Links to the HLFS presentations

Yesterday I wrote about Statistics NZ's day seminar on the Household Labour Force Survey. Here are links to the papers I mentioned.

Stats' Diane Ramsay on the history of the HLFS
MBIE's David Paterson on the changing nature of the labour market
AUT's Gail Pacheco on the impact of minimum wages
Waikato's Bill Cochrane on the gender pay gap
Stats' Sharon Snelgrove on updates to the HLFS

I've tested the links, and they work, but sharing links via Dropbox files is on the frontier of my technology skill set, so please let me know if there are any issues.

Happy birthday, dear survey...

It's not often a statistical survey has a birthday celebration, but yesterday Statistics NZ had a 30 year anniversary do at AUT to celebrate the Household Labour Force Survey (the HLFS) getting underway in 1986. Stats brought along copies of the very first HLFS data announcement: it had a well-written press statement that has stood the test of time pretty well, though the tables will take you back to the era of dot matrix printers and what looks like Lotus 1-2-3 output (children, ask your parents).

Diane Ramsay from Stats took us through the history of the HLFS. There could have been, should have been, an HLFS in 1979 - the Department of Labour and the then Statistics Department had done a feasibility study and recommended one - but the Muldoon government, with characteristic incompetence and contempt (my comment, not hers), decided it couldn't afford one. The Labour party, on the other hand, recognised that a proper measure of employment, unemployment, underemployment and participation is a fundamental piece of information in an open democracy, and got the HLFS going in 1986.

And so here we are today, with the HLFS pretty much as it was day one. It's one of the biggies for the financial markets, right up there with GDP and the CPI, but as the various presenters showed, the long set of consistent data has also been enormously useful over that time to investigate all sorts of social and economic issues. Dave Paterson from MBIE, for example, explored a number of trends over that time - notably the large rise in the labour market participation rate of women, how the various business cycles had different regional impacts, and what the forecast demographic profile of the workforce looks like and its implications for aggregate economic growth and productivity.

AUT's Gail Pacheco - a fellow Warriors tragic - summarised her research papers (written with various colleagues) on the impact of changes in the minimum wage. This is one of the red-hot economic policy topics in the US (and elsewhere) at the moment, and to be honest I wasn't aware that there was equivalent research in New Zealand. Turns out, Gail said, that by international standards we have a relatively high minimum wage relative to the median income, so our results happen to be especially relevant to people overseas thinking of whacking up their minimum wage (like this month's US$15/hour moves in New York and California). If you're interested in the topic, best read Gail's output properly rather than rely on my takeaway, but in one study where she focussed on employment effects where the minimum wage was a binding constraint, she found negative effects on teenagers and minorities, which is what I would have expected.

Gail and Waikato's Bill Cochrane used the HLFS, and an occasional supplement run alongside it, the Survey of Working Life, to look at the gender pay gap. It has been narrowing, but it's still there, and even after throwing a battery of control variables at it to allow for different occupational distributions and everything else that might be a plausible explanation, there's still a 10% gap left unexplained. Is that big or small? Well, as Bill said (and I'd endorse as the father of a working daughter), why don't you leave 10% of your income at the door when you leave, and see if it feels small to you.  The Herald's social issues editor, Simon Collins, had the gumption to come along to the day, and you can find his coverage here.

The other news was that, after 30 years. the HLFS is getting a bit of a remake and a refresh, though not so as to cause any major inconsistencies and series breaks - there'll be an element of 'backcasting' if needed to put the old data on all fours with the new. Fuller details here. As Sharon Snelgrove of Stats explained, some of the changes reflect different ways of doing things today (looking for jobs over the internet, for example, rather than in the job ads in the newspapers), and some are aiming at new data (such as union membership, or being part of a collective bargaining agreement). When people respond that they'd like more hours of work, they'll now be asked, "how many?", so we can get a volume measure of underemployment.

Three technical details I found interesting.

