Recent Economic and Monetary Trends

This review covers the period from the beginning of September to late November

SUMMARY

Growth in the global economy is high and broadly based. The upswing in the USA has moderated in the last few quarters, while the euro area has gained ground, and there are upswings in the UK and the Scandinavian countries. Oil prices declined from the beginning of August to the middle of November, and long-term interest rates have generally decreased since July. The drop in oil prices has contributed to curbing price increases, and despite high global growth inflation is moderate.

The Danish economy continues to boom, with strong growth in both domestic and external demand. The capacity pressures have intensified considerably, and imports have increased, but Denmark continues to show a sound current-account surplus due to rising oil exports, among other factors. Employment has risen rapidly in 2006, and unemployment has fallen to the lowest level for more than 30 years. The pressure on the labour market has intensified. All regions, and more and more sectors, including large parts of the public sector, report shortages of labour, and wage increases have accelerated during the year. In 2007, the pressure on the Danish labour market is expected to intensify further, which will increase the competition for labour. Labour-market flexibility will be put to the test, and there is a considerable risk of detrimental overheating of the Danish economy.

INTERNATIONAL ECONOMIC BACKGROUND

USA
In the USA, economic growth has abated after several years of strong cyclical development. According to preliminary national accounts data, economic growth was 0.4 per cent from the 2nd to the 3rd quarter of 2006. This is the lowest quarterly growth rate since the 1st quarter of 2003. The moderation in economic growth is especially attributable to a cooling of the housing market after strong price increases for a number of years. House prices were lower in August and September than one year before, cf. Chart 1, and the last two quarters have seen declining residential investments. The housing market's cooling was not reflected in private consumption, however, which continued its unabated growth in the 3rd quarter of 2006. In this period, private consumption and business investments were stimulated by decreasing oil prices and long-term yields, and consumers and business enterprises retain an optimistic near-term outlook, albeit less optimistic than in the spring.

Considerable imbalances still characterise the US economy. Despite the significant improvement of the federal budget, the US deficit was 248 billion dollars or just over 2 per cent of GDP in the fiscal year 2006 which ended on 30 September. The principal factor behind the improvement of government finances is higher tax revenue than expected, in view of the favourable economic development. The current-account deficit has remained almost unchanged in 2006, amounting to 6.6 per cent of GDP in the 2nd quarter. In contrast, the OPEC countries and Asia posted strong surpluses, cf. the article on the US balance of payments on p. 33ff. The considerable, and growing, goods and capital imbalances in the regions of the world, comprising very large deficits in some regions and very large surpluses in others, are hardly likely to be sustained in the long term, cf. Box 1.

US employment rose in the first 10 months of the year, and unemployment has dropped to a low level, intensifying capacity pressures on the economy. Wage increases have been moderate during the upswing, although some indicators point to higher wage increases, and the domestic price pressure, measured by core inflation, has mounted since the beginning of the year. However, the moderation in economic growth may ease the price pressure. In October, prices were 1.3 per cent higher than in October last year in CPI terms, but 2.7 per cent higher excluding energy and food.

Referring to the moderation in economic growth and receding inflationary pressures, the Federal Reserve held the fed funds target rate at 5.25 per cent at its meetings in September and October. Most market participants expect the US fed funds target rate to remain at this level for the rest of the year.

Japan and China
In Japan, the economic upswing continued with high export growth, and business and consumer confidence was still high in the 3rd quarter of 2006. Notwithstanding the upswing, CPI inflation has been modest this year. In September 2006, consumer prices were 0.6 per cent above the level in September 2005, but consumer prices excluding fresh food and energy were 0.5 per cent lower than one year before. The Bank of Japan has kept its official interest rate unchanged since July when it was raised from zero to 0.25 per cent. In connection with Japan's zero-interest-rate policy, purchases of e.g. US securities have been extensively financed by yen-denominated loans. This " carry trade" has contributed to the yen's depreciation by around 5 per cent since the spring.

