There was good news on the unemployment front this week. As the New Zealand Herald reported:
The number of people unemployed in New Zealand has been dropping by more than 1000 a week in recent months, with an extremely tight labour market pushing employers to up pay to keep staff.
Statistics New Zealand revealed today that in the three months to June 30, the unemployment rate fell to 4 per cent, from 4.6 per cent at the end of March...
The total number of people unemployed fell by 17,000 over the three month period, to 117,000, a drop of 12.4 per cent, the largest percentage drop since the Department of Statistics began the household labour force survey in 1986.
Unemployment is now below where it was in the middle of 2019.
Wage inflation and the unemployment rate are linked. A search model of the labour market can be used to explain why. [*] A search model recognises that the labour market requires a matching of workers to available jobs. Each match between a worker and a job creates a surplus (which is the difference between the additional value that the worker will create for the employer, and the search costs - the costs of searching for a worker and evaluating potential matches). The employer and the worker share the surplus. How the surplus is shared depends on the relative bargaining power of the worker and the employer. If the employer has less bargaining power and the worker has more, then the worker can demand a bigger share of the surplus, and wages will be higher. On the other hand, if the employer has more bargaining power and the worker has less, then the employer can offer a lower wage, and wages will be lower.
Now, think about what happens when the unemployment rate falls. Most workers already have a job, and so the number of people looking for jobs decreases (this doesn't mean that workers with jobs don't look for a better opportunity, only that they are less motivated to do so than unemployed people are). Employers have fewer workers to choose from to fill their vacancies. This gives workers more bargaining power, because the employer will find it more difficult to find an alternative match for their job. Workers will get a slightly higher share of the surplus, and wages will increase.
This is more or less what economists expected to happen. Based on a New Zealand Herald article from earlier in the week:
"We expect wage inflation will have jumped as record labour market tightness, exacerbated by the closed border and the Q2 increase in minimum wage, sees firms willing to pay top dollar," [Finn Robinson and Sharon Zollner of ANZ] said...
"Across the country, finding staff across all skill levels is becoming increasingly difficult –and that means that the labour market is a seller's market at the moment (ie workers have the bargaining power right now)," they said.
"If firms aren't willing to shell out top dollar for staff, then people can relatively easily jump ship and find jobs with businesses who will.
In the actual data released on Wednesday, the labour cost index rose by 2.1 percent, and the New Zealand Herald reported:
Construction wages were the biggest riser in the index, up 3 per cent, although Statistics New Zealand said the biggest reason for the increase in the index was caused by retail and accommodation wages which were impacted by the increase in the minimum wage to $20 per hour on April 1.
The effect of a minimum wage on wages of employed workers can also be explained with the same search model of the labour market. A higher minimum wages improves the 'outside option' for workers (it makes the alternative to accepting a job a bit less unattractive). This means that workers are less likely to feel pressured into accepting any job offer, and that increases their bargaining power. As above, workers will get a slightly higher share of the surplus, and wages will increase.
The combination of a lower unemployment rate and a higher minimum wage both lead to higher wages in a search model of the labour market.
*****
[*] A search model is not the only model that we can use to link changes in wages and changes in unemployment rates. I'll post next about using The supply and demand model can also be used in a stylistic way to show similar effects. However, the difference is that in the search model, changes in unemployment rates can cause changes in wages, whereas that is not the outcome in the supply and demand model, where an exogenous change causes both changes in wages and changes in unemployment.
No comments:
Post a Comment