Home > Economic policy, Economics - General > Unemployment: forgotten, but not gone

Unemployment: forgotten, but not gone

February 17th, 2006

My opinion piece in yesterday’s Fin was about unemployment. It’s over the fold.

Unemployment hasn’t been frontpage news for some years now. The main labour market story in the last couple of years has been the emergence, for the first time since the 1980s, or significant labour shortages for some classes of skilled worker.

Despite these shortages, the number of people who are unemployed or underemployed remains very high. The official rate is above 5 per cent, but when various forms of hidden unemployment are taken into account, the true rate exceeds 10 per cent. It seems to have been accepted that a headline rate of unemployment of 5 per cent is the best we can possibly do, though such a rate would have been considered disastrous in the 1950s and 1960s.

But a run of disappointing statistics in recent months should remind us how fragile even that rate might be. Employment has been flat for about six months, and the unemployment rate is rising again. A prolonged slowdown could easily push the rate back up to 7 or 8 per cent, wiping out all the progress made since the Howard government was elected. A severe recession could push the rate all the way back up into double digits.

A characteristic feature of labour markets is that unemployment rates spike rapidly upwards, but decline only very gradually as the economy recovers. When the last boom ended in 1989, the unemployment rate had inched downwards to around 5.5 per cent over six years. It took less than three years to double to 11 per cent during the ‘recession we had to have’.

Although the economy stopped contracting in 1991, unemployment did not even begin to decline until 1994. After a reasonably promising start to recovery, the labour market performed poorly. The reduction in unemployment was significantly slower in the 1990s expansion than in that of the 1980s. Between 1995 and 2003, the headline unemployment rate dropped by only two percentage points, from 8 per cent to 6 per cent.

Fortunately, even slow improvements mount up if they are given long enough to work, and it’s been fifteen years since the end of the last recession. Most discussion of economic policy seems to be based on the premise that Australia is no longer subject to the cycle of boom and recession.

It’s not that hard to identify the crucial difference between the current expansion and previous cycles. In the past, when the economy expanded, it usually wasn’t long before a balance-of-payments deficit emerged. Governments responded by tightening fiscal policy or raising interest rates, and external balance was restored, at the cost of a domestic slowdown. If the tightening was overdone, as often happened, the slowdown turned into a recession.

By this stage in the expansion, on past experience, we should have expected a blowout in the current account deficit, followed by a contractionary policy response and an upward ratchet in the unemployment rate. This time around, the current account deficit has behaved much as usual. If anything, the blowout has been even bigger this time, though its magnitude has been masked by favourable shifts in the terms of trade.

The difference has been in the policy response. Governments and central banks now adopt the ‘consenting adults’ view under which the current account deficit (and its mirror image, the gap between national savings and national investment) is the aggregate of the individual decisions of households and corporation.The current account deficit is merely the flipside of negative household savings and massive investment in residential housing. So, rather than adopting a contractionary policy, the Reserve Bank has assumed that borrowers and lenders are responsible for their own choices.

The ‘consenting adults’ view may well be right, but if the growing imbalances in the Australian economy are not resolved by policy, they will be resolved by market forces. Perhaps this will go smoothly, but we have little recent experience to go on.

If we do experience a recession, and a resurgence of unemployment, the long expansion of the last fifteen years will look, in retrospect, like a wasted opportunity to achieve permanent reductions in unemployment.

The government’s answer, presumably, will be that its WorkChoices reforms will provide the flexibility that has long been missing in Australian labour markets. Yet WorkChoices seems to be at least as much about settling scores with unions as about improving the operations of labour markets. What has been missing for the last decade, and more, is any acceptance of a government responsibility to achieve full employment and any sustained focus on that goal.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

  1. February 20th, 2006 at 07:28 | #1

    But I can’t let Helen’s thing about unemployment pass. Helen, we have followed the ILO definition of “unemployment�, which includes the bit about one hour’s work in the last week, since the late 1960s. Whether you think that a good or bad definition, it does mean we are comparing apples with apples. Figures before the late 1960s *understated* unemployment as they were based on (post 1948) CES registrations and even (pre 1948) union records.