The very strong growth in the Chinese economy continued in the first three quarters of 2006, with annual GDP growth rates of some 10 per cent. The upswing is driven by e.g. the strong increase in investments, leading to concerns about overinvestment. As a result, several political measures were implemented to dampen the propensity to invest. Furthermore, the People's Bank of China has raised its lending rate by a total of 54 basis points in 2006 so far. The trade surplus has grown further this year, and already after the first nine months the total trade surplus exceeded the surplus in 2005 overall. The substantial trade surpluses have brought a large inflow of foreign exchange to China. With the aim of preventing the renminbi from appreciating, the People's Bank of China has continued recent years' large-scale purchases of foreign exchange, and in September China's foreign-exchange reserves reached 988 billion dollars, equivalent to approximately 44 per cent of China's GDP. However, the People's Bank of China has allowed the renminbi to appreciate a little. In mid-November the renminbi was almost 5 per cent stronger against the dollar than in July 2005 when the People's Bank of China abandoned its strict fixed-exchange-rate policy vis-à-vis the dollar.

Europe
Economic activity in the euro area is increasing. In the 2nd quarter of 2006 GDP was 2.7 per cent higher than in the 2nd quarter of 2005, and the preliminary national accounts data point to continued growth in the 3rd quarter. Growth is primarily driven by domestic demand, in particular fixed investments. Growth in private consumption has been more moderate, but consumer confidence in the euro area rose from June to October, and retail trading data indicates growth in private consumption in the 3rd quarter. From the turn of the year, VAT in Germany will be raised from 16 to 19 per cent for large areas of private consumption. The latter is therefore expected to rise up to the turn of the year. According to the preliminary national accounts data for the 3rd quarter, consumers are beginning to respond to the VAT increase.

Industrial production rose during the summer in the euro area, and business confidence was still high in October, indicating that the favourable cyclical development will continue. Based on the two German confidence indicators, Ifo and ZEW, in the 3rd quarter of 2006, business enterprises and analysts in Germany expect slightly weaker growth six months ahead. This probably reflects Germany's VAT increase and expectations of higher financing costs due to tighter monetary policy. Fiscal-policy tightening measures are expected in Italy too. The fiscal tightenings, the effect of interest-rate increases over the past year, and the contagion effects of the slowdown in the USA may dampen the economic growth in the euro area in 2007.

The upswing in the euro area has increased employment and brought unemployment down to 7.8 per cent in September. In 2006 so far, wage increases have shown a slightly rising trend from a low level. Energy prices have decreased since the summer, and in September HICP inflation in the euro area fell below 2 per cent for the first time since the beginning of 2005. Core inflation, i.e. HICP excluding food, energy, alcohol and tobacco, has been relatively low and stable since the beginning of 2005, cf. Chart 2.

The European Central Bank, ECB, raised the minimum bid rate by 25 basis points to 3.25 per cent in October on the grounds of upside risks to inflation in the euro area due to higher economic growth and strong growth in money and credit. This was the fourth increase of the ECB's official interest rate in 2006. The minimum bid rate is still low, and stimulates activity, while the money market has taken a further increase this year into account.

In the UK, GDP grew by 0.7 per cent from the 2nd to the 3rd quarter of 2006, as in the preceding four quarters. The upswing has led to an expansion of the labour force, which has increased rapidly in 2006. The background includes immigration from especially the new EU member states, as the UK takes a very liberal stance on this immigration. The increased supply of labour has helped to curb wage increases. Since the spring, inflation has been just over the target of 2 per cent in terms of annual CPI inflation, and the Bank of England raised the official bank rate to 5.0 per cent at its meeting in November.

The Scandinavian economies are also gaining momentum. Both Sweden and Norway are in an upswing, and the confidence indicators point to a growing shortage of labour. Inflation has fallen below the central banks' targets, and wage increases have remained moderate in both countries so far. Sveriges Riksbank raised its monetary-policy interest rate by 25 basis points to 2.75 per cent in late October, and Norges Bank raised its monetary-policy interest rate to 3.25 per cent at the beginning of November.

INTERNATIONAL COMMODITY AND FINANCIAL MARKETS

Most commodity prices have increased in 2006 so far. In mid-November the oil price was above the average level in 2005, even though the oil price fell by 25 per cent from the beginning of August to October. Non-energy commodity prices rose strongly in the first 10 months of the year, and in October the prices reached the highest level for many years in terms of the IMF index.

In view of the moderation in economic growth in the USA and lower inflation expectations, 10-year US government bond yields began to decline in July 2006, and the decline continued in the autumn, cf. Chart 3. Short-term US interest rates have been relatively stable since July, reflecting that the Federal Reserve has kept the fed funds target rate unchanged in this period. Long-term yields in Germany have decreased a little since July, while short-term interest rates in the euro area have increased, thereby narrowing the spread between long-term and short-term interest rates, cf. Chart 3.

