Tag Archives: Labour Force Particiaption

RBNZ – LUCI indicator

RBNZ Deputy Governor Geoff Bascand presented a speech on inflation pressures through the lens of the labour market. The key message from the speech is that weaker than expected labour market pressures have been “a factor in our assessment that it has been appropriate to keep monetary policy accommodative” RBNZ research has identified large flows from non-participation into employment, flows that are much higher than that witnessed in other countries. Around two thirds of the newly employed were non-participators in the previous quarter. Bascand stated that “one implication is that participation is potentially more sensitive to cyclical variation than previously thought. Another is that the unemployment rate is a weaker indicator of labour market slack and inflationary pressure than previously assumed.”

Therefore, the RBNZ has developed a labour utilisation composite index (LUCI) which shows how tight or loose the labour market is relative to a long-run average. It combines 17 labour market indicators,weighted so as to provide the best historical fit to the broader economic cycle. The boom in the early 2000’s saw labour market conditions tighter than usual with resulting higher wages. However the GFC put a stop to that with a lot of labour market slack. Today, with labour market conditions broadly in balance since 2014 there has been little upward pressure on wages.

Recent low consumer price inflation in New Zealand of 0.1% can be mostly explained by falls in commodity prices and the high New Zealand dollar which makes imports cheaper.  However, the growth in labour force participation rates (see graph below) have put the brakes on wage inflation and therefore has had a lower inflationary impact than expected.

Participation rate NZ

Source: RBNZ

The participation rate has trended higher over the past 15 years, reaching around 69 percent in 2015. The main influences on this trend have been the ageing population, increased participation of older workers, and increased participation of women.

Participation tends to be cyclical in nature:

  • Strong employment and wage growth encourage people to seek work, who otherwise would not choose to participate.
  • When unemployment rises people spend longer time out of work. However some are discouraged from seeking work and no longer participate in the workforce.

A recent example of cyclical impact is Canterbury, where the strong rebuild activity encouraged additional workers to join the labour force. Participation in Canterbury rose from 67 percent at end-2011 to around 72 percent at the end of 2015, 4 percentage points above the rest of the country

Confusing signals from New Zealand employment data

You may have heard Stephen Topliss of the BNZ in the media this morning talking about the inconsistent employment data that was recently published. In 2012 30,00 people lost their jobs and there was drop in the number of participants in the labour force by 48,000 as people gave up looking for work – see diagram below for Composition of Labour Force. There are some conflicting pieces of data:

1. The unemployment rate fell from 7.3% to 6.9% over the last quarter but this most probably is due to the fact that the participation rate has fallen.
2. The number of people employed fell by 1.4% for 2012 but the Quarterly Employment Survey suggests that employment grew by around 1.5% over the last year.
3. Business intentions and actions are inconsistent – survey indicate that they expect to hire more labour but ultimately they don’t
4. In surveys consumer confidence is high with the backdrop of so many losing their jobs
5. Housing market usually reflects the state of the labour market – today employment market poor

It begs the question how accurate is the employment data. Lies, damn lies and statistics.

Composition of Labour Force in New Zealand January 2012
NZ Labour Market