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How dynamic is the New Zealand labour market?

Advisor, Productivity Commission
4 November 2019

Two new Productivity Commission reports tell us that the New Zealand labour market is characterised by change.

New Jobs, Old Jobs found that the type of work in New Zealand has changed a lot over the last 40 years. We’ve seen a big decline in manufacturing jobs and growth in services jobs. Another Commission report coming out soon will show that a significant portion of New Zealanders move to a new job within a different firm each year.

Dynamic labour markets matter

Dynamic labour markets matter for lifting productivity. They facilitate worker moves from less productive to more productive firms and industries (known in economic-speak as “labour reallocation”). They also promote worker moves to jobs that offer a better skill match. Moving from one job to another is an important way for workers to grow their wages – so much so that the Australian Treasury thinks that lower rates of job changes help to explain the recent fall off in wage growth in Australia.

Dynamic labour markets can also provide greater job prospects for people who are seeking work. This is important given that one of the downsides of labour market dynamism is more frequent job loss.

How does our labour market stack up internationally?

One of my recent blog posts looked at whether the New Zealand labour market has been becoming more dynamic over time (spoiler – it hasn’t). This was of interest because we might expect that faster tech change leads to greater dynamism in the labour market.

But another interesting question is – how dynamic is the New Zealand labour market compared to other OECD countries? I’ve looked at a couple of different measures, which both suggest that New Zealand is at the upper end of the OECD in terms of labour market dynamism.

One measure of labour market dynamism is the rate at which people become unemployed and how long it takes them to find a new job. This measure shows that New Zealand has comparatively frequent flows into and out of unemployment.

It is also striking that countries such as Canada, the US and New Zealand that have the most people (as a share of the labour force) entering unemployment also have the shortest spells of unemployment, whereas countries such as Germany and France are the opposite.

Flows into unemployment and length of unemployment in selected OECD countries 1

Flows into unemployment and length of unemployment in selected OECD countriesSource: OECD

Another good measure of dynamism is the rate of job switching (also known as job-to-job transitions). Yet, comparing estimates of job switching rates across countries can be problematic because it requires using different data or studies that have different methodologies. Even so, I’ve taken a look.

In the Commission’s forthcoming paper Job-to-job transitions and the regional job ladder, Coleman and Zheng find that 19-22% of New Zealanders switched jobs each year between 2000 and 2017. Bassanini and Garnero estimated job switching rates for a selection of other OECD countries between 2000 and 2007, using a similar methodology (note 2 at the end of the post explains these methodologies).

New Zealand’s rates of job switching are high, compared to Bassanini and Garnero’s estimates for other countries. For the United States, Golan, Lane and McEntarfer estimated similar rates of job switching as the New Zealand estimates (though for the period 1991-2001).

Estimated share of people who switch jobs each year in selected OECD countries, 2000-2007

Estimated share of people who switch jobs each year in selected OECD countries v2Source: Coleman and Zheng for NZ data and Bassanini and Garnero – for data on other OECD countries

These indicators point to strong labour market dynamism in New Zealand by international standards. This is encouraging! Unfortunately, dynamism – while desirable – is not a solution to everything (if it were our productivity might be doing much better…).

For example, despite our high rates of job switching, the OECD finds that New Zealand has among the worst quality of job matches with high rates of over-qualification. One of my earlier blog posts explored the possible link between unemployment support and job matching. Another issue for job match quality might be New Zealand’s thin labour markets, so that while people can easily move between jobs, it is difficult for them to find one close by that well utilises their skills.

Strong dynamism can also mean more difficult adjustments for workers. The OECD points out that a challenge for governments is “nurturing labour market dynamism while keeping the adjustment costs that are borne by displaced workers as low as possible”. High adjustment costs are not just problematic for worker wellbeing but also for productivity, especially if they make workers become more resistant to new technologies that might lead to job loss.

Notes

1. The unemployment inflow rate is the number of unemployed who have been unemployed for less than one month as a percentage of the total labour force one month earlier. The graph shows the average flow rate over the period 1996-2016.
2. Both Coleman and Zheng, and Bassanini and Garnero, defined a job to job transition as when a person was in a job at a specified point in year t and another job at the same point in year t+1. Coleman and Zheng estimated the job to job transition rate as the share of people in a job in year t who made a job to job transition between year t and year t+1. Bassanini and Garnero estimated the rate as the share people in a job in year t+1 who made a job to job transition between year t and year t+1.