In both the USA and Europe, stock prices have risen almost continuously since June, and more than recovered the ground lost in the spring. The increase in stock prices can be attributed to such factors as high growth in earnings, receding long-term yields and market expectations that the US fed funds target rate has now peaked. When the fed funds target rate peaked in February 1989 and again in February 1995, stock prices rose in the following months.

The dollar/euro exchange rate has been relatively stable since May within an interval from 1.25 to 1.30 dollars per euro. The dollar moved beyond this interval in the last part of November, to approximately 1.31 dollars per euro towards the end of the month.

DANISH MONETARY AND FOREIGN-EXCHANGE CONDITIONS

Since September the Danish krone has been stable against the euro at a level close to the central rate in ERM II of kr. 7.46038 per euro.
Danmarks Nationalbank did not intervene in the foreign-exchange market in September and October, and the foreign-exchange reserve was approximately kr. 180 billion at the end of October. Danmarks Nationalbank has only intervened on a few occasions and for modest amounts since mid-February when the lending rate was raised by 10 basis points in order to curb a considerable outflow of foreign exchange. Over the entire period since February 2006, the portfolio inflows to and outflows from Denmark have virtually balanced in overall terms. The maturity-adjusted differential between 10-year government bond yields in Denmark and Germany was stable at around 10 basis points from the spring to the beginning of September, after which it narrowed a little.

On 6 October, mirroring the ECB's interest-rate increase, Danmarks Nationalbank raised its interest rates by 25 basis points. The increases were expected by the market, and no market reactions were observed. The Danish increase in October brought the lending rate to 3.50 per cent and the discount and current-account rates to 3.25 per cent.

On 1 January 2007, Slovenia joins the Economic and Monetary Union, cf. the article on the Slovenian economy on p. 49ff. Slovenia thus leaves ERM II, which then consists of 7 member states and the ECB. The euro is at the core of ERM II, and the other participating currencies have central rates against the euro, but not against each other. If a participating currency reaches one of the fluctuation limits, only the central bank of the relevant member state and the ECB are obliged to intervene. The other participating member states have no intervention obligation in this situation. Slovenia's departure from ERM II therefore has no effect on the conditions for the Danish krone.

THE DANISH ECONOMY

The upswing in Denmark has continued in 2006 with strong and broad-based growth in demand. Private consumption and business investments have grown just as strongly as in 2005. Export growth has been robust, and Danish business enterprises gained market shares in the first half of the year. The shortage of labour has probably contributed to the rising corporate investments in machinery, software, etc. since the start of the upswing. The investment growth has enhanced production capacity, giving more room for the upswing.

According to the confidence indicators for building and construction, industry and service, the high growth in the Danish economy will continue. Consumer confidence is also high, indicating continued expansion of private consumption.

The households' optimism and expanding consumption mainly reflect higher disposable income. Other contributing factors are high job security, a continued low level of interest rates and the significant increase in home equity due to recent years' strong increase in housing prices. Since, during the current upswing, private consumption has grown at a considerably slower pace than net worth, the households have only to a minor degree converted increasing capital gains to consumption. The proportion of income channelled to consumption is thus smaller than during the upswing in the mid-1980s, cf. Chart 4.

Lending by banks and mortgage-credit institutes to households and business enterprises has increased by around 14 per cent year-on-year in 2006 so far. The households have embraced the new loan products, and deferred-amortisation loans are gaining more and more ground, in October accounting for almost 38 per cent of lending by mortgage-credit institutes for owner-occupied and holiday homes. The ratio of households' variable-rate loans from banks and mortgage-credit institutes has been stable at around 60 per cent since the beginning of 2005, but is greater than e.g. five years ago. Consequently, the households are more exposed than before to increases in short-term interest rates. Taking into account that the households also have interest income, the interest-rate increases over the last year will reduce the households' disposable income by 0.3 per cent in 2007, cf. Box 2. The interest-rate increases particularly affect domestic demand via housing prices, net worth and investments, but the dampening effect in 2007 is expected to be limited.

