Uploaded on Apr 16, 2008
Why falling unemployment isn't so miraculous
Analysis by interest.co.nz of migration and employment figures shows net migration to Australia over the last nine years matches almost exactly the drop in the number of unemployed in New Zealand over the same period. A chart showing this relationship is on the left.
We're not suggesting that the same people who were unemployed left to go and live and work in Australia, but it is interesting that as we lose workers to Australia, their positions appear to have been filled directly or indirectly from the ranks of the unemployed.
It suggests that the Labour-led government's claims that falling unemployment are a central achievement of its three terms have not taken into account the leakage of workers to Australia.
It also suggests that a core reason for labour shortages and the resulting wage increases and inflation is as much to do with migration to Australia as it is linked to falling unemployment.
It also raises questions about whether one of the reasons for poor productivity growth in the last nine years is because more skilled, healthier workers are leaving New Zealand and being replaced by less skilled, less productive workers who were unemployed.
It's hard to tell whether those leaving are jobless or highly skilled. Either way it's bad for productivity, inflation and interest rates. The fallout is worse if our most highly skilled and productive are leaving and being replaced by jobless. There is some debate over this. Many believe a large number of those leaving are going for lower skilled (but higher paid) jobs in mining, construction and the services sector in Australia.
Whoever it is that's leaving, the productivity of their replacements is likely to be lower and the inevitable result is wage pressure as more employers compete for fewer workers and have to employ more workers to produce the same output. If it is simply jobless people leaving for jobs in Australia, that also reduces the total available pool of labour and increases wage pressures.
The inevitable result of these wage pressures is inflation and then higher interest rates, which is what we're suffering now.
It's worth comparing this exodus of people to Australia with the last big exoduses in the late 1980s and early 1990s and in the final years of the last Muldoon government of the late 1970s and early 1980s. There was also a surge around 2000 when the economy slowed. It's fairly clear that previous exoduses happened at times of growing unemployment and slow growth, with many leaving simply to get a job. Whereas those leaving this time are leaving to get a job with a higher salary almost despite relatively strong economic growth and low unemployment.
Muldoon joked at the time that unemployed New Zealanders migrating to Australia in the early 1980s increased the IQ of both countries. That may or may be the case this time around, but it's clear that something is happening that is reducing the productivity growth of our labour force, which in turn is lifting inflation and interest rates.
This linkage also begs the question: what are we left with after the longest period of economic growth in the last 50 years and 9 years of a Labour-led government?
We have low unemployment (good), high household and foreign debt (bad), high interest rates (bad), higher inflation (bad), unaffordable housing (bad for homebuyers, good for home owners) low productivity growth (bad for all) and low economic growth (bad for all). It now turns out the one unreservedly good thing to come out of this growth (low unemployment) may actually have been a factor in creating some of the other bad things (low productivity, high inflation and high interest rates) via migration to Australia.
What's clear is we don't have the recipe for sustained and fast economic growth that we need to raise wages and stop this exodus.
Those looking for a deeper read on the costs and benefits of migration to Australia should have a look at this working paper from the Treasury from 2001, which concluded that surges of net migration to Australia were a "same drain" rather than a "brain drain."
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