With the economy in seemingly good shape and unemployment at a record low, Kiwi graduates should be looking forward to prosperous futures. But why are so many eager to leave New Zealand and what affect is this having on the economy?
On December 1st 2003 New Zealand’s capital city, Wellington was awash with young Kiwis, cheering on the Lord of the Rings cast.
This epic trilogy epitomised the image that this small, geographically isolated country wants to portray to the rest of the world: of a nation that is innovative and productive.
Erin O’Neil was amongst the crowd to celebrate the premier of the movie that put New Zealand on the map. Erin; a student set to graduate from Victoria University in Wellington this May, has much to be positive about in terms of job prospects.
Her optimism is shared with Business Roundtable chief executive; Roger Kerr, who stated that “New Zealand is experiencing one of its most prosperous periods in several decades.” So it maybe comes as a surprise that Erin plans to leave her home country and look for work across the Tasman Sea after graduation.
Erin is not the only one. Many young New Zealanders are uprooting themselves from their homeland even though, at first glance, the state of the New Zealand economy seems positive for people about to enter the work force. According to the Organisation for Economic Co-operation and Development (OECD) statistics, New Zealand’s GDP per capita growth has improved over the last five years and with an almost 4% average growth rate, it has been running above the OECD average of 2.3%
In fact the economy has been growing even faster over the last two years at 5%. This higher growth, however, is more the result of increased labour utilisation (which is high and improving) rather than labour productivity (which remains low and static relative to the OECD).
Another indicator of New Zealand’s strengthening economy is it boasts the lowest unemployment rate in nineteen years.
New Zealand’s unemployment fell dramatically by almost thirty percent between 1999 and 2006. Today, the OECD average unemployment rate of almost 7% is nearly double that of New Zealand. This gives New Zealand the lowest unemployment rate in the developed world.
However, these glowing economics indicators mask some of New Zealand’s more pressing issues. There is evidence that suggests the level of economic activity is currently higher than the level of potential output, thus giving rise to inflation risks and wage pressure. Information from New Zealand’s Institute of Economic Research illustrates that labour utilisation is at a record high level. Clearly, many businesses are stretched or running at full capacity. Moreover, firms have been reporting for over three years that they are having increasing difficulty in finding both skilled and unskilled staff.
One reason for this lack of skilled workers is the high levels of young graduates, like Erin, leaving New Zealand. A report compiled earlier this year by the OECD illustrates that almost a quarter of all New Zealand-born people with tertiary education have now left the country. New Zealand journalist; Simon Collins describes this as “the biggest exodus of skilled workers from any developed nation.”
New Zealand has been losing its graduates ‘en-masse’ from as early as 2001. This trend was first examined through a survey compiled by the University of Auckland Business School. Over nine hundred young New Zealanders concluded that this mass migration was partly due to “the push from New Zealand’s relative lack of challenging, well-paid jobs with which to develop a career.”
This ‘brain drain’ may have a dramatic effect on the national economy. Even though the economy appears to be thriving and New Zealand is running at full speed, it looks as if the unexpected strength of this recent economic expansion has brought with it a new set of issues. These are outlined by Prime Minister; Helen Clark in the Financial Times. Due to the shortage of young, educated new talent, Ms Clark stated that “The issues of the future aren’t going to be unemployment. They are going to be lack of workers and the ageing society.”
Ms Clark’s comment is corroborated by her own governmental statistics. Latest trends indicate that the country’s population continues to age. The over sixty-five age group grew by over fifteen percent over the last decade to reach almost half a million, almost fifteen percent of the total population. Projections also suggest that this number is likely to increase further. New Zealand’s Enterprise Recruitment states, “our workforce is getting older. There aren’t so many young people to replace those who retire.” In other words; the labour market is ageing along with the population.
Not only is the workforce getting older, it will soon start to shrink in size too. The Department of Labour estimates that by around 2020, those who retire from work will far outweigh people entering the job market.
This shrinking workforce and ageing population will have major implications for the future of the New Zealand economy. One factor, which may be affected, is labour productivity.
