Employment in New Zealand

Abstract

Explaining post-war employment and unemployment in New Zealand is problematic for neoclassical economic theory. Up until the late 1970s the economy was overlaid with controls and 'rigidities' of many sorts, interfering with the operation of ‘free' market forces. Yet it delivered virtually zero unemployment without being unusually prone to inflationary pressures. From the 1980s onwards, our economy has been subjected to a remarkable regime of policy 'reform', involving the opening up of markets to overseas competition, the dismantling or emasculating of centralised and/or collectivist institutions, and the adoption of an extreme version of monetarist ideology. Yet throughout these years of actions aimed at fostering ‘free markets', the actual macroeconomic performance of the markets, measured by the mismatch between supply and demand in the labour market (unemployment) has persistently deteriorated, with unemployment rates rising from less than half of one percent as late as 1977 to above 10% in the early 1990s. That is, the more market-oriented we became, the worse the markets performed. How can this be? The research program on which the present paper is a progress report tests hypotheses that can explain how both Keynesian and monetarist orthodoxies miss important aspects of New Zealand reality, and develops a model based on empathy between supply and demand sides of the labour market that is consistent with non-inflationary over-full employment.