EFFECT OF INTEREST-RATE INCREASES ON HOUSEHOLDS' INTEREST EXPENSES	Box 2
Adjustable-rate loans have gained more and more ground in recent years, cf. the Chart. This has made the households' disposable income more vulnerable to fluctuations in short-term interest rates.
HOUSEHOLDS' LOANS FROM BANKS AND MORTGAGE-CREDIT INSTITUTES
Note: End of period. Source: Danmarks Nationalbank.
Assessed on the basis of the interest-rate terms in mid-November 2006, refinancing of 1-year mortgage-credit loans can be expected to cost the households just over 1 per cent p.a. more in December 2006 than in December 2005. At the end of the 3rd quarter of 2006, households' loans from mortgage-credit institutes with interest-rate adjustment within one year totalled around kr. 500 billion. Furthermore, the households' loans from banks amounted to almost kr. 450 billion. The interest-rate terms for these loans can also be expected to generally follow the short-term interest rate. Against this background, the households' interest expenses before tax are estimated to be just over kr. 10 billion higher in 2007 than in 2006 as a result of the interest-rate increases during 2006. This is equivalent to just over kr. 7 billion – or around 0.9 per cent of private consumption – after adjustment for the taxation value of interest expenses. At the same time, the households hold financial assets at variable interest rates. Households' deposits with banks totalled almost kr. 600 billion at the end of the 3rd quarter, and their holdings of very short-term mortgage-credit bonds issued to finance adjustable-rate loans amounted to a further kr. 30 billion on estimate. Taking this into account, the households' net interest expenses after tax are estimated to be only just over kr. 2 billion higher in 2007 than at the beginning of 2006, due to higher short-term interest rates. This corresponds to around 0.3 per cent of both disposable income and private consumption. Since some households have loans and deposits for which the interest rate is linked to the very short-term interest rate, the change from 2006 to 2007 in full-year terms is likely to be minor. The effect on consumption of changes in disposable income probably varies among the individual households, depending especially on whether the household has net interest income or net interest expenses. The liquidity situation is normally good for households with positive net interest income, and they also have good access to borrow, making them less vulnerable to changes in disposable income than households with net interest expenses. A reduction of the borrowers' disposable income is therefore likely to have a relatively stronger effect on consumption than an increase in the disposable income of households with positive net interest income.

According to the statistics of the Association of Danish Mortgage Banks, the rising trend for housing prices continued in the 3rd quarter of 2006, albeit at a slower pace. Furthermore, the number of homes for sale on estate agents' books has risen considerably since February, cf. Chart 5. The year-on-year rate of price increase is still high, but prices for owner-occupied flats in the Greater Copenhagen area stagnated from the 2nd to the 3rd quarter, and a number of factors indicate normalisation of this segment of the housing market after several years of strong price increases. The number of owner-occupied flats for sale has risen strongly in 2006, and it takes longer to sell them. In addition, more and more flats are sold at a reduced price compared to the initial sales price.

In view of the high housing prices, new construction is an attractive alternative, and construction of new flats has risen considerably in 2006, particularly in the Greater Copenhagen area, cf. Chart 6. This expansion of supply has contributed to curbing price increases.

Balance of payments, foreign trade and government finances
Indicators point to a smaller current-account surplus than in 2005. In the first nine months of the year, the surplus totalled kr. 33 billion, which is almost kr. 11 billion less than in the same period last year. The strong domestic demand and limited capacity in the Danish economy have pushed up imports and reduced the trade and current-account surpluses.

Oil prices and energy export values were higher in the autumn of 2006 than at the start of the upswing in 2003. Consequently, the upswing's adverse impact on the trade surplus is illustrated more clearly by the trade balance in constant prices, cf. Chart 7. The Chart shows that the trade surplus in constant prices has been almost halved since the upswing began. However, the surplus is still sound, and the fact that Denmark is a net exporter of oil and gas is not the only contributing factor, since exports of machinery and medical and pharmaceutical products have also risen considerably since 2003. In addition, the balance of payments is positively influenced by increased earnings from sea freight and rising investment income from abroad.

