Unemployment must spur focus on competitivness

MEDIA RELEASE
5 May 2009

Rising unemployment must spur a focus on New Zealand’s competitiveness and measures to prevent a future social deficit

In the run-up to this Thursday’s release of unemployment statistics from the Household Labour Force Survey, it is timely to consider how an environment of rising unemployment should influence the policy choices of this government. The Government should be seizing opportunities to position New Zealand strongly coming out of the recession in an attempt to restart employment growth and raise New Zealand’s long run growth potential. And the Government must also be realistic about the potential social costs of rising unemployment and put in place measures to avoid a long term social deficit.

The Institute believes there is an opportunity to restart employment growth by investing in areas that will boost New Zealand’s export competitiveness and expanding its presence in overseas markets. The focus in the Budget should be on both the quality and the quantity of job growth – investing in areas that will both boost employment and support a higher growth path in the future. There is a window of opportunity to spring-board over other countries coming out of the global recession by repositioning New Zealand to prosper on the back of stronger ties with the new epicentres of global growth in China, India and the rest of Asia.

The Government’s response to limit the social costs of rising unemployment should identify the most vulnerable group and refocus spending to address the needs of those groups. The Institute recommends particular attention be applied to young people in disadvantaged communities. Youth unemployment generally rises faster and stays at a higher rate longer in a recession. In 1991 the unemployment rate for youth aged 15-19 shot up to 23% at its peak.

In 2008 the unemployment rate for that group was still high at 14.3%. The importance of keeping young people in positive training is already an issue and the potential social costs including rates of youth crime are high if the Government does not act to support this group.

The experience with earlier recessions shows that the quality of skills training determines whether workers make the adjustment through to new jobs as the economy recovers. Makework schemes, boot camps and sub-standard training options don’t help – it needs to be meaningful long-term training that improves qualifications or pathways into increasingly higher skilled work. Funding for community groups that provide mentoring and support networks for young people is another key area.

Back in February, the New Zealand Institute noted that historically recessions originating in financial crises have been associated with more protracted downturns and higher rates of unemployment than the types of recessions New Zealand has experienced in its recent past.

The Institute advised policy makers to be prepared and plan for the possibility of double digit unemployment over the next two years as an extreme scenario.

Since February, the OECD and the IMF have released major downward revisions in their forecasts of global growth and unemployment. The global recession is expected to be by far the deepest contraction in global activity since the Great Depression, with global trade expected to contract by 11 percent in 2009, leading the IMF to revise their forecast of global growth downwards to a decline of 1.3% in 2009. The OECD is forecasting unemployment across the OECD to average 10% by the end of 2010, and has noted that far from being insulated, New Zealand is particularly vulnerable due to its reliance on foreign investment and exposure to foreign demand shocks. This reinforces the Institute’s view that it would be irresponsible to assume that New Zealand might be immune from experiencing a rapid increase in unemployment as the full impact of the global recession hits home.

The dramatic fall in New Zealand manufacturing output announced on Saturday was just the latest in a string of data pointing to a collapse in labour demand in the first part of this year.

Unemployment experience is likely to differ by region with Auckland experiencing the sharpest increase due to the stress on the manufacturing and construction sectors while some provincial centres may be more resilient as dairy and beef prices hold up.

Looking forward, uncertainty still hovers over the impact on New Zealand and underscores the difficulties of forecasting in the present environment. Market predictions for this week’s unemployment result range between 4.8% and 5.5% and predictions for the unemployment rate by December 2010 are creeping up, with 8% suddenly looking mainstream, whereas predictions were in the range of 6-7% a few months ago. The more important question, however, is whether the Government’s Budget will be effective in limiting the rise in unemployment over the next few years and mitigating its impact on New Zealand.

ENDS

© Scoop Media