    DD (one of my favourite online nics), I wasn’t trying to make the point that our government is trying to make itself look good in relation to other governments. The fact that the one-hour-per-week system brings us into line with others is irrelevant to me. My point is that “it’s employment Jim, but not as we know it”. When we are told on the evening news that unemployment is down to whatever percent, we tend to assume that “employed” means securely in a reasonable job, not a mickey mouse job involving less than 10 hours per week.

    In other words, the standard may be hunky dory to economists, but it’s become meaningless as an indicator of actual wellbeing to us the proletariat.

    It would be possible to construct an index which looked at the under-employed as well as the unemployed, no?

  2. Bring Back EP qt LP
    February 20th, 2006 at 08:32 | #2

    DD,
    sometime ago when I traipsed the corridors of Parliament and the rest Australia had the lowest participation rate for males 55-65.
    Treasury thought this was because people would retire at 55 live on the super and then at 65 double dip and live on the pension.
    most people then had two pensions ( husband and wife) and IF you owned your own house and only the husband worked this was quite a reasonable income to live on.

  3. derrida derider
    February 20th, 2006 at 09:41 | #3

    No, thats quite wrong BBEP@LP. Oz has a somewhat lower PR for 55-64 males than the OECD average, but by no means the lowest. Also the “double dipping” theory simply has not survived empiric scrutiny – basically, the overwhelming mass of people didn’t, and still don’t, have enough super to do that (which is not to say that it couldn’t be a *future* problem). And in the 1980s and early 90s most married females over 55 had not returned to work after they’d had kids.

  4. derrida derider
    February 20th, 2006 at 09:51 | #4

    Oh, and Helen it certainly is possible to construct an index that includes underemployment – click here for an ABS paper discussing this. The trouble is that, as I noted, its not possible to get a consistent time series going very far back (basically the ABS didn’t used to ask the right questions), so you can’t compare the past with the present easily.

  5. jquiggin
    February 20th, 2006 at 10:19 | #5

    NG.

    I agree that my answer wasn’t entirely satisfactory, though the capital intensity point is more significant than you imply. Human services are much less capital-intensive than the rest of the economy, particularly when compared to alternatives like physical infrastructure.

    My argument is that demand-switching towards human services can increase employment without a concurrent increase in the trade deficit (maybe with some reduction due to lower capital-intensity, but I have to work that through).

    In our current position we need to reduce the trade deficit not just hold it constant. That means we need to increase net savings to achieve long-run external balance. That must mean higher real interest rates, I think, whether these arise from policy-driven adjustments in the short rate, or market driven adjustments in long rates. I think that’s logically separate from my main argument, though.

  6. Bring Back EP at LP
    February 20th, 2006 at 11:19 | #6

    DD,
    I did say that was historical.
    I do remember some conversatons about this topic with Treasury people some 6-7 years ago.

  7. SJ
    February 20th, 2006 at 17:11 | #7

    James Farrell Says:

    SJ

    The reasoning connectng profit income and saving has absolutely nothing to do with supply side economics or the Laffer Curve.

    Yes, I understand that. Your argument is that reducing taxes on the rich will increase saving and reduce consumption. The supply siders argument was that reducing taxes on the rich would increase investment, which would increase GDP, tax receipts, employment, real wages, and consumption.

    The policy prescription in both cases is the same: reduce taxes on the rich.

    The assumptions in the two cases are different, but in both cases are false.

    The empirical evidence in either case shows that the policy prescription does not have the desired effect.

    In your case, you acknowledge directly that your assumptions do not hold: “The recent decline in the overall US household saving rate is largely a consequence of reduced saving by the very rich”, which directly contradicts your first premise. That’s what makes it voodoo economics. It’s “based on unrealistic or delusive assumptions”.

