Shortage of Workers

This blog post is by PaulL, a regular commentor and sometime contributor to Kiwiblog.

In recent times there has been a lot of discussion of a worker shortage. Statistics say that we have a high workforce participation rate (there are as many workers as pre-COVID), and we know some industries such as tourism are employing fewer people than pre-COVID. How can we be short of staff?

This post is an attempt to unpick what’s going on.

Let’s start with some basics. NZ’s labour force participation is historically high:

So, of the working age population, the percentage either in work or looking for work (but unemployed) is a bit higher than 2018, and definitely we haven’t lost workers as a percentage of the working age population. Unemployment is also historically low, so it’s not people unemployed.

Arguably the population could be getting older (working age population shrinking). However, there can’t be a material change in the last 5 years since the participation rate (as a percentage of population) hasn’t increased a little since 2017.

The number of people employed is the highest it’s ever been (2.85 million), so we do genuinely have more workers than in the past.

Our employment rate has dropped a tiny bit, but I have trouble seeing a drop from 68.8% in late 2021 to 68.5% in July 2022 as a problem, and we’re still well above 2019.

That data is all NZ Stats data presented by TradingEconomics.  If I look instead directly at NZ Stats the graphs aren’t as pretty looking, but they tell a similar story – we have as many people working as we ever have.

There’s a suggestion that a cause of our worker shortage is that we’re missing immigrants – that we have fewer immigrants than we did have. The problem is that the employment rate statistics say they relate to “people in NZ” – i.e. I believe they include immigrants whether temporary or permanent.

In short, I can see no evidence that we have fewer workers than we had pre-COVID. Yet many businesses clearly have problems recruiting the staff they want.

One possible cause is that we’re simply making more stuff than we used to – so if we as a country have are making more stuff, then we’d need more employees (if productivity doesn’t change). NZ’s GDP per capita has been increasing over time – so we’re making more stuff per head.

However, our productivity has also been increasing – so whilst we’re making more stuff per head, we’re also making more stuff per hour worked.

The question is whether they balance out. If I compare 2017 to 2022, then labour productivity is up 3.7%, GDP per head is up 9%. So we got 4% of the GDP per capita increase through productivity improvement, 5% of that increase must be more hours worked (per capita).

Another way to put this is that, as a country, we want an increase in GDP per head. That means (on average) that NZers are getting wealthier.

To get an increase in GDP per head, we need to either work more hours (per head), or we need to increase our labour productivity so that we make more stuff in each hour. Over the past 5 years NZ has done about half of each – we’ve become 4% more productive, and we’ve worked 5% more hours per head.

Labour shortages, if not addressed, result in less product being made. We then import instead, or go without. In other words, labour shortages will result in lower GDP. This may not be a bad thing. We might prefer to have had only 4% GDP per head increase, and work no additional hours.

I can see four ways to address labour shortages:

• Produce less stuff – i.e. reduce GDP per capita. We will then not need as much labour, and won’t have a labour shortage any more. In effect this is what happens if we do nothing – the jobs go unfilled and we make less stuff
• NZers work more hours on average. We can do this by those in the workforce working longer hours, or by having more people in the workforce (fewer people not working). We can have more people in the workforce by increasing the retirement age, by changing our demographic composition so more people are of working age, or by moving those on benefits into work (amongst other options).
• Immigration to create more workers. Note that immigrants also increase the population, so immigrants only increase GDP per capita if they each produce more GDP than the average NZer. Immigrants are typically of prime working age, and often have lower unemployment than existing citizens, so they will often work more hours than the average NZer, and therefore this works, but we need to understand that it’s a relatively minor gain.
• Increase productivity. Instead of trying to work more hours, we try to produce more for each hour worked. In other words, if our productivity growth in the past 5 years had been 9% instead of 3.7%, then we wouldn’t have a worker shortage at the current level of GDP per capita

I remain interested to see National focused on immigration as a solution to worker shortages. This can work where it’s a very specific skill needed – particularly if it’s a skill we don’t train enough of. But we need to understand that we’re in an international market for immigrants – it’s not like NZ is the only country who’d like nurses to immigrate. It can make a short term difference, but I don’t believe it is a basis for long term economic growth. Importing large numbers of people (rather than specific targeted skills) is not a basis for per capita economic growth.