One, the HLFS rotates out one-eighth of the survey panel every quarter. The same rotation process appears to have caused real issues for the Aussies and the volatility of their monthly employment data, so I asked the Stats folks if ours were likely to go off the rails. The answer was, it's hard to know, as there's quite a lot of volatility in the employment data anyway, and it's not that easy to figure out how much might be due to some non-representative oddity of the new one-eighth intake. But their rough-and-ready feel was, no.

Two, immigrants have recently been one of the big components of growth in the labour force: do we know anything about their employment experience? Short answer, no, not in the short-term anyway: the HLFS is designed to exclude anyone who has been been in New Zealand for less than a year.

And three, I was reminded - well, got into a bit of an argy-bargy about it, really - about the very tight definition of unemployment. To be unemployed in an HLFS sense (which in turn is a definition set by the International Labour Organisation)

A person must be actively seeking work and available to work in the reference week to be classified as unemployed. ’Actively seeking work’ means an individual must use job search methods other than looking at job advertisements – for example, contacting a potential employer or employment agency. Previously, responses that specified using the internet to seek work were captured in an ‘other’ category and consequently classified as ‘active seeking’

My beef is that if I were an unemployed economist, and keen to get a job, I might very well turn to Seek or whatever, enter 'economist' in the keyword box, read the options, and flag them away if there's no fit. That, for me, has all the look and feel of an unemployed person actively looking for work. But not for the HLFS (nor other ILO-compliant surveys). I won't feature in the unemployment stats, though I will be in what is called 'the potential labour force', which makes up one part of the 'underutilised' labour force (the unemployed, the underemployed, and the potential labour force).

So my reaction is that I think I won't be quite so hung up on the headline unemployment rate in the future, and I'll pay a bit more attention to the underutilisation rate, as will Stats itself: "As part of the new outputs released from the June 2016 quarter, Statistics NZ will include the underutilisation rate as a key statistic".

Well done to all involved - Stats really does go the extra mile to connect with its users.

What's behind those jobs numbers?

Yesterday's labour market figures, and particularly the employment outcome and the participation rate, came as an unwelcome surprise to everyone. The consensus expectation amongst economic forecasters had been that employment would rise by 0.4%, whereas it actually fell by 0.4%, and the participation rate (the proportion of the population in the labour force), which had been expected to hold up at its historically high 69.3%, dropped back to 68.6%. Given that a falling participation rate is usually taken as a sign of a weaker labour market, since people tend to leave the labour force when they become less confident that jobs are available,  the employment and participation numbers taken together showed an unexpectedly soft jobs market in the September quarter.

On the other hand, though, there were some oddities in the numbers. Employment certainly went down, but the number of filled jobs, and the total number of hours worked, both rose during the quarter, and those increases would tend to suggest that the labour market was a bit better than previously.

The different outcomes got me wondering about how these three measures - employment, filled jobs, hours worked - have behaved over time. Here's the answer, since the start of 2000.

Generally they move together, as you'd expect. There is the odd occasion, as in this latest September quarter, when employment falls but the number of jobs and the hours worked rise (March 2000, September 2006, September 2012). There is even the odd occasion where the opposite happens - employment rises but jobs and hours fall (June 2005, March 2008, June 2009, June 2015). But as a rule they tell the same story, and quarters like this June (employment up, the others down) and this September (employment down, the others up) are the exceptions.

What's happened, I reckon, is that there was clearly some general slowing of the economy earlier this year, with an impact on the labour market, but  we're also seeing the impact of quite a lot of noise in the data. Over the long run (back to early 1989, when the jobs and hours series start), all three measures have almost exactly the same average growth rate: employment, jobs and hours have each grown, on average over the long haul, by 0.4% a quarter. But there's a lot of volatility in the three numbers: if you look at the standard deviation of each one, for employment it is 0.6%, for jobs 0.8%, and for hours worked it's 1.0%. As a rough rule of thumb, even if the underlying 0.4% hasn't changed at all, two thirds of the time you're going to see employment numbers between -0.2% and +1.0%, jobs numbers between -0.4% and +1.2%, and hours numbers between -0.6% and +1.4%.