The large government surplus in 2005 gave Denmark a national savings surplus in overall terms, cf. Box 3. The Ministry of Finance's August forecast anticipates a surplus of kr. 50 billion in 2006, equivalent to 3.1 per cent of GDP, but the surplus could very well exceed this amount, as indicated by the larger central-government surplus than expected in September. The revenue from taxation of pension yields varies strongly from year to year. In 2002, it was close to zero, while in 2005 it accounted for 2.4 per cent of GDP, and is around 1 per cent of GDP on average if pension assets remain unchanged. The revenue from taxation of oil extraction in the North Sea may also vary considerably. The Ministry of Finance expects a revenue increase to more than 2 per cent of GDP in 2006 due to the high oil prices in 2006 so far. In the longer term, oil production in the North Sea will decline as the reserves are exhausted. At the same time, government expenditure on pensions, and especially on care of the elderly, will increase as a ratio of GDP in the coming years. In order to balance government expenditure and revenue in the long term, the most appropriate course is to use the present surplus to reduce government debt. Viewed in isolation, this will contribute to improving government finances in the longer term when the pressure on expenditure is expected to increase as a result of an ageing population.

GOVERNMENT BUDGET BALANCE AND SAVINGS BALANCES	Box 3
The government budget balance has improved significantly since the start of the upswing in 2003. In 2005, the government surplus totalled approximately kr. 70 billion, or around 4.5 per cent of GDP, cf. the Chart. The surplus to a high degree reflects the strong economic development, which has led to increased tax revenue. In addition, the extraordinarily high revenue from pension yield tax and the taxation of oil and gas production in the North Sea should also be taken into account, cf. the main article. The government surplus can be attributed to the central-government surplus since the cyclical gains and the extraordinary tax revenue have first and foremost fallen to the central government. The regional and local authorities taken as one have seen increasing deficits in recent years. In 2005, the regional and local authorities posted deficits of respectively kr. 3 billion and kr. 2 billion, according to preliminary data.
SAVINGS SURPLUSES
Source: Statistics Denmark and own calculations.
The private savings surplus has deteriorated in recent years and in 2005 was reversed to a deficit, cf. the Chart.1 This means that the private sector's demand for goods and services was partly financed by reducing financial assets. It is normal for the private savings surplus to diminish during an upswing that is driven by consumption and investments. The private sector comprises both business enterprises and households. The deterioration in the savings balance in 2005 can be attributed primarily to the households, which invested in new homes, and whose consumption increased faster than disposable incomes. The decline in the households' savings ratio in 2005, cf. the text in Chart 4, can be regarded as a relatively modest reaction to the strong increase in home equity. The households' rapidly increasing borrowing has to some extent been offset by higher savings in financial assets, including pension savings. The business enterprises have financed the increasing investments via earnings, and maintained their financial savings in 2005. For a number of years, the sum of private and public savings surpluses has been stable at around 3 per cent of GDP. This overall national savings surplus can, by definition, also be regarded as a savings deficit vis-à-vis abroad, cf. the Chart, and is by and large equivalent to the current-account surplus.2 The balance of payments did not deteriorate to the same extent as was observed during the upswing in the 1990s. The explanation is that the higher revenue from sea freight, and especially from the North Sea activities, has either gone to the public sector as tax revenue or to a great extent remained in the corporate sector without being channelled to the households. Furthermore, the current upswing is characterised by lower growth in the consumption ratio than the development in the households' net worth would otherwise warrant. This has contributed to curbing the deterioration in the private savings balance to a less significant level than in previous upswings.
1   The savings surplus is calculated as savings less real investments and capital transfers, etc., and is a measure of (net) savings in financial claims. The savings surplus is also called financial savings or net borrowing/net lending. 2  Modest net capital transfers, etc. to abroad account for the difference between the external savings deficit and the balance of payments.

Labour market, wages and prices
Employment has risen strongly over the last year, especially in the building and construction sector which attracts labour from other sectors as well as other EU member states. In September, unemployment had declined to 117,100, i.e. 4.2 per cent of the labour force, or 3.5 per cent measured by the EU's harmonised definition. This was the lowest unemployment rate in the EU in September. The lower unemployment rate has increased the pressure on the labour market, and the regional labour market councils report a growing shortage of labour in all sectors in 2006, particularly in the construction and service sectors, cf. Chart 8.

