If this week’s figures represent the peak of the current cycle of unemployment, they will be a final reminder that we dealt with the post-pandemic inflation spike by the simple expedient of putting tens of thousands of people out of work.
Inflation, as the economist Geoff Bertram once remarked, is a matter of settling “distributional contests among the great classes of society”. And one way to think about those contests is this: if prices start to rise, who bears the burden of bringing them down again – companies making excess profits, or rank-and-file workers?
Yesterday’s unemployment data, in which the official jobless tally stayed at 5.1% or 156,000 people, is all the answer you need. (The underutilisation rate, which includes people who don’t have enough work, is more than twice as high, at 12.3% or 390,000 people.) If, as some economists predict and any sensible person would hope, these figures represent the peak of the current cycle of unemployment, they will be a final reminder of the fact that we dealt with the post-pandemic inflation spike by the simple expedient of putting tens of thousands of people out of work.
Since at least the 1980s and the rise of “inflation targeting”, this has been how it goes. When the economy is deemed to be “overheated”, and inflation rising too sharply, the Reserve Bank hikes the rate at which commercial banks borrow money. Those banks in turn levy higher borrowing charges on firms, which duly cut back investment, and large numbers of people lose their jobs. All this reduces the amount of money available to be spent on goods and services, and so inflation falls.
Various problems with this approach have been evident in the latest bout of inflation-related combat. One is that it has proceeded on the assumption that the major force “overheating” the economy was a Labour government spending too much money through the pandemic, just as other governments had supposedly overspent worldwide.
Inconveniently for those making this argument, there is a fair bit of evidence to the contrary. When the Council of Trade Unions looked into it a couple of years ago, they found that easily the biggest contributor to New Zealand’s inflation spike was not government spending but higher corporate profits. Some careful attempts to tease out this question globally came to the same conclusion. This was the phenomenon characterised by the economist Isabella Weber as “greedflation”: firms taking advantage of an economic shock, and exploiting their own market power, to raise prices faster than their own internal costs were increasing. (This was not an argument universally accepted, of course.)
The other obvious problem with our inflation-combating approach is that it ignores – or is overly sanguine about – the immense personal toll inflicted by job losses. As the University of Auckland economist Robert MacCulloch has shown, unemployment has a much, much larger negative effect on people’s wellbeing than does inflation. (Albeit inflation is directly experienced by a greater number of people.)
Peculiarities of New Zealand politics also mean that job losses have a greater impact here than they might elsewhere. Most countries’ welfare systems incorporate something known as social insurance, in which the shock of unemployment is cushioned by a temporary payment that is more generous than the conventional benefit – typically something like 60-80% of the person’s former salary, paid for six to 12 months.
This reduces the likelihood of catastrophic post-redundancy events such as people having to sell their house to survive. It gives them time to assess their options and potentially retrain. Above all, it prevents them from having to snatch at the first job that comes their way, whether it be a good fit for their skills or not. This is the kind of system that Labour was preparing to introduce before Chris Hipkins put it on the “policy bonfire” in early 2023.
Unable to access such support, or indeed much else by way of job-seeking assistance, unemployed New Zealanders often end up in positions much worse than the ones from which they were let go. A detailed study by Motu found that New Zealanders who lost their jobs were, even five years on, earning one-fifth less than their peers. Even if they found another job, it typically paid 15% less than their old one.
Given that this situation often implies a skills mismatch, in which people are working below the level for which they are qualified and not fully using their capabilities, there is a massive cost not just to the individual but to the wider economy. And that is even without accounting for all the other harms that often accompany unemployment, including lowered self-esteem, greater social isolation and worse health.
The damage that ripples out from this surge in unemployment, in short, will be felt for years to come. Of course the pain is not limited to employees: many small business owners have gone under, as is obvious to anyone observing the closed shopfronts on our country’s main streets.
So far, however, the large companies operating in uncompetitive markets – which are also those most able to raise prices during supply shocks and stoke inflation – have not had to feel much pain. Our supermarket duopoly remains splendidly insulated from the threat of real competition. Our – or rather, Australia’s – banks continue to report colossal profits and post margins far higher than those generated in other countries. Fletcher’s continues its near-total dominance of the markets for key building products. The insurance sector – where price rises have contributed significantly to inflation – remains highly concentrated.
There are rumblings of discontent – even among the current crop of ministers – about some of these arrangements. The supermarkets, for instance, have been threatened with even tougher action than normal. But it remains to be seen if the government will actually follow through. As it stands, then, the depressing thought is that the response to the next inflationary shock is likely to repeat the same mistakes, and that innocent workers – rather than profiteering firms – will pay the price.
