Matt Nolan

Unemployment over 11%?

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NZI has suggested that unemployment may go over 11%.  Now although it sounds like this estimate is no more than random conjecture (the countries in the Rogoff study are not comparable to the New Zealand case), it is still worth putting what this means in some historical context.

unemploySource (Infoshare)

The time axis above gives us the “number of quarters”.

So during the recession of the late 80’s in NZ, when we suffered a massive shock to wealth (falling stocks), bank failures, threats of a credit downgrade, tightening fiscal policy (because of our high sovereign debt), tight monetary policy, a falling terms of trade, structural adjustments in the economy (as we dumped tariffs etc), and we had relatively inflexible labour and goods markets – unemployment peaked at 10.9%.

Now even if we believed the situation in NZ is as dire now (I think it is in some places overseas – but not here) it is important to note that it took five years for unemployment to get from 4% to 10.9%.  Even in a worst case scenario I think we can expect the adjustment to be similarly elongated this time.

8 replies
  3. Miguel Sanchez
    Miguel Sanchez says:

    “the countries in the Rogoff study are not comparable to the New Zealand case”

    More precisely, the Rogoff study only looks at the impact in countries where the banking crises actually happened; it doesn’t even attempt to gauge the impact on other countries, which is what we need to know for NZ.

    The NZ Institute will no doubt say that they were only pointing out that 11% unemployment is “possible”. Well any number between 0 and 100 is “possible”, you gotta have something to back it up.

  4. Richard
    Richard says:

    The cynic in me initially assumed that the 11% comment was nothing more than the NZI seeking to make a headline. But in the context of their paper I think I was a bit harsh.

    Applied to the New Zealand context, for example, this points to a worrying possibility that unemployment could rise from a historical low of 4.2% to a rate of 11.2% over the next two years – a rate exceeding the most pessimistic forecasts at the present time. This simple extrapolation may be misleading, however. The Rogoff/Reinhart study included all major postwar banking crises, and two major pre-war crises. Labour markets in advanced economies such as New Zealand have become more flexible over time, meaning that the unemployment impact may be less extreme today than predicted on the basis of historical averages. On the other hand, the present crisis is arguably more severe than any earlier banking crisis given its global scope, whereas earlier crises were more confined to one or more countries.

    …and they didn’t plug the number into the Exec summary or conclusion.

  5. Matt Nolan
    Matt Nolan says:

    “More precisely, the Rogoff study only looks at the impact in countries where the banking crises actually happened; it doesn’t even attempt to gauge the impact on other countries, which is what we need to know for NZ.”

    Indeed

  6. Matt Nolan
    Matt Nolan says:

    “…and they didn’t plug the number into the Exec summary or conclusion.”

    That really just tells me that they know how to sell a story without seeming desperate – I wouldn’t quite curb my cynicism yet.

    I know that any of the economists I work around would NEVER throw a number like that in without doing some hard work first – by stating it that are putting a reasonable probability on it, I’d say about 5%, they really are.

    They have enough experience to know that – so I’m a bit disappointed in them. If they did some research, and found that given NZ’s industry makeup this was a potential worst case scenario I would be very interested.

    But taking a summary statistic from a famous economist and arbitrarily applying it to get a headline grabbing number (even if they didn’t put it in the executive summary) is enough to make people a bit cynical …

    My purpose here was to try and give the number some context – even if no-one finds my context useful, at least I’ve managed to frame the issue for myself 🙂

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