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Sectoral reallocation and income growth in the labour market during the COVID-19 pandemic

A review of the New Zealand labour market during COVID-19.

Guanyu Zheng and Marea Sing

Published date:
ISSN/ISBN:
2230-5505
Sectoral reallocation and income growth in the labour market during the COVID-19 pandemic
Sectoral reallocation and income growth in the labour market during the COVID-19 pandemic

A review of the New Zealand labour market during COVID-19.

Marea: Kia ora, I'm Marea

Guanyu: and I'm Guanyu

Marea: Recently, we carried out research about workers’ experience during the Covid-19 pandemic. We looked at how they changed jobs and what happened to their pay checks since the start of 2020. 

Guanyu: We found that workers appeared to find it much easier than usual to move around the job market during the pandemic, with workers switching industries to stay in work and earn more. This helps explain the strength in the labour market over the past few years, with employment surprisingly strong and unemployment relatively low, despite the pandemic. 

Marea: During 2020 and 2021, there were big increases in the number of jobs in the health and building industries. At the same time, employment in face-to-face jobs and tourism-related industries, such as hotels, restaurants, and the arts, fell because of COVID-related restrictions. 

Guanyu: At the start of the pandemic, economists generally expected unemployment to be much higher and more persistent in New Zealand. This was largely because of strict border controls which led to international tourism virtually disappearing, and a consequent rise in skills mismatches across the economy. But unlike past economic shocks, the pandemic saw unusually high numbers of workers moving between industries rather than staying in the same type of work, especially since 2021.  

Marea: For example, the research shows a strong flow of workers into the health sector. Many of those workers came from jobs dealing with customers face to face, including tourism-related industries, as well as primary and secondary sectors, such as the building industry. 

Guanyu: This was surprising and suggests that skills are more transferable between industries than previously thought. At a time of skills shortages workers were able to move from say a job at a hotel or in a cafe to work in the health sector.  

Marea: It also found that these tens of thousands of people who were changing industries were more likely to earn more. This finding from our research has important implications for inflation dynamics. It suggests that wage inflation is especially sensitive to workers moving across industries to meet changes in demand and supply. 

Guanyu: We hope you find the research interesting.  

Marea: You can read the full analytical note on the Reserve Bank’s website.

Key findings

  • The New Zealand labour market has been resilient and flexible during the COVID-19 pandemic, with workers switching industries to stay in work and earn more.
  • During 2020 and 2021, there were big increases in the number of jobs in the health and building industries. Jobs in the health industry increased by 15,950 and jobs in the building industry increased by 17,650.
  • Jobs in high-contact and tourism-related industries — for example hotels, restaurants and arts and recreation — fell by 33,250. This was because of COVID-related restrictions and our borders being closed.

How the labour market changed during COVID-19

At the start of COVID-19 in 2020, economists generally expected skill mismatches to increase and cause higher structural unemployment in New Zealand. This was also considered likely because labour flows into the economy were restricted by strict border controls.

According to the research in this Analytical Note, the COVID-19 pandemic saw high levels of workers moving between industries, especially since 2021 — this was unlike past economic shocks. This churn in the labour market has coincided with growth in income, which has important implications for inflation dynamics.

For example, the research shows there was a strong flow of workers into the health sector, especially from high-contact and tourism-related industries, as well as primary and secondary sectors (including the construction industry). 

This is a somewhat surprising finding, suggesting that skills are generally more transferable between industries than would have been assumed. This confirms that between-industry job-to-job transitions are positively correlated with income growth at the aggregate level.

These findings highlight how administrative tax data can be used to understand key relationships and developments in the New Zealand labour market to meet both the inflation and employment objectives of our dual mandate.

Why we've published this research

The Monetary Policy Remit outlines the goals of monetary policy for: 

This Analytical Note is also in line with our Statement of Intent.

While we maintain a broad research agenda, in the near term, our research focus will be on topics that support the economic recovery from COVID-19 and provide a deeper understanding of the post-COVID-19 economy. These will include monetary policy transmission, the aggregate and distributional consequences for the labour market across households, regions and industries, and the distributional consequences and effectiveness of alternative monetary policy.

Read our Statements of Intent

 

What data have we used?

We use the Employer Monthly Schedule (EMS) data set in the Integrated Data Infrastructure (IDI) database managed by Statistics New Zealand (Stats NZ). This dataset matches paid jobs to firms in New Zealand and provides rich information on labour market earnings, employment industries, and the geographical location of jobs.

The EMS dataset follows the individual employment movements and earnings of over 2 million workers. The empirical analysis we pursue in this note focusses on the period June 1999 to March 2022, aggregated into a quarterly frequency.  We choose workers between the ages of 15 and 64, whose incomes or salaries are their main source of income in a given quarter. 

Given these choices, we note that our dataset might not be directly comparable to any official labour market statistics produced by Statistics New Zealand.