Danish business enterprises and institutions increasingly use foreign labour to counter the shortage. This is e.g. reflected in the number of employees from the new EU member states, which has increased rapidly since the enlargement of the EU in 2004, cf. Chart 9, and accounts for around 10 per cent of the growth in employment in this period. Furthermore, Danish business enterprises have hired a considerable number of new employees from Sweden and Germany. During the first 10 months of 2006, more than 2,500 Swedes took jobs in Copenhagen, i.e. twice as many as in the same period last year. The increased supply of foreign labour is also attributable to the higher number of foreign business enterprises operating in Denmark. The number of VAT-registered foreign building and construction enterprises has risen considerably in the course of the upswing. The number of employees is unknown.

The monthly statistics for work permits issued to citizens of the new EU member states, cf. Chart 9, disclose the number of eastern Europeans employed by Danish business enterprises. There are no equivalent timely statistics for the number of people from the old EU member states employed in Denmark as they do not require work permits. Despite the higher influx of foreign labour, the contribution to the total labour force, especially from the new EU member states, is still modest.

The Danish government has launched a number of initiatives to accommodate the demand for labour, including initiatives to attract more foreign workers to Denmark. The aim of these initiatives is to help Danish employers recruit people abroad, and to provide better information about job opportunities in Denmark. However, it takes time for these measures to have an impact.

The need for more foreign labour in Denmark is emphasised by the fact that the population groups with the highest participation rates are diminishing by approximately 20,000 per annum. This reduces the demographic basis for continued growth in the labour force and employment, cf. Chart 10.

Nevertheless, the labour force has actually increased a little in recent years, which can be attributed to several factors. Firstly, approximately 40 per cent of the rapidly increasing group of 60-64 year-olds are part of the labour force. The demographically determined labour force has thus decreased by only approximately 6,000 per annum since 2003. Secondly, in recent years the participation rate of the over-55 age group has increased. Part of the explanation is the gradual phasing out of the access to transitional allowance. Thirdly, as stated, there has been a considerable influx of foreign labour to Denmark.

Overall, the rising participation rates and the influx of foreign labour have contributed 10,000 people annually, whereby the labour force has increased by approximately 4,000 per annum since 2003, notwithstanding the unfavourable demographic trends.

The participation rates of the older age groups may possibly continue to rise, and initiatives have been launched to attract more foreign labour to Denmark. The labour force will automatically diminish by 6,500 per annum from 2006 to 2010, if the age-determined participation rates remain constant. Maintaining the labour force at its current level therefore requires an equivalent influx of foreign labour or an increase in Danish participation rates, including for the older age groups. The current level of employment is expected to remain by and large unchanged, as it will be difficult to further reduce unemployment.

The shortage of labour is apparent from the wage statistics of most sectors in 2006, especially building and construction. There is a risk of the pressure on the labour market generating higher wage increases. This applies both to the usual local negotiations and to this winter's collective bargaining in several major areas, including building and construction, as well as industry.

Strong increases in unit labour costs will diminish opportunities for continued growth and rising real incomes. The strong, uninterrupted growth in real wages in the last decades has been associated with moderate wage increases, cf. Chart 11.

The tighter labour market and intensified capacity pressure in 2006 have reinforced domestic price pressures, cf. the article on the cyclicality of domestic prices, p. 21ff. Although underlying inflation can thus be considered to be rising, consumer price inflation has been modest in the period. The explanation is that the external price pressure has abated as a consequence of lower energy prices, and in October the consumer price index, HICP, was only 1.4 per cent above the level in October 2005.

All in all, the continued upswing and the expected trends in the labour force and in the employed groups will put the Danish labour market's flexibility to the test.

The shortage of labour also curtails output, which can hardly grow more than productivity. The latter has risen by 1.9 per cent per annum over the last 15 years, measured in terms of GDP per employee. The pressure on the labour market will grow in the light of the expected increase in demand for Danish goods by 2.5-3.0 per cent in 2007.

In the long term, it is in the interest of business enterprises and wage earners to prevent wage increases from jeopardising business earnings. Already at this point, the pressure on the labour market is so strong that there is a considerable risk of detrimental overheating, which will entail excessive wage increases. This tends to reduce competitiveness, so that the Danish economy may risk a hard landing in a few years' time, which could push down employment and cause unemployment to rise.

The Finance Bill 2007 is aimed at 1.3 per cent growth in public consumption, i.e. 0.3 per cent more than in the original proposal. According to the Bill, the fiscal effect is neutral, so government finances will not contribute to curbing growth in domestic demand. This only serves to reinforce the need to increase the supply of labour.