The myth of the Great Resignation (in New Zealand)

I was interested to read this article in the New Zealand Herald this morning:

Companies grappling with labour shortages and discerning job seekers are turning to hefty cash incentives to recruit staff - offering several-thousand dollar sign-on bonuses or finder's fees.

Recruiters say employers facing the "perfect storm" of wage inflation, increased overheads and talent shortages are getting increasingly innovative to catch the attention of potential candidates...

[People & Culture director at Simpson Grierson, Jo Stevenson] explained the pandemic had also made prospective employees more picky.

"People are becoming more discerning about their employment choices and they're wanting to move to a place because it's got the right culture, and the right level of flexibility," she said...

Dunedin's Platinum Recruitment director Dean Delaney said employers were facing the perfect storm of wage inflation, increased overheads and talent shortages.

He said companies were finding sign-on offers a better use of their money, than widespread job advertising.

His clients were reporting very little interest in their job ads.

I found it interesting because it is hard to reconcile labour shortages and difficulty in recruiting with a rhetoric of the Great Resignation, like this from an AUT press release:

NZ employers take note: the “great resignation” is happening here...

Internationally, and especially within the United States, there is a lot of talk about the “great resignation” – the informal name for the widespread trend of a significant number of workers leaving their jobs during the COVID-19 pandemic. 

Ok, let's take a step back and think through what it would mean if we had both of these things (difficulties hiring and a Great Resignation) at the same time. To do so, we need to this through a pretty simple model of how we categorise people of working age (which we use in my ECONS101 class).

People of working age [*] can be classified as being in the labour force, or not in the labour force. Pretty simple, really. People of working age are in one of these categories, or the other. People in the labour force are either employed (they have a job), or unemployed (they don't have a job, but they are looking for one and they are willing to work). Again, this is pretty simple. People in the labour force are one, or the other. People of working age who are not in the labour force are those who both don't currently have a job, and aren't looking for one.

Now think about the 'Great Resignation'. If people of working age are resigning from their jobs in large numbers, then there are only a few things that can happen to them in our model. They start as employed, and then they can either: (1) become employed somewhere else; (2) become unemployed; or (3) leave the labour force. Those are the only things that can happen, unless they are erased from existence.

Now, assuming that Thanos isn't operating in our labour market, let's look at the other three options. If people were resigning and being employed somewhere else in large numbers, then we wouldn't see problems with recruiting, as in the Herald article quoted above. So, clearly, that isn't happening. If people were resigning and simply becoming unemployed, we'd see an increase in the unemployment rate. But, at 3.2 percent, the unemployment rate is the lowest it has been since 2007.

The decreasing unemployment rate also tells us that people aren't simply leaving the labour force either, but to see why it requires a bit more explanation (and a tiny bit of maths). The unemployment rate is the proportion of the labour force who are unemployed. So, because the labour force (LF) is made up of employed (E) and unemployed (U), then unemployment rate (UR) can be calculated as:

UR = U / LF = U / [U + E]

Now consider what happens when the number of employed people decreases, but without an increase in the number of unemployed (as would happen if people leave their jobs and exit the labour force). Unemployment (U) doesn't change, but the labour force (U+E) decreases (because employment (E) decreases). [**] The unemployment rate would increase. But it hasn't. It's at a long-term low, at 3.2 percent.

What does that leave us with? If people aren't resigning and going into new jobs, becoming unemployed, or exiting the labour force entirely, then they must be staying in their current jobs. There is no Great Resignation in New Zealand. Or at least, no evidence of it yet.

[Update]: A couple of keen former students of mine pointed out that there is another possibility: people of working age resign and then move overseas. However, that is effectively the same as erasing people from existence, so if that were the case the unemployment rate should be increasing.

However, if people were moving overseas (lower E), but then being replaced from the ranks of the unemployed (lower U, higher E), then resignations combined with new hires could reduce the unemployment rate. But that wouldn't necessarily be consistent with the difficulty that employers are facing in finding people. While net international migration is negative, it has been around 8000 people per month over the last few months, which is about 0.2% of the labour force per month. Not all migrants are of working age, of course, but it could still be a contributing factor to a lower unemployment rate. Maybe there is something to the Great Resignation, after all? 

*****

[*] Let's not get bogged down in how 'people of working age' is defined. It actually makes no difference to the rest of the story whether working age is defined as 15 to 64 years, or 15 years and over (the two most common definitions), or whatever other definition you want to apply to it.

[**] Interestingly, the effect on the unemployment rate of people leaving the labour force is exactly the same as if Thanos erased employed people (but not unemployed people) from existence.