The Department of Labour (DOL) recognise that the implications for labour productivity due to an ageing population can be double-edged. On one hand; “older workers are likely to have more workforce experience and therefore higher productivity” and that “the performance of workers does not appear to be significantly impaired by age.” This implies that labour utilisation will not be adversely affected by an ageing population, as members of the older generation are still willing to work.
This may be true, but a high labour utilisation rate could also pose problems for the economy. Even though the New Zealand Treasury recognise that labour utilisation growth promotes GDP per capita growth, the DOL acknowledge that a negative relationship presently exists between productivity and labour utilisation. “Increasing labour utilisation can actually slow productivity as those entering the workforce are likely to have lower skill levels than the existing workforce.” This is corroborated by the fact that “many of the skills possessed by older workers have been acquired on the job [and] may be specific to particular occupations. This potentially constrains the ability of older workers to adapt to changes in the labour market and technology.” So even though the ageing population is boosting labour utilisation, productivity is not benefiting.
Productivity growth picked up from the mid-1990s to average 1.5 percent between 1998 and 2002. However, New Zealand’s growth rates are now below those of the majority of OECD countries, which have averaged between two and three percent.
This slowing productivity growth is a pressing and immediate problem which will only worsen if current economic conditions do not change. Rod Oram of the Financial Times claimed that “productivity would have to improve from 1.5 percent to 2 percent to maintain economic growth [in its present state.]” Thus, with productivity low and labour utilisation high; the current GDP growth rate of almost fiver percent appears to be unsustainable.
Even though sustaining current economic growth looks doubtful, there is hope for New Zealand. To combat the relatively new challenge of skill and labour shortages, reform of the welfare system by the government over the next two years is suggested. The OECD states that “strengthening work incentives in the welfare system could improve employment and social outcomes…for marginal groups such as the young and the less skilled.”
In light of this, the government is planning to fully implement the Single Core Benefit in 2007/2008, which will roll seven existing benefits into one. It is intended that this new system “will remove the current raft of entitlements, categories and administrative requirements” and will hopefully “help meet the challenge of filling the jobs created by a growing economy” says Steve Maharey; Minister for Social Development and Employment. The new scheme should allow case managers more time and resources to provide targeted employment assistance focussed on work for everyone who is able.
The government believe that a simplified benefit system and expanded employment service will have an important part to play in boosting the number of workers available to employers and assisting employers to address labour shortages.
Although a simplified benefit system may encourage increased labour, wage increases may also be an incentive. Peter Conway, an economist for the Council of Trade Unions commented that “There have been labour shortages for more than four years, but there’s a very long lag in signs of wages rising in response.” As well as labour shortage due to the ageing population and brain drain, the New Zealand Treasury claim that low level of capital per worker is a major contributor to low productivity.
Virginia Marsh of the Financial Times said that the 2004 OECD report on New Zealand concluded that “seventy five percent of the gap between New Zealand’s relatively low and Australia’s relatively high productivity and income levels was attributed to greater capital intensity in Australia.” The New Zealand Council of Trade Unions agrees that “Australian workers have a minimum wage of $NZ13.49 which is much higher than the $NZ9.00 rate in New Zealand. Their average wage is 26% higher.” With Australia, just three hours away by plane, young skilled New Zealanders are understandably attracted to the promise of higher wages by their larger neighbour.
This is corroborated by information gathered from the University of Auckland Business School; ‘Beyond the Brain Drain Survey’ suggests that over three quarters of recipients who had left the country raised issues of pay levels.
Even though the departure of young, talented Kiwis is a potential problem for the economy, the opportunities that are available overseas are largely overlooked. Some may consider training overseas to expand their knowledge, which may be essential for the future of New Zealand. Although Erin plans to leave the country for a career in Australia, she considers New Zealand her home. “My family are here, I’m sure I will return one day” says Erin.
The bottom line is that New Zealand needs well-educated people to stay in the country for the economy to prosper. If key changes can be made to boost wages and provide work incentives, then hopefully the lost generation will one day return.