Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Tough job market awaits beneficiaries

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There were 150,000 people unemployed at the end of last year according to the latest Household Labour Force Survey. Photo / Martin Sykes
There were 150,000 people unemployed at the end of last year according to the latest Household Labour Force Survey. Photo / Martin Sykes

And the Oscar for double standards goes to ... John Key, for A Chance Would Be A Fine Thing.

Announcing the next stage of welfare reforms on Monday, the Prime Minister declared the current system to be economically unsustainable.

This is a bit rich coming from someone who refuses to countenance any change to New Zealand Superannuation, which is clearly unsustainable if anything is.

Super will gobble up 90 per cent of the budgeted increase in transfer payment over the next four years, according to the pre-election economic and fiscal update (Prefu), leaving five-eighths of not very much at all for welfare payments.

This is not to deny that the welfare system is in need of an overhaul or that Key has grounds to say it is not delivering good outcomes for beneficiaries and their children.

But the context of these reforms is a period of serious fiscal stringency and job growth too weak to do more than nibble at the existing level of unemployment, never mind absorb the surge in job seekers the reforms are designed to produce.

The Government is bound and determined to return its bottom line to surplus within three years, barring a second 2008-scale global financial crisis.

That is a tall order when its starting point - excluding the hopefully one-off impact of the earthquake - is a deficit of between 4 and 5 per cent of gross domestic product, most of which is structural and will not just come right with the economic cycle.

It requires fiscal belt-tightening on a scale not seen since the Mother of All Budgets 20 years ago.

Of the big four big-ticket items in the Budget - health, education, super and welfare - it is welfare which is the softest target politically, with the weakest constituency.

As at the end of 2011 there were 351,000 people on one of the four main benefits, representing 12 per cent of the population aged between 15 and 64.

The Government says it expects the changes announced this week to result in up to 46,000 fewer people on benefits.

That is on top of the 19,000 fewer by 2016 the Prefu already forecast on the strength of a recovering economy.

Since then, of course, the Treasury has revised down its growth forecast in the near term and accordingly revised up the track for unemployment.

But taking the Prefu forecasts at face value, employment will grow by 1.4 per cent a year over the next four years, which is in line with the average rate over the past 10 years, a period that included boom and bust.

It represents an increase of 32,000 jobs per annum on average, or 130,000, give or take, over the four years.

That is the demand side. What about supply?

Statistics New Zealand's central projection for labour force growth over the next few years is 24,000 a year, reflecting a natural increase in the population and normal net migration flows.

So three out of every four new jobs would be required to mop up that increase. Call it 100,000 over four years.

It would leave around 8000 a year to come off the level of unemployment.

There were 150,000 people unemployed at the end of last year according to the latest Household Labour Force Survey, the official measure of unemployment. They are by definition already available to work and actively seeking work.

Add them to the projected new entrants to the labour force and you have a quarter of a million people competing for about half that number of new jobs.

That is the labour market which the reforms aim to facilitate beneficiaries to join or rejoin.

These figures are projections and therefore spongy.

But they impart a certain Tui ad quality to the Prime Minister's blithe assurance on Monday that "there are plenty of jobs out there for people if they look really hard."

"Not, obviously, for every single person," he added, "but people do find work and the economy is constantly creating new jobs."

While there are 150,000 people statistically recognised as unemployed, there are only 60,000 on the unemployment benefit.

The broadest measure of joblessness, which includes those who want a job but are too discouraged to look for one, is 260,000.

There are also 105,000 people classified as underemployed - part-timers who want to work more hours.

None of this is an argument for not expending effort to enable people on benefits to join or rejoin the workforce. Enhancing their ability to compete in this tough market is a worthy aim.

To have nearly one person in eight aged between 15 and 64 on welfare is clearly a waste on many levels including the economic.

Worse still is 13 per cent of 15 to 24-year-olds classified as NEET - not in employment, education or training.

The concern is how heavy a hand the state will apply to compressing those ratios.

Increasing the number of job seekers without increasing the number of jobs only drives the unemployment rate higher and keeps a lid on wages at the lower end of the skill spectrum.

If the driver of this policy, which we are told will cost $130 millon a year, is genuine concern about intractable long-term welfare dependency and the associated child poverty, well and good.

But if that is window dressing and the real objective is to balance the Budget, and in the process keep the marginal cost of low-skilled labour low for employers, then the cost, human and social, could be high.

It could be argued that much of today's welfare problem represents the scar tissue of the last episode of fiscal consolidation combined with welfare reform, in the early 1990s.

The Prime Minister assures us it will be different this time.

If the jobs just aren't there, fair enough. People will not lose their entitlements, he says. Payment levels for the main benefits are not to be cut, and will continue to be inflation-indexed. That suggests that the fiscal goal of a return to surplus by 2014/15 - already looking precarious - is what will give.

In the end there is no substitute for a brisk rate of job creation from a strongly growing economy.

With that, welfare reform is largely redundant. Without it, it is futile.

- NZ Herald

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