Sunday, February 22, 2009

Basis for unemployment prediction of 11.2 percent

According to a NewstalkZB report the NZ Institute has "dropped a bombshell" warning unemployment may reach 11.2 percent. I always wonder how they make these predictions. Here's the answer;

The eminent American economist Kenneth Rogoff and co-author Carmen Reinhart released research showing that recessions originating in financial crises such as the current global recession are
generally protracted affairs associated with profound declines in output and employment. On average, real house prices decline 35 percent stretched out over six years, while the downturn in equity markets lasts for at least three and a half years. Unemployment rises, on average, by seven percentage points. The decline in economic activity is steep – an average decline of over nine percent –although output recovers more quickly than employment with recovery starting after two years.

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.

The point about the flexibility of labour markets is important and confirms that government moves to increase flexibility even further are well-advised.

1 comment:

Manolo said...

We're getting used to endless wave after wave of doom and gloom news.

The response of the CTU and other unions would be of interest this time, despite of the fact its socialist leadership makes little sense and invariably supports failed policies of the past.