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Full Employment: Not There Yet

Full Employment: Not There Yet

Last week Statistics New Zealand reported that the unemployment rate fell in the September quarter to 3.4 % of the labour force, a 24-year low.

This is an important achievement. New Zealand now enjoys the lowest unemployment rate among OECD member countries.

The situation is a turnaround from 1991, when unemployment reached 11 percent. At that time there was widespread pessimism that New Zealand could return to anything like full employment.

Comments like “We cannot hope to see unemployment fall below about 5- 6% of the labour force”, and “Children must be taught to prepare for the reality that they may never get a job” were commonplace.

Such statements were appalling and wrong.

I wrote in 1992 that “Full employment – the opportunity for anyone who wants a job to get one – is not an impossible dream."

I was confident that the freeing-up of the labour market with the Employment Contracts Act would lead to high employment growth and rapid falls in unemployment.

Indeed it did. By 1996 total employment was 18% higher than in 1991 and the unemployment rate had fallen to 6.1 percent.

In a 1994 study for the Business Roundtable, Australian academic Judith Sloan suggested unemployment could be as low as 4% by 1998 given further policy improvements, such as a rollback of damaging Employment Court rulings and stricter welfare rules.

These did not happen, however. Unemployment rose during the Asian economic crises and it took New Zealand until 2004 to get it below the 4% mark.

Some people think employers want unemployment to stay high – an ODT correspondent on 12 September spoke of them wanting to manage unemployment back to “their acceptable level” : “Six to 8% would do nicely."

This idea harks back to Karl Marx’s notions of a “reserve army of unemployed” and wages at subsistence levels. Like most of Marx’s ideas, it is bankrupt.

An employer is perfectly happy to hire someone if their contribution to the value of output of the firm exceeds their cost. Firms’ markets are expanded if more people are employed and higher wages generate more purchasing power.

Should we be happy now that the unemployment rate is 3.4% (and 2.2% for ‘European/Pakeha’)? Certainly not. The Maori unemployment rate is still 9.1% and youth unemployment (15-19 age group) is 12.4%.

Full employment is not a measured unemployment rate of zero – there will always be people taking time searching for jobs – but it is certainly closer to 1-2% than 3.4%.

In addition, there are many people on other benefits and many potential older workers who could be productively employed. It is wrong to argue that the only way that New Zealand can now grow is through higher labour productivity.

The key to full employment remains fewer barriers to getting a job and fewer welfare disincentives, along with better general policies for growth.

The Australian government is currently reducing employment barriers by scrapping unfair dismissal laws for SMEs (firms with under 100 employees) and establishing a 6-month probation period for larger firms.

The removal of hiring and firing restrictions benefits marginal workers in particular. As I wrote in a paper for the Hui Taumata earlier this year, the most disadvantaged Maori (or non-Maori) should be able to say to an employer: “Give me a chance. I realise I have a bad employment record, 3
I’ve been on drugs and in prison, but I’m now determined to get my life back together. I know I can do the job you’re offering and I’ll work hard at it. I don’t even care if you won’t pay me much for a while as my family will support me, and if things don’t work out you’re free to dismiss me, no questions asked. But I’m confident I’ll make the grade and that you’ll be happy to give me a permanent job and good wages down the track.” Sadly, that employment contract is unlawful in New Zealand today, or at least unenforceable.

Excessive employment protection laws leave marginal workers without jobs and without hope – as the riots in France demonstrate.

The best protection for any worker against unfair treatment is a state of full employment (so that alternative job opportunities are available) and common law sanctions against such things as misrepresentation and duress.

With respect to welfare, US experience has shown the dramatic reductions in welfare numbers that can be achieved with tighter rules, with most of those joining the workforce being better off than they were on benefits.

Today, the job market is generally a buyer’s market – employers nationwide are crying out for staff.

This is as it should be. At full employment, firms able to pay better wages bid workers away from lower-valued employment – that is how wages rise.

But we are not there yet. There is ample scope to absorb more people into the workforce as well as to raise productivity by policies that encourage investment and growth, including investment in skills.

Roger Kerr is the executive director of the New Zealand Business Roundtable


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