References

Bassanini, A., Garnero, A. (2013). Dismissal protection and worker flows in OECD countries: Evidence from cross-country/cross-industry data. Labour Economics. 21, 25-41.
Coleman, A., D. Maré & G. Zheng (2019). New jobs, old jobs: the evolution of work in New Zealand’s cities and towns. New Zealand Productivity Commission
Coleman, A., Zheng, G. Job-to-job transitions and the regional job ladder. New Zealand Productivity Commission
Golan, A., Lane, J., & McEntarfer, E. (2007). The dynamics of worker reallocation within and across industries. Economica, 74(293), 1-20.
OECD (2017). Back to work New Zealand: Im(2007)proving the re-employment prospects of displaced workers. OECD: Paris
OECD (2019).
Statistics: Labour Force Statistics. https://stats.oecd.org/

Caption

In the spirit of job-to-job transitions (and all their supposed benefits), I’ve decided to try one for myself. This is my last week at the Commission – after four years, I’m finishing up in my role and joining the Treasury team. I’ll have five days in between jobs where I technically won’t be employed… but I shouldn’t need any income smoothing support or active labour market policies! Thanks for reading my posts and be sure to keep up to date with blog posts from my great colleagues, and the reports that the Commission will be publishing, over the next few months! Kia ora.

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Comments

  • Gravatar for Amy

    Amy 5 Nov 2019, 16:19 (38 days ago)

    Great post, Tim. Re this: "It is also striking that countries such as Canada, the US and New Zealand that have the most people (as a share of the labour force) entering unemployment also have the shortest spells of unemployment, whereas countries such as Germany and France are the opposite." Is this plausibly because the Canadian, US and NZ labour markets are more open and less regulated than those of Germany and France? Theoretical downsides of a very open and flexible labour market: more likely to be made redundant, and a less generous safety net (esp in short term). Theoretical upsides: easier to find a new job, and - one hopes - productivity payoffs from all the dynamism! Though I have to say the data rather makes mincemeat of the theory on this one, in terms of productivity payoffs, possibly because the incentives to quickly find a new job, any job, mean people who are made redundant "match" into their next jobs very poorly? Also interesting to reflect that unemployment often seems to be very harmful to individuals (psychologically and emotionally as well as financially), even in places where it's a widespread experience - for most people, it's not "just part of working life" but a fairly traumatic personal event.

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    • Gravatar for Tim Maddock

      Tim Maddock 6 Nov 2019, 12:24 (37 days ago)

      Thanks Amy! Definitely agree with your last point re job loss being "a fairly traumatic personal event". I'm not sure if open and flexible labour markets by definition have low safety nets, though countries with the most dynamic labour markets like NZ, US and Australia tend to be the ones with less generous income support. There do seem to be a small handful of countries like Canada and Denmark that have quite a bit of labour market flexibility combined with higher levels of support (ie, the concept of flexicurity).

      Ignoring productivity implications, there does seem to be a trade-off that countries face between having higher rates of job loss but better job prospects for job seekers and vice versa. And in both cases, countries have another choice about setting levels of income support in the event of unemployment (bearing in mind that generous support can discourage job search efforts). My personal preference might differ depending on whether I'm in a job or a jobseeker! But coming back to productivity, theory, as you pointed out, suggests that there are productivity gains from more efficient labour reallocation etc. There may be costs in terms of poorer matching (esp where the safety net is poor - see my previous blog post!) but one could also argue that in a less dynamic labour market where it is more difficult to find a new job, job seekers, all else constant, are pressured to take an early job offer, regardless of the match, if the chances of getting another offer are small.

  • Gravatar for Paddy Plunket

    Paddy Plunket 4 Nov 2019, 11:32 (39 days ago)

    You say that dynamism is a positive for productivity and "Dynamic labour markets can also provide greater job prospects for people who are seeking work. This is important given that one of the downsides of labour market dynamism is more frequent job loss".
    Do you, or can you, take into account the emotional impact of job loss and periods of unemployment and the impact of that on personal productivity - eg. potential versus actual productivity as a result of frequent or even occasional job loss or unemployment. Does making it easier to be briefly unemployed (easy to get transitional jobseeker benefit or even a UBI) increase the positives of dynamism and decrease the negatives?
    Thanks for all your good work at the Commission Tim and all the best for the future.

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    • Gravatar for Tim Maddock

      Tim Maddock 6 Nov 2019, 12:34 (37 days ago)

      Thanks for your comment Paddy and for your kind words! You are definitely right that about the emotional impact that job loss can have, and yes, these are inherently difficult to estimate. And as Amy's comment points out, even in countries with strong safety nets job loss can be a stressful and difficult experience. An inherent downside of dynamic labour markets (from the perspective of affected workers) is more frequent job loss. However, in an 'undynamic' labour market - say one where it is extremely difficult and costly for firms to let go of workers - then it would be harder for people who are seeking a job (displaced workers and other types of jobseekers) to find one (let alone one that is a good match to their skills). Therefore, such a labour market is great for incumbent workers but undesirable for potential workers (or jobseekers). However, as the end of my post alluded to, it is important for countries to not just nurture dynamism but also provide strong safety nets and supports that smooth adjustments for workers, for the benefit of productivity and wellbeing (by both reducing the social costs of job loss and contributing to an economy with higher wage growth). Hope this goes some way to addressing your comment!

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