Xero’s Small Business Insights shows that employment growth is softening, though it’s from a gallop to a canter.

Employment growth in the month of June was negative. Employment was down 1.3 percent compared to the month prior.  That followed a 0.6 percent increase in May and a 0.1 percent rise in April. Employment growth was down slightly over the quarter.  That’s somewhat typical in terms of what happens over the June quarter looking at official government employment figures (taken from the Household Labour Force Survey or HLFS for short) though the official seasonally adjusted figures showed a modest rise.  Over time we’ll have enough data points to seasonally adjust Xero’s employment series too and make more comments on the trend from quarter to quarter.

A softening bias is apparent looking at the annual growth figures (a comparison with the same month of the prior year).   

Xero’s Small Business Insights showed annual employment growth of 8-10 percent over 2017 and early 2018. Growth in the number of employees per firm was equally strong so the growth was not being driven by increases in the number of organisations alone.  Those are turbo-charged rates and hard to sustain.

Annual growth in employment has now dipped below 8 percent for two months in a row.  Annual growth in the number of employees per organisation has slowed too. It has been sub 5 percent for two months in a row.

We need to be careful making sweeping judgements. Those sort of employment figures are very robust.  The official HLFS employment figures show employment is up 2.9 percent on last year so small businesses are still doing a lot of the employment growth heavy lifting.

However, momentum is being tempered.  

Why the moderation in employment?

There are numerous candidates.

Employees are harder to find. The unemployment rate is 4.5 percent though there are still people who would like to work more hours (the so-called under-utilised pool of labour).  The ANZ Business Microscope notes difficulty finding skilled employees as small firms second biggest problem. Number one is regulation. It’s not a lack of demand that is holding small firms back. It’s meeting the demand and compliance costs.

Small businesses could have concerns over the economy. This ties in with various confidence survey readings which has dominated the media, but not the hard data coming out of Xero’s Small Business Insights.  The time to be really concerned over the economy is when people are taking longer to pay. Small Business Insights data is showing the opposite of that!

Small firms could be more focused on driving productivity growth and investing in technology, which could also be related to difficulty finding skilled staff.  That could be a good thing. New Zealand’s productivity performance has been poor. Embracing technology is one way of improving productivity.

The business sector has expressed concerns over the path for industrial relations policy.  Wage costs are on the ascent as are other expenses. This is creating uncertainty and potentially adding to business costs. Firms’ naturally become more cautious in such an environment.   How labour relations policy unfolds will likely have a significant influence on business sentiment (though somewhat of a biased indicator) and firms hiring intentions over the coming year.

The flipside is that increasing labour costs will incentivise businesses to look at alternatives such as investing more in technology and capital equipment. The human element will remain a critical element of any business.  But shifts in the relative price of labour / capital is simply telling firms to embrace more of the latter and that’s not bad thing.

 

This article, including the insights and analysis contained within it, was prepared by Economist, Cameron Bagrie with the support of Xero through Xero Small Business Insights data. All data used is anonymised and aggregated. For the purpose of informing and developing policies to promote small business in New Zealand. It contains general information only and should not be taken as taxation, financial, investment or legal advice. Xero recommends that readers always obtain specific and detailed professional advice about any business decisions.


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