CTU Economic Bulletin No. 32

The CTU November Economic Bulletin, including comment on unemployment, economic snapshot and wages.

Comment

Why do we have 107,000 unemployed people in New Zealand (or 176,600 jobless) when every day we hear reports of labour shortages?

The usual reasons given are that the current unemployed don't have the right skills, don't live in the right place, or don't have high enough standards of literacy or good work attitudes.

Also, there is an assumed "frictional" unemployment rate to take account of people moving from one job to another with brief periods of unemployment in between. There is fairly high labour market churn in other words.

Of the current unemployed it is estimated that 63% have been unemployed for less than 6 months, 15% for 6 months to a year, 5% for one to two years and 6% for over 2 years. There were 57,000 unemployed men and 50,000 unemployed women.

The approximate age breakdown is 22,000 (15-19), 20,000 (20-24), 14,000 (25-29) 10,000 (30-34), 10,000 (35-39), 10,000 (40-44), 6,000 (45-49), 6,000 (50-54), 3,000 (55-59) and 4,000 (60-64).

There were 59,000 Pakeha unemployed and 25,000 Maori, and 9,000 among Pacific peoples. There are 30,000 unemployed in Auckland. There are obvious categories where unemployment is concentrated (e.g. young people in the 15-24 age range and Maori).

The major question is however - is this as good as it gets? We have seen significant growth in employment in the last three years (50,000 in the last year).

There are many initiatives such as modern apprenticeships (3,254), Youth Training (5,331), Skill Enhancement (753), Training Opportunities (7,947) and other programmes.

But why should we accept that having around 100,000 or one in twenty people unemployed is about the best that can be done? What is emerging is that there is much more to be done to ensure that the school - training - work transition for young people is better resourced.

Even if we accepted that (say) 3% is a frictional rate of unemployment, that leaves 40,000 unemployed people who should be "matched" with current vacancies given the right policies. Although there are differences in how countries measure unemployment, in USA the unemployment rate fell consistently from 6% in 1994 to a low of around 4% for all of 2001, with little worry about inflation.

There is no doubt that this Government is firmly committed to reducing unemployment. There are many good policies. But more is needed. This is one of the reasons why the CTU is drawing up a draft memorandum of understanding with the Mayors Taskforce for Jobs. They have agreed on a number of goals.

These are that by 2007, all 15-19 year olds will be engaged in appropriate education, training, work, or other options which will lead to long term economic independence and well-being, all young people up to age 25 being in employment or education and training; and ultimately all people in our communities having the opportunity to be in work or training.

Economic Snapshot

Because most of the key statistics are released quarterly and this is a monthly bulletin, I sometimes get queries about statistics from previous bulletins. In this bulletin for example in the last month there have been updates on wages and employment, but not on overall consumer prices.

So I will from now on have a very brief snapshot of some key indicators in this section of the Bulletin. Consumer prices rose by 0.5% in the September 2002 quarter and 2.6% in the September 2002 year. Food prices rose by 0.5% in October and 1.7% in the October 2002 year. Unemployment is at 5.4%.

Ordinary time wages as measured by the Quarterly Employment Survey were up 2.6% in the private sector and 4.5% in the public sector. The Labour Cost Index increases show private sector wages up 2.1%, and public 2.7%.

The key statistic for unions to note probably is that the LCI shows that for those firms where there were wage increases in the last quarter, the average rate of increase was 3.8%.

The increase in GDP for the March 2002 quarter was 1.1%, June quarter 1.7%, and 3.5% for the June 2002 year The current account deficit is estimated to be 3.2%. The official cash rate is 5.75%.

Wages

Ordinary time average hourly earnings were up by 1.8% in the September 2002 quarter after a 0.1% reduction in the June quarter. Public sector ordinary time hourly earnings were up 1.7% after a 1.4% fall in the June quarter.

However, we have to treat these Quarterly Employment Survey (QES) figures with some caution. The net increase over two quarters is 1.55%, the 1.8% figure for the quarter is not seasonally adjusted, and the QES is subject to compositional change (so an increase in wages can actually be the result of more employment in a higher than average wage sector).

On an annual basis private sector hourly earnings are up by 2.6% and they are up by 4.5% in the public sector. The Labour Costs Index shows that private sector ordinary time wages rose by 0.6% in the September 2002 quarter and a 0.8% increase in the public sector.

The annual increases are 2.1% for the private sector and 2.5% for the public sector. However of the private sector ordinary time pay rates that rose in the September 2002 quarter the average increase was 3.8%.

Employment

The latest Household Labour Force Survey shows that employment is up to 1,878,000 but unemployment increased to 107,000 or 5.4%. However, on an annual basis there has been an increase of 50,000 in employment evenly split between males and females.

The jobless rate is 176,600 (the jobless figure is a broader measure of unemployment and includes for instance those who are unemployed but not actively seeking work). The number of underemployed workers is estimated as 108,600. The labour force participation rate is 66.6%.

The Deutsche Bank Chief Economist noted that continued strong net inward migration will contribute a safety net for growth going forward but it will also likely contribute to a renewed rise in the unemployment rate as well. Meanwhile the number of job advertisements rose by 4.9% in October but job ads have generally been a poor indicator of labour market trends.

Interest Rates

The Reserve Bank kept the official cash rate at 5.75% when it announced its Monetary Policy Statement on 20th November. This was a full statement of a new approach to monetary policy under the new Policy Targets Agreement. The RBNZ says that the medium term focus of the PTA gives it a 3-year forecasting frame, with the qualification that the forecast trajectory of inflation should normally have it within the target band in 18 months.

