Many people in business and the general population will well remember the days when we used to say “last one out turn off the light” and discussions would rage about how to stop the “brain drain.” No-one talks like that these days and the underlying problem with New Zealand’s labour market has shifted perhaps permanently from too many people and not enough jobs to a plethora of openings but insufficient people to fill them.
We can see evidence of how tight the labour market is in a number of measures. The NZ Institute of Economic Research regularly asks businesses what main factor is holding them back from producing more. On average 10% of businesses say labour. Now that is 20%.
On average a net 29% of businesses have said they struggle to find skilled staff. Now that is 44%. A net 4% usually say that it is easy to get unskilled people. Now a net 29% say it is a struggle to get such employees.
More than that, a net 18% businesses in the most recent NZIER survey said that staff churn has risen. This is the highest such reading since 1973. Staff are starting to realise that there are perhaps better work options for them out there and they are starting to move.
Are People Leaving NZ?
Why is it that SMEs are struggling to find people? Is it because we are losing our labour force overseas? Not at all. In the year to March the country had a net population gain of 68,000 people from migration flows. Some 131,000 people shifted to New Zealand this past year and 63,000 left. Migration has added over 300,000 people to our population since late-2012.
In fact there has been a massive trend shift in our migration flows. In the ten years to 1986 on average we lost a net 17,000 people each year. That changed to a gain of 3,000 each year running to 1996, then 11,000 up to 2006. Now, over the past ten years on average, the net flow has been a gain of 30,000 people per annum.
What Has Changed?
New Zealand is no longer a country devoted almost exclusively to farming and rural servicing industries with a few protected manufacturers. There has grown up over the past three decades a wide range of new industries offering business and employment opportunities which were never there before.
This huge change is helping to keep young people in the country, attract some of the one million Kiwis offshore back home, and of course attract many foreigners to work and live here.
But if migration flows have changed so much, where are the staff? They are largely already in work. The country’s unemployment rate sits at 4.5% and in fact only rose as high as 7% in the years immediately after the Global Financial Crisis.
More than that, the employment rate, which is the proportion of the working age population actually in a job, is just below 68% compared with 66% in 2007 when the unemployment rate was 3.3%. One reason for this apparent discrepancy is that near 24% of people 65 years of age and over are now undertaking some form of paid work. Back in 1998 that was less than 6%.
Strong Economic Growth Has Produced a Jobs Boom
The labour market has become so exceptionally tight not just because of the trend changes in the nature of industries in New Zealand, but because the economy has surged ahead by 14.7% over the past four calendar years. The pace of growth has averaged near 3.7% per annum which is well above the long-term average of 2.7%. Why?
Principally booms in tourism and construction, plus the simple boost from net migration flows soaring from -4,000 in 2012.
As we look ahead to a world of average growth and a Kiwi dollar remaining relatively calm, it seems reasonable to expect that tourism growth will continue though at a slightly slower pace than the 45% recorded these past five years. Construction is also likely to remain strong with many houses needing to be built, more hotels and motels, roads and so on. The new government also plans to spend more.
Now add in the strong labour market and low interest rates keeping household spending strong and we get an economy likely to grow 2.5% on average perhaps over the next four years. And there is likely to be support from one other growing factor which is hugely relevant to and in fact partly stemming from the SME sector and reactions to the further tightening of the labour market we are forecasting.
What To Do?
Pursuing growth in one’s firm simply by adding staff is no longer cheap, smooth, or perhaps even possible. Businesses are increasingly paying large amounts to source staff, train them up, then lose them to another firm down the road.
New Zealand SMEs need to shift away from our traditional way of thinking about growing business profitability which invariably involves attracting more customers. More customers can no longer be comfortably serviced.
For some businesses the answer to operating in what we economists call a capacity-constrained economy is to ease off marketing, drop low yielding clients, raise prices if feasible, and concentrate on developing new product rather than a wider customer base.
Investment and Collaborate
For others the answer will be more investment in labour-saving technologies – which is where we get an extra boost to growth in our economy. For some this will mean better software and computer systems. For others it may mean changing location or at least the layout of one’s premises. For some it will mean new machinery, robotics etc.
With regard to becoming more selective on which clients to service, don’t make this judgement solely on the basis of current profit. We are all living through a technological revolution which is changing business operating environments at a pace which we have never seen before. The challenge for SMEs becomes how to keep up with the change.
For some the answer is turning out to be outright collaboration with businesses in potentially unrelated fields. For others it involves selecting clients open to innovation experiments – clients who perhaps will accept some design changes for selected products before they are rolled out to the whole market. Such clients can provide useful insight into whether one’s changes actually work or not and potentially save one’s business a lot of money which could otherwise be lost by releasing a new product which does not in fact gain market acceptance.
Planning Processes Must Change
At a minimum, even for SMEs who feel they have things well under control, a change in the way one plans for the future is probably needed. Instead of trying to pick changes and developing methods to profit from them, allowance needs to be made for the actual decline in working environment predictability brought about by the depth and speed of technological change. A need exists to develop strategies ahead of time for handling whatever unexpected changes come along.
In the old days we might have called such an exercise “disaster planning” or “contingency management”. But the scope of such exercises is too limited because shocks these days tend to come from competitors, changes in customer behaviour etc. more than Nature and government.
Maximising flexibility and adaptability to unpredictable change has become a worthy goal alongside developing systems so that changes are recognised as early as possible.
Running an SME has never been easy. And although these days there are plenty of management and accounting tools which relieve one of some of yesterday’s burdens, things have become harder because change has become faster, bigger, and more unpredictable. Preparing for unknown changes through maximising flexibility, constraining output growth to what labour inputs will allow, and becoming a lot more selective about which customers to service have become new imperatives for SME owners.
This article is written by Tony Alexander, Chief Economist at BNZ.