The overall lesson is that you're probably best advised not to get fixated on any one of the three measures: employment is somewhat less volatile than the others, and to that extent it's more of a reliable pointer than the other two, but they're best considered (a) in the round and (b) on timeframes longer than a single, possibly unrepresentative, quarter.

If, for example, you look at 2014 as a whole, the average quarterly increase in employment was +0.89%, the average increase in filled jobs was +0.61% and the average increase in hours was +0.74%. In the first three quarters of this year, the same averages were +0.12% (employment), +0.56% (jobs) and +0.77% (hours). So you'd conclude, overall, that there has been some modest slowdown: employment on its own would point towards a reasonable slowdown, but the other two point to little or none. That's not at all surprising, given the effect that falling dairy prices were having at the time. A modest slowdown, but still ongoing growth in employment, is also exactly what you see in the employment component of the ANZ's business survey, so it all fits together nicely.

When overzealous job "protection" makes matters worse

I've gone on a bit in some recent posts about the necessity of efficient, flexible labour markets - noting (here, here and here) that the labour market tends to have huge gross flows with small net outcomes, and that it's easy, with good intentions but bad policy, to stuff up the flexible working of hiring and firing. I also found some evidence that our own labour market stacks up pretty well, when considered in long-run international perspective, in keeping unemployment down.

I'd said in that last post that "if you're concerned about unemployment, you're likely to be better off if you come up with some form of social protection that doesn't impede the flexible working of the labour market, rather than reaching for some "job protection" measure that makes it harder for employers to lay people off. Making it harder to fire, for example, makes it less attractive to hire in the first place". I didn't include anything concrete to back that up, but over at his blog Jim Rose happened to be writing about some recent local court decisions which appeared to be re-regulating employers' ability to lay off staff (his two articles are here and here), and as part of his argument he'd found this.

Isn't that neat? There's a clear* link between how tightly protected existing jobs are, and how long people are stuck in unemployment before they get their next one - with the best of intentions, policymakers trying to make the labour market more secure from an employee's perspective have produced a completely counterproductive outcome. It's good to know that again our own labour market shows up to international advantage, with relatively low long-term unemployment and indeed even lower long-term unemployment than you'd expect from a country with our level of job protection. Australia scrubs up pretty well, too.

I asked Jim where the chart came from, and he pointed me to the source, a June '14 article in the IMF's Finance & Development publication profiling the career of Christopher Pissarides, who won the Nobel prize in economics for his work on labour markets and unemployment. It's a good read. From a policy point of view, the bottom line is

“protect workers, not jobs.” Trying too hard to protect existing jobs through excessive restriction of dismissals can stop the churning of jobs that is necessary in a dynamic economy. It is better to protect workers from the consequences of joblessness through unemployment benefits and other income support—accompanied by active policies to get the unemployed back to suitable jobs before their skills and confidence deteriorate

Incidentally, if Jim is right that our Employment Court "stands apart from the modern labour economics of human capital and job search and matching as well as the modern theory of entrepreneurial alertness, and the market as a discovery procedure and an error correction mechanism", maybe there's a case for it to sit with a lay member who knows something about labour economics. The High Court sits with an experienced economist, when there are major competition or regulation cases, and it's a system that works well.

*I said 'clear' originally but two commenters over at The Dismal Science site said it didn't look at all clear to them, and they've got a good point. I did a rough and ready regression based on eyeball estimates of the data, and while there is a statistically significant link -  a 1 point increase in the index is associated with a 3.5 month increase in duration of unemployment - it's not a strong one, accounting for only about 25% of the variance in the data. "Clear' link overstates things: there's a lot more going on as well. I'd guess a big part is countries varying a lot in the effectiveness of their 'active' labour market policies. (Updated March 17)

Our labour market in perspective

I wrote a piece the other day, basically saying that, if you're concerned about unemployment, you're likely to be better off if you come up with some form of social protection that doesn't impede the flexible working of the labour market, rather than reaching for some "job protection" measure that makes it harder for employers to lay people off. Making it harder to fire, for example, makes it less attractive to hire in the first place.