We disagreed with the decision to hold the official cash rate at 5.75% rather than drop it a notch. Our reasoning was simply that if we have (say) an 18 month outlook, then the forecasts for exports, commodity prices, and the exchange rate, all suggest an economic slowdown next year despite some strong domestic indicators.

Australia is at 4.75% and USA is now down to 1.25%. The Reserve Bank in New Zealand also stated that they see "no change in short-term interest rates over the period ahead". The RBNZ picks CPI at 2% for this time next year and GDP growth for the March 2003 year of 4.25%.

However, the most recent figures on exports and the exchange rate since this announcement suggest that an interest cut will be needed in the New Year to assist a soft landing in the economy next year.

For instance the Bank of New Zealand did not support a rate cut on 20th November but have since noted that "The New Zealand dollar is starting to cause a few headaches.

It's not so much the level of the currency, as we've been here before, but the pace of the appreciation is beginning to bite. So much so that it may be starting to tilt the Reserve Bank toward an easing bias".

Trade

This months trade deficit was much higher than expected but this was almost exclusively due to imports of aircraft.

Monthly trends indicate rising imports and declining exports, resulting in a widening deficit for the latest seven months. The value of eexports for October were down 8.7% on the previous year, down 8.5% on the October 2001 quarter, and down 4.4% for the year ending October 2002.

Prices

Food prices were up by 0.5% in October and 1.7% for the year. Meanwhile bread prices are expected to rise by 10% but finally the fall in export dairy prices resulted in a drop in some local milk prices.

The Producers Price Index outputs index, which measures changes in prices received by producers, fell 0.6% in the September 2002 quarter mainly due to lower dairy prices. The PPI inputs index, which measures changes in the prices of inputs into production, fell 1.2% in the September 2002 quarter. On an annual basis, the PPI outputs index rose only 0.3% from the September 2001 quarter to the September 2002 quarter. The PPI inputs index recorded an annual fall of 1.7%.

Farm expenses prices were up 0.5% in the September 2002 quarter and 4% over the year. Capital goods prices rose 0.1% in the September quarter and 1.2% over the year.

Fiscal situation

The Government operating balance for the 3 months ending in September was $509 million higher than forecast due to higher company tax revenue and GST, and some delays in health expenditure.

Net Crown debt was down to just 15.3% nearly 5% below the target (or around $5 billion less than what it would be if it was on the 20% target).

Migration

There were 95,600 permanent and long-term arrivals in the year ended October 2002, up 18,900 or 25% on the October 2001 year.

In contrast, there were 16,900 or 23% fewer permanent and long-term departures (58,100) in 2002. The overall result was a net migration gain of 37,500 in the October 2002 year, compared with a net inflow of 1,700 in the previous year.

The main contributors to this increase in net migration were non-New Zealand citizen arrivals (up 16,000), and New Zealand citizen departures (down 16,500). There were net inflows from China (14,700), India (6,600), the United Kingdom (5,800) and South Africa (3,000) in the year ended October 2002. There was a net outflow to Australia of 12,800, less than half the net outflow of 27,100 in the October 2001 year.

Public Hospital and Health Services

Total seasonally adjusted income for the September 2002 quarter was $1,021.5 million, up 7.1% on the $954.2 million recorded in the June 2002 quarter. Government revenue, which accounted for 92.6% of total income, was the main contributor to the increase, up $57.8 million or 6.5%, to $946.0 million.

Medical charges and all other income also increased, up 16.5% to $74.2 million. Medical charges and all other income includes items such as funding received for clinical training, accident insurance revenue, private patient revenue, pharmacy sales and income from the renting and leasing of buildings and land.

Total seasonally adjusted income in the September 2002 quarter was 8.7% higher than in the same quarter of the previous year.

Total seasonally adjusted operating expenditure increased a further 3.4% this quarter to reach $1,067.0 million, up from $1,032.1 million in June 2002. Driving the increase was a 13.6% or $40.7 million rise in the cost of direct medical supplies and all other expenses, which reached $339.9 million.

Operating expenditure in the September 2002 quarter was 8.4% higher than in the September 2001 quarter. Over the same period employee costs rose 7.4%, and direct medical supplies and all other expenses increased 11.4%. Only capital charge payments decreased, down 8.9% on the same quarter a year ago.

The capital charge paid by the HHS providers is based on actual shareholder funds. The decline in capital charge payments therefore reflects the worsening equity positions of the HHS providers over the past year, even though equity levels have improved in the latest quarter.

Housing

Consents were issued for 3,412 new dwelling units in October 2002. This was the largest monthly total since March 1976. Of the total number of new dwellings in October 2002, 45% were new apartment units.

The annual rate of house price inflation is 8.5%. In Auckland it is 11.9%. The latest Auckland City revaluation of property values shows a 13.1% increase from 1999.

Tourism

Visitor numbers for the year ended October 2002 increased by 2.8%. Tourism accounts for 10% of New Zealand's GDP.

On the farm

The national lambing percentage reached a new record of 124% this Spring. However lamb prices are expected to fall.

Retail Sales

Retail sales fell by 0.1% in September, quarterly sales were 1.1% up. Annual sales are up by 7.4%. However, the monthly retail trade figures have been on a gradual downward trend since March, partly driven by weaker demand growth in the regions as a result of significant reductions in farm incomes.

Banks held to account

A recent report suggests that Citigroup and Credit Suisse First Boston in the USA could face fines of up to $200 million each because of their deceptive practices including providing positive reports on companies so their banks could win big banking deals when their private assessment of the same companies was highly unfavourable.