means they’re no longer needed.

Since the Global Financial Crisis began, unemployment in New Zealand has increased significantly. The idea that there is some sort of “natural rate of unemployment” – called NAIRU in the fancy models built by the Reserve Bank – means that historically unemployment “should” be around 5%.

This month we learned that unemployment is at a 13 year high of 7.3%. That’s not good. Because of the limitations of the Household Labour Force Survey, we can’t really break down exactly who has lost their job because of a downturn in demand and who has lost their job because their skills aren’t sufficient to keep it.

This means that the government has to be careful about the narrative it’s telling around unemployment. If most unemployment is structural as opposed to cyclical, then a major shift in the rhetoric around unemployment has to happen.

Some employers claim that there is a skilled worker shortage. They claim that they have lots of applicants but even when they train people they can’t stick to the job. The quotes in the Herald from these sorts of employers go against basic labour market economics.

If there is a shortage of skilled workers, who may have gone to Australia to earn higher wages, then there are two options to plug that gap:

  1. Increase the starting wage on offer to close the gap between skilled wages in Australia and skilled wages in New Zealand.
  2. Lower your expectations about the quality of employees you can obtain in the current marketplace and mould your ideal worker by offering a clear pathway to higher wages if they stick to your training plan.

Many of the business owners who complain about the skills shortage are not offering decent wages or a credible pathway to decent wages through in house training.

In 2012, with the plethora of free information available on the internet, there is no excuse for employers wanting skilled employees to do a bit of groundwork and set up an in house training scheme.

They can even partner with local training institutes and polytechnics who might be more than willing to match hungry students to opportunities in the work place.

The reason that the $10.80 an hour “training wage” won’t work is that labour market economics do not work with my generation. There is no positive relationship  between employer and employee.

The incentives to work are heavily skewed by the option of remaining in study for longer periods of time or relying on parental support. When we’ve all been told we can be astronauts no one will take a job they don’t want to unless there’s a desperate need for money.

The labour market is so competitive that for many skills, there is no actual labour market but a job and project specific skills market. This is where freelancing and self-employment comes in.

For many reasons, including regulation and tax obligations, contracting arrangements have replaced many former employer-employee arrangements. Job security is a myth. It’s far riskier to rely on an employer than on contract income from a diverse group of clients.

This is a factor aggravating the current unemployment crisis. Why? Because if you low skills and no job, with little hope of moving beyond minimum wage, there is little incentive to obtain higher qualifications.

There are several policy options for the government to get their hands dirty and make hiring marginal workers more attractive. An enormous increase in the Work and Income programs that move people from welfare to work is just the beginning.

Additional tax credits for employers who pay for training and commit to clear income trajectories for employees who progressively move from novice to skilled worker on time would help too.

Simultaneously, a more realistic approach to education subsidies is in order. We need to stop the fantasy that we can all act like aristocrats at Oxbridge studying society and culture degrees.

The arts are important, but having an income to pay the bills is more important. And increased focus on linking the education system to the skills employers need is definitely good policy.

One of the key changes that needs to happen is the reinforcement of how important mathematics is. If you want to work on most modern factory floors you need to be able to program expensive machines for low tolerances with special manufacturing machine programming languages.

Despite what you thought about maths at high school, mathematics can be learnt by anyone with the drive and dedication to work their way through Khan Academy or MIT OpenCourseware.

Becoming proficient in mathematics is becoming more important for workers in all fields who want to earn anything above minimum wage. If I had my way, a modest weekly bonus would be paid to beneficiaries who worked through online education websites regularly.

There is another bottleneck in the labour market that needs to be reformed urgently : the unrealistic standards imposed by HR on hiring “outside the box” people who could deliver substantial value innovations for their employers. I’ll be writing more about that over the next few months.

The current beneficiary bashing rhetoric employed by the National government isn’t helpful at all. It will simply breed resentment for those people who are actually victims of the business cycle.

Not everyone is capable of accurately forecasting the demand for their skills over long periods of time. Blaming people without any economics under their belt for not realising the job polarisation trends in the economy is sadistic.

In recognition of this, a more supportive attitude that realises that workers without previous high skill work experience are ideal for employers to mould into excellent employees if they are simply given a chance to prove themselves.

Lowering wages without simultaneous reductions in the cost of living leaves us at the status quo. Because inflation happens constantly, low starting wages with no reasonable prospect of pay rises will simply not motivate anyone who can think clearly about the value of time and money.

Moving towards lower unemployment will take time. But the government can take a more aggressive approach in kickstarting the process by drastically increasing the attention it pays to upskilling and encouraging self directed learning.


Are Jobless Recoveries The New Norm?

This week at Vox EU an interesting piece by Henry Siu & Nir Jaimovich argues that jobless recoveries, at least in the United States, are the new norm. It’s called “Jobless recoveries and the disappearance of routine occupations“.

They talk about job polarisation where there is an increasing division between high skill and low skill jobs, with the “middle” jobs that are routine and can be automated or mechanised are no longer needed. The reduced reliance on labour-intensive production methods in manufacturing and increased reliance on software and robots to perform routine tasks is an example of this trend.

To examine this against they data they constructed a counterfactual scenario – if routine employment rebounded after a recession the same way as it did before job polarisation started happening, what would total employment look like?

In the 2001 recession:

For the global financial crisis:

They conclude:

The loss of routine jobs in recent recessions has given rise to jobless recoveries. Aggregate employment struggles to rebound following recessions since middle-wage, routine occupations no longer recover. Moreover, employment growth following recent recessions has been unevenly distributed across pay, concentrated in high- and low-wage occupations. A recent report by the National Employment Law Project (2012) indicates that the recovery from the Great Recession has been particularly lopsided, with the majority of jobs added being low-paying jobs.

What does this mean for New Zealand’s unemployment crisis? If the US situation applies to New Zealand then we should be very concerned indeed. We already suffer from low levels of labour productivity and rising labour costs. More flexible hiring practises including the 90 day trial period have not made any difference in net job creation.

It means that we need to think careful when thinking about who is unemployed. Are they unemployed for cyclical reasons – because their employers failed due to lower demand for the goods and services they produced? Or are they unemployed because their job is no longer needed or they no longer have the skills necessary to perform a similar job in the same industry?

If the structural changes in the labour market are not addressed promptly, hysteresis will set in and the long-term unemployed from the past few years will be permanently locked out of the labour market. The urgency of addressing this problem is clear – if workers aren’t supported through the retraining and adding skills process they will not be able to participate in any recovery in the labour market.