Since then I was browsing on the excellent Vox site, which is where the Centre for Economic Policy Research posts shorter version of its research papers (the papers themselves are, sadly, only available by subscription, through you can see the titles and read the abstracts here). And I came across a piece by Jan van Ours, a professor of labour economics at Tilburg, that was mostly about other things but happened to throw a little light on how well our own labour market is performing. It included a graph (below) which compared unemployment rates in a range of countries in 1985 and 2013, the years being chosen because they were at a roughly similar point in the global economic cycle ("a couple of years after the 1980s recession and the Great Recession respectively"). The chart's not perfect - Ireland for example happened to be in a tight cyclical spot in both years, for different reasons - but it's still a good general guide to which countries had persistently low or persistently high unemployment.

Some countries can burden themselves, more or less permanently, with labour markets that work systematically badly, and other countries have devised labour market regimes where unemployment tends to be systematically low. Or as the author says, "Clearly, despite the difference of 28 years, the unemployment rates in the two years are highly correlated across the countries. Spain has the highest unemployment rate in both years whereas Austria, Japan, Norway, and Switzerland have the lowest unemployment rates in both years", and, I'm pleased to say, we're in the same neighbourhood as the good guys. We've got a system that works, by international standards.

I also quite liked the author's conclusion (and it applies to other less easy to employ groups, too) that "Economic growth affects above all the position of young workers. Economic growth causes youth unemployment rates to go down quickly and youth employment rates go up fast. Therefore, economic growth benefits mostly those who need it the most". In these post-Piketty days there's a lot of attention, some of it deserved, on inequality and possible redistribution policies: let's not forget the bleeding obvious, that running the economy at full capacity, with decent jobs likely to be available for more marginal groups, does wonders for social outcomes.

Don't block the entrance - or the exit

I wrote a while back about the excellent data the Bureau of Labor Statistics in the US produces on the labour market - what they call the JOLTS data (Job Openings and Labor Turnover Survey). You can access it yourself here. The graph below shows the key results from the latest (December '14) reading.

The mechanics of the thing are simple - when hires (the blue line) are greater than separations (essentially layoffs and quits, in red) total employment grows (in green). What's really striking about the US labour market - and indeed most labour markets - is the huge gross flows compared with the much smaller net outcome. In December alone, for example, hires were 5.1 million and separations 4.9 million: for 2014 as a whole, there were 58.3 million hires and 55.4 million separations, for a net gain in employment of 2.9 million.

We don't have the equivalent set of data in New Zealand, though it is on Stats' radar, but we do have some data that shows the same patterns operating here. Here, for example, are the numbers of jobs created at new firms, and the numbers of jobs lost through firms closing - the jobs associated with company 'births' and 'deaths'. The numbers come from Stats' Linked Employer-Employee Database, and again you can find them for yourself at Stats' (free) access site NZ.Stat under the 'Business demography statistics' heading.

This is only a slice of the labour market - the bigger part is the hiring and firing at ongoing firms - but it's interesting nonetheless. Again the gross flows are considerably larger than the net flows.

What's the relevance? It's because most folk (I believe) don't realise this is how the labour market works. I'd guess that most people reckon hiring dries up during a recession, and layoffs dry off in good times. They don't: there are very large numbers of new hires even in bad times, and very large numbers of layoffs even in good times. Rather, the ratio between them changes: hires drop faster than layoffs in bad times, and grow faster than layoffs in better times. But both power along in large volumes all the time, with a high degree of churn or turnover going on. There's a vast amount of matching and rematching going on all the time as both employers and employees look for the best fit. The efficiencies from a process where people are continually looking for the best option for both parties must be very large indeed..

