Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Failings at school will hurt our economy

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The school system may be doing a good job by international standards for most kids buy there is too large a minority for which that is not true. Photo / Paul Estcourt
The school system may be doing a good job by international standards for most kids buy there is too large a minority for which that is not true. Photo / Paul Estcourt

Businesspeople as much as anybody should be pressing the Government for more effective action on the twin issues of child poverty and the fat tail of failure in the school system.

If only for the sake of their future labour supply.

Right now the labour market is a buyer's (employer's) market.

But the longer-term trends point the other way, to scarcity.

The twin challenges of an ageing population and a common labour market with Australia are well known.

If we add to them the waste of human capital latent in the kinds of inequality Simon Collins has been reporting this week, we risk closing a kind of triangle of doom around the economy's neck.

Officials' briefing to the incoming Minister of Youth Affairs makes sobering reading.

The proportion of students leaving school without an NCEA level 2 qualification - the minimum required for a basic apprenticeship - has fallen from an alarming 43 per cent in 2005.

But in 2010 it was still 26 per cent, including 45 per cent of Maori and 32 per cent of Pacific school leavers.

And 13 per cent of kids left school without even the basic literacy and numeracy required for NCEA level 1.

The briefing also notes the recession's impact in swelling the ranks of young people (15 to 24-year-olds) classified as NEET, that is, not in employment, education or training: 9.7 per cent in the year ended September 2011, up from 7.2 per cent in 2005.

Again Maori and Pacific people were over-represented among the NEET, with rates of 16.4 and 13.7 per cent respectively.

So while the school system may be doing a good job by international standards for most kids, there is clearly way too large a minority for which that is not true - a fact that cannot be separated from wider social failure.

These numbers indicate a qualitative problem to overlay and compound the quantitative problem of slowing growth in the labour force.

The statisticians' central projection for labour force growth has the net increase relentlessly dwindling from here.

With the babyboomers now starting to retire, over the next 20 years the labour force is expected to increase by 320,000, less than half the 700,000 increase over the past 20 years.

That assumes medium rates of fertility, and mortality, and an average net migration gain of 10,000 a year.

It also, by the way, assumes that people's working lives will get longer, from 45 years for men now to 48 years by mid-century.

The two obvious ways of boosting labour force growth are immigration and raising the labour force participation rate, which is the proportion of working age people who are employed or actively seeking work.

New Zealand's participation rate is already relatively high - eighth out of 33 OECD countries on this score.

Nevertheless the Labour Department, briefing its incoming minister, points to groups which, as it demurely puts it, "struggle to participate fully".

They are "100,000 domestic purposes beneficiaries, 140,000 sickness and invalids beneficiaries (whose numbers have been rising since the 1970s despite overall population health steadily improving), low-skilled men (whose participation has been declining since the 1960s) and disengaged young people, who are likely to enter the welfare system and stay in it for long periods."

This, clearly, is a large part of the impetus behind the Government's welfare reform agenda, as well as fiscal constraint. It is worth noting that almost all of the increase in the welfare vote budgeted over the next three years is required to fund New Zealand Superannuation.

The briefing also calls for more funding for early childhood education and care for 1 to 5-year-olds to enable parents on low incomes to take up paid work.

But while there may be some scope for raising participation rates, the immigration dial looks to be set pretty close to "max" already.

The Labour Department tacitly acknowledges there is some limit to how many immigrants are socially and politically digestible when it says immigration alone cannot compensate for slower labour force growth "as the required number of migrants is greater than New Zealand can absorb".

It planned to approve residency for between 45,000 and 50,000 people last year, equivalent to just over 1 per cent of the population.

In the event it fell short, approving 40,700, of whom 23,100 were in the skilled/business category.

At the last census in 2006 just under 880,000 residents had been born overseas, representing 23 per cent of the population - a relatively high proportion by international standards. Ten years earlier it had been 605,000 or 18 per cent of the population

Coincidentally, just over 1 per cent of the population is the proportion of New Zealand citizens who departed for Australia as permanent or long-term migrants last year.

The Labour Department estimates that wages for the average worker in Australia, when adjusted for differences in living costs, are 19 per cent higher than in New Zealand.

Such a gap, to say nothing of those with most other developed countries, has taken decades to open up and will not close in a hurry .

The bottom line is that immigration, while relatively high in gross terms, is low in net terms - too low to make much difference to the prevailing picture of an ageing population and structural skill shortages.

As the working population shrinks as a proportion of the total population, the productivity of the workforce will need to keep rising just to maintain existing standards of living.

Our record on productivity growth is not good.

Lifting it requires getting a lot of things right.

But the foundation has to be giving kids a better start in life than the statistics say we are doing right now.

- NZ Herald

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