Brian Gaynor

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Brian Gaynor: Baby boomers clogging the job market

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In New Zealand, youth unemployment is relatively high, partly because of the large number of baby boomers remaining in the workforce. High unemployment looks as if it will be one of the lingering consequences of the global financial crisis.

We could be facing years of low global economic growth and high unemployment just as the world was afflicted by low growth and high inflation in the 1970s.

At the end of May, the 34-country Organisation for Economic Co-operation and Development (OECD) had an unemployment rate of 7.9 per cent.

Nearly 48 million were out of work, 15 million more than when the financial crisis began in 2007.

The unemployment rate continues to rise in the eurozone and is now 11.1 per cent.

The two main features of this situation are high youth unemployment, those aged 15 to 24, and rising long-term unemployment.

In New Zealand, youth unemployment is relatively high, partly because of the large number of baby boomers remaining in the workforce. Many are not retiring when they reach 65 because of their low level of retirement savings.

There has been considerable variation in the performance of labour markets in OECD countries since the beginning of the crisis.

The unemployment rate has remained within the 3.5 to 5.5 per cent range in nine countries (Australia, Austria, Japan, Korea, Luxembourg, Mexico, Netherlands, Norway and Switzerland) and has fallen from 8.2 per cent to 5.6 per cent in Germany since the end of 2007.

At the other end are the PIIGS. Spain's unemployment rate is 24.6 per cent, Greece is at 21.9 per cent, Portugal 15.2 per cent, Ireland 14.6 per cent and Italy 10.1 per cent.

Youth unemployment is a major problem, particularly for the low-skilled and those seeking employment in the construction and manufacturing sectors.

The youth unemployment rate, which excludes those in education and training, is more than 52 per cent in Spain and Greece, 36.4 per cent in Portugal and 28.5 per cent in Ireland.

These countries have all had major property construction booms and busts - the busts now making a large contribution to unemployment.

High youth unemployment has negative long-term consequences, particularly for those with low levels of education.

A study by the International Labour Office argues that youth unemployment leads to social instability and contributed to street demonstrations, and regime changes, in a number of Middle East countries in recent years.

Other studies have revealed the following consequences of youth unemployment:

* Fairlie and Kletzer (1999) estimated that being unemployed while young resulted in lower earnings by as much as 8.4 per cent to 13 per cent in future years.

* Kahn (2010) estimated that a 1 percentage point increase in United States unemployment resulted in a 6 per cent to 7 per cent decrease in the wages of college graduates.

* In the United Kingdom, Burgess et al (2003) found youth unemployment raised the probability of unemployment in later life.

* Gregg and Tominey (2005) estimated an earnings loss of up to 21 per cent at age 41 for workers who experienced unemployment in early adulthood.

* Bell and Blanchflower (2010) showed unemployment in the early 20s negatively affected employment and earnings, as well as health and job satisfaction, up to two decades later.

Another worrying feature is the continuing rise in the number of long-term unemployed.

According to the OECD, the number unemployed for more than a year has risen from 1.6 per to 2.9 per cent of the total workforce since the economic crisis began five years ago.

The long-term unemployment rate, those unemployed for two years or more, has increased from 0.9 per cent to 1.5 per cent of the OECD's labour force over the same period.

New Zealand has one of the lowest unemployment rates, particularly for those in the 25-plus age group.

The country's overall unemployment rate is 6.8 per cent, compared with the OECD total of 7.9 per cent, but youth unemployment is 17 per cent, compared with the OECD's 16.1 per cent.

One of the issues facing New Zealand, and many other OECD countries, is the number of baby boomers remaining in the workforce after 65 and the impact this will have on youth unemployment.

In 1986, there were 239,200 people employed in the 20 to 24 age group in New Zealand compared with only 29,600 in the 65-plus group.

The latest figures show there are now 213,500 employed in the 20 to 24 age group and 114,900 in the 65 and over age bracket.

In other words, total youth employment has declined by 11 per cent over the past 26 years, while there has been a 288 per cent surge in the number of 65-year-olds and over in the workforce.

A large number of our youth are involved in training and further education and one of the biggest challenges facing the economy is to find stimulating and well-paid jobs for them when they're ready to enter the work force.

This will be difficult if baby boomers are reluctant to retire because of their low level of savings.

On a more positive note, our unemployment rate for the 25 to 65 age group is only 4.7 per cent and we have minimal long-term unemployment. According to OECD figures, only 10.2 per cent of our unemployed have been without a job for 12 months or more compared with an OECD average of 34 per cent.

The OECD Employment Outlook 2012 also reveals labour's share of national income in its 34 countries has declined from 66.1 per cent to 61.7 per cent in the past decade.

But this doesn't necessarily mean there has been a decline in workers' living standards because "workers may still be better off to the extent that the decline in labour share was accompanied by faster economic growth".

The decline in labour's share - and the increase in capital's share - of national income have been due to a number of factors including:

* Greater productivity gains, particularly through the huge improvements in information and communication technologies.

* Increased international mobility and the transfer of low-skilled activities from developed to emerging countries.

* Weaker unions and the negative impact this has on workers' bargaining powers.

* Privatisation, whereby newly privatised companies are more profitable and have fewer employees.

The OECD argues against a minimum wage. It believes hikes in the minimum wage will boost prices and wages in the short term but in the long run the "evidence suggests that firms react by increasing efficiency levels and productivity beyond the wage increase, leading to a decline in the labour share".

In other words, higher wages encourage companies to invest in capital technologies, which is one of the main reasons why labour's share of national income has fallen over the past decade.

Labour's share of national income is less than 50 per cent in New Zealand compared with the OECD average of 61.7 per cent.

There are a number of reasons for this, including the absence of a capital gains tax. This encourages farmers and other business people to run their enterprises for capital gains, rather than income purposes.

It also means capital accumulates far more quickly than it does in countries where there is a capital gains tax.

New Zealand, like most other countries, can improve on its employment and tax policies, but job seekers here are better off than they are in most other OECD countries.

Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

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