Why NZ faces worst 'labour scarring' risk since 1990s

New Zealand is at risk of "labour scarring" if people remain stuck on the sidelines of the employment market too long, economists say.Data on Wednesday showed the unemployment rate lifted to 5.7 percent. Most commentators had expected it to fall.But the data also showed that 21.5 percent of unemployed people had been out of work for more than a year.That is a level last seen in June 1995, when it was 24.3 percent.Kiwibank economists said long-term unemployment could be a major problem because it could cause workers to become discouraged and drop out of the labour force completely, or move overseas."Long periods of time spent outside of the labour force also erodes workers' experience and skills, making it even harder to find a job. After a year of unemployment, employers might start to question how up-to-date a candidate's knowledge is, how long it would take them to get up to speed and if the cost of re-training the re-entrant is worth it."Simplicity chief economist Shamubeel Eaqub said the longer someone was unemployed, the harder it was to become employed."It's also a function of a long recession. With unemployment, it's not the same group of people. There's usually people coming in and people who are exiting unemployment."The number of people exiting unemployment has slowed. It's starting to become that longer-term unemployment ... and that really does make it harder to get back which is what we call labour scarring."The scarring effect is when the longer you've been out of work, the harder it is to get back in because some of the skills atrophy, you lose contact, you lose confidence both the physical things and the more psychological things."Simplicity chief economist Shamubeel Eaqub.SuppliedIt was harder to find a job from outside the labour force, he said."Even though lots of people do come from out of the labour force, it's definitely harder."He said the unemployment rate overall was flattered by the fact that almost half-a-million people would prefer to have more hours.Kiwibank economists said young people were still suffering particularly."The proportion of those aged 15 to 24 not in employment education or training has grown again to 14.1 percent. The non-seasonally adjusted unemployment rate for those aged 15 to 19 has barely moved, from 25.3 percent in the June quarter to 25.2 percent in September."For those aged 20 to 24, the move was a little larger from 12 percent in the June quarter to 11.3 percent in September."They said they expected the peak in unemployment had not yet been reached. Eaqub said he hoped it had, but he was watching the number of job ads."That's still kind of hovering just off the lows of the recession, but hasn't improved that much. So it's really frustrating because at the beginning of the year, we had good signs, the economy was doing well, and then the war, a little bit of relief, and then again, the escalation in oil prices have really kind of put this recovery on ice."So it feels like it's going to be pretty tough for a little bit longer. And the measure to watch, I think, is very much what's happening on job ads. When that starts to increase, we'll have more confidence that businesses are converting that optimism into job opportunities."BNZ chief economist Mike Jones said he thought this was the peak for unemployment, or very close to it."The message from today's numbers was hard to ignore - the labour market in the third quarter was quite a bit weaker than everybody thought. But, looking ahead, the slow improvement we've seen in economic activity should filter through to additional hiring and start to bring down the unemployment rate."That's consistent with what firms have been tell us in some of the business surveys - conditions are challenging, but employment intentions have held in at above average levels."Sign up for Money with Susan Edmunds, a weekly newsletter covering all the things that affect how we make and spend money