New Zealand’s labour market remains tight, with unemployment at 4.2% and businesses finding it difficult to source workers. At the same time, employment growth has slowed, and the Reserve Bank has stated that, in its view, “employment is near its maximum sustainable level”.

With unemployment so low, businesses are finding that it can be more hassle than it’s worth to try and train someone who doesn’t fit the bill. Trying to drag those people into the workforce who are long-term structurally unemployed highlights a difficult choice for firms, with the costs of a new worker needing to be weighed against the benefits of more business.

With unemployment low, the pool of potential workers to choose from that aren’t already locked into an employer is small. The remaining pool will mostly be made up of people who are structurally unemployed: people who don’t have the skills that are being demanded by employers.

We often think about structural unemployment in terms of a mismatch between potential workers’ skills and the specific skills required in a particular workplace. But some proportion of those people who are structurally unemployed might be generally unsuitable for any work.  These people might not be interested in working or cannot hold down a job for various reasons such as drug addictions or transience.

Given a shrinking pool of unemployed people, businesses are faced with four options. Businesses can:

According to the NZIER’s Quarterly Survey of Business Opinion, it is the most difficult for businesses to find skilled and unskilled labour since March 2005. In the March quarter, 50% of businesses (seasonally adjusted) reported it was more difficult to find skilled labour than previously, with 34% saying the same for unskilled workers (see Graph 1).

Graph 1

So even with a low unemployment rate and a small pool of talent to choose from, businesses are still keen to take on new workers when they can find them.

Employment growth has slowed over recent quarters, as the limits of the labour market are tested by a dwindling pool of talent. In the last six months, annual average growth in  part-time employment turned negative for the first time since the end of 2013 (see Graph 2).

Graph 2

With full-time employment still growing, albeit at a slower pace, the widening gap between full-time and part-time employment growth suggests that businesses are making up for the labour shortages by having full-time workers work longer hours to achieve the output growth.

The Reserve Bank is also now expecting employment growth to be weaker over the next year than previously thought, with employment growth easing to a low of 0.7%pa in September 2019 (see Graph 3).

Graph 3

With the labour market tight and businesses still crying out for more workers, businesses are faced with a difficult choice. They could choose to employ someone from the dwindling pool of labour and pay to upskill them. They could bring on a part-time worker to get some marginal increase in worker output, but which might not increase output enough. They could work their current employees harder, by increasing hours or seeking efficiency gains, but risk worker burnout. Or they could pull back their growth targets because the costs of the previous three options outweigh the benefits of more growth.

We’re worried that businesses are deciding that the hassle and cost of employing someone new, who might not fit the job properly, is more difficult than it’s worth. If that trend occurs on a wider scale, the economy’s potential to expand will be constrained and growth is likely to stagnate.