The wrong idea, that layoffs happen only or overwhelmingly in bad times, tends to lead to a well-intentioned but wrong policy prescription: that if we stop the layoffs, we can keep employment up. Unfortunately in some over-regulated markets, 'job protection' measures, that aim to make it harder to lay off people, gummage up both sides of the labour market. Employers can't lay off people when they'd like (or need), and knowing that, they're less inclined to to hire in the first place, or only in unregulated ways (eg with short term contracts that don't accrue the same protection rights). Much of continental Europe is lumbered with high unemployment as a result. Well-meaning but inefficient job protections aren't the only reason for Europe's high unemployment, of course, but they're a part of it, and likely to be a substantial part of it when it comes to youth unemployment or the unemployment of more marginal groups in general.

There's also a school of thought that employees need to be protected, because the employers have the whip hand: there's some kind of market power on the employers' side. That's not true, either. Have a look at this, also from the latest JOLTS data.

In fact, things don't just 'happen' to employees at employers' discretion.  Most of the time, voluntary 'quits' are substantially larger than involuntary layoffs. In a bad recession, more people than usual prefer to sit tight, for obvious reasons. But usually there are substantially more people leaving jobs of their own volition than are leaving them because they've got the pink slip. Again the efficiencies - and personal career and life satisfaction - from a system where people can freely leave and freely find new jobs must be enormous. Anything that throws sand into this process - and it's not just job protection regulation, but could be barriers of other kinds, such as the US system of employer-provided medical insurance, or in New Zealand arguably differences in regional housing costs - risks jeopardising one of the main productivity engines of a modern economy.

Why the shortages?

Yesterday I posted about recent trends in immigration, and made a case for taking in more talented and skilled people, especially from Europe: business conditions there aren't great, they're much better here, and there's a window of opportunity to hoover up some talent.

Along the way I got thinking a bit more about MBIE's lists of local skill shortages, which they use to prioritise people overseas who come looking for New Zealand work visas. There are two of them, the 'Long Term Skill Shortages List', which MBIE says "identifies occupations where there is a sustained and on-going shortage of highly skilled workers both globally and throughout New Zealand", and an 'Immediate Skill Shortage List', which "includes occupations where skilled workers are immediately required in New Zealand and indicates that there are no New Zealand citizens or residents available to take up the position".

On the 'Immediate' list, there's a whole bunch of medical shortages - virtually every speciality you can think of (cardiologists, haematologists,paediatricians, you name it, it's there), the technicians to support them, plus dentists, dental technicians and dental therapists.

On the 'Long Term' list, there's a equally wide range of shortages - anaesthetists, clinical psychologists, GPs, intensive care specialists, nurses of all kinds, obstetricians, physiotherapists, just to pick out a selection, plus we're short vets as well.

Why is this?

I can rule out one explanation: it's not because people aren't interested in taking up these professions. I can't speak for all of them, but I do know about some of them, and I'd be confident that the medical and vet schools aren't short of people trying to get in.

There could be benign explanations.

Maybe we just don't have the resources to turn out all the skills we need, and that could be because we're not a rich enough country or because, like a lot of governments post GFC, ours has had to prioritise pretty hard in recent years, and not everything desirable can be financed.

And then there's the possibility that we've been at home to Mister Cockup. Maybe we've made a complete hames of matching labour market supply and demand, and I'm open to that as a theory, too, especially as you don't get normal labour market incentives working in these essentially centrally planned disciplines.

And then there's a darker hypothesis: that some or all of these professions are artificially restricting local supply. Do the gatekeepers to these careers face an inherent conflict of interest when advising on the level of student intake?

It doesn't help that the possibilities I've listed aren't mutually exclusive. We might have a mixture of cyclical or secular shortage of the readies, ineffective planning, and anti-competitively narrow entry gates. So I don't have any smoking gun answers.

But we can't leave these markets the way they are. They're just not working properly.