    Yet you advocate the policy regardless.

    Does this suggest to you (it certainly does to me) that in both cases flimsy arguments have been flung together to justify a particular policy?

  8. Voodoo Supply-Sider
    February 20th, 2006 at 17:51 | #8

    All right, SJ, one more try…

    ‘Your argument is that reducing taxes on the rich will increase saving and reduce consumption.’

    No, I made no mention of tax.

    ‘The policy prescription in both cases is the same: reduce taxes on the rich.’

    No, I made no mention of tax.

    ‘In your case, you acknowledge directly that your assumptions do not hold: “The recent decline in the overall US household saving rate is largely a consequence of reduced saving by the very richâ€?, which directly contradicts your first premise.’

    My first premise was that the rich save a higher proportion of their disposable income than the poor. I later noted that this proportion has recently shrunk. These statements do not contradict each other. As long as the rich have a higher saving ratio, even it isn’t as high as it used to be, then a resdistribution in their favour makes the overall saving ratio higher than it would otherwise have been. I can give you a numerical illustration of this if it’s really necessary.

    On the question of ‘policy prescriptions’, see my reply to Carlos.

  9. SJ
    February 20th, 2006 at 18:55 | #9

    James Farrell (presumably) says:

    No, I made no mention of tax.

    OK, OK. I can see that I’ve misunderstood your original statement.

    I withdraw my objections.

  10. Ex Voodoo Supply-Sider
    February 20th, 2006 at 20:11 | #10

    Thank you, SJ.

    Pity, though, in some ways. I was starting to enjoy my new identity!

  11. February 20th, 2006 at 22:17 | #11

    Going back to DD’s point about Helen’s point, and this response from DD:

    But I can’t let Helen’s thing about unemployment pass. Helen, we have followed the ILO definition of “unemployment�, which includes the bit about one hour’s work in the last week, since the late 1960s. Whether you think that a good or bad definition, it does mean we are comparing apples with apples.

    DD, you sure about this? I’m just wondering as I also just read a Vinnie de Paul paper that asserted that:

    official claims are made that the unemployment rate is a low 5 per cent compared to say Germany at 10 per cent or so. But they fail to mention that Australia uses the ridiculous definition of employment as have one hour of work per week. Germany, by contrast, clings to a definition of 15 hours of work a week. On that basis, and taking into account numbers deliberately excluded from labour force data in Australia, our unemployment rate is 10-12 per cent, similar to that of Germany.

    So, tell me, why would Germany not use the ILO definition? Just so it can cop a bagging round the world whenever the issue comes up? Something isn’t right here. Does anyone have any links that will allow us to run this rabbbit down?

  12. Terje Petersen
    February 20th, 2006 at 22:38 | #12

    Terje,

    Your theory of employment generation through outsourcing.

    Actually I think it was JQs theory. I was just talking about the implications that tax had on such a policy aspiration. However I will push through to your other points.

    Each couple incorporates 2 teeth brushing businesses. Corporation A1 brushes the teeth of Corporation A2 at a price and with conditions as described in their AWAs. Teeth brushing services provided amount to 1 hour per week. Unemployment would converge to zero.

    You are not very clear. I assume you are trying to say that two people start businesses brushing teeth and sell the same service to eachother for the same price. That seems unlikely and irrelevant. Nobody would do this with or without tax so I don’t see what point it illustrates. Whereas in the example I gave somebody might realistically sell Karate lessons and then use the money to pay their plumbing bill.

    Now, you say this job creation through entrepreneurial activities that involves outsourcing is prevented (’market distortion’) because of personal income tax and services tax (GST).

    No I don’t. Let me be really clear. If tax was zero I would still find it unlikely that two people would start teeth brushing businesses and sell the service to eachother. It seems absurd.

    Please let me know where I have violated any one of your conditions in your theory.

    Given that the teeth brushing business will probably see zero dollars worth of service with or without taxation then I can say that business has doubled with the ellimination of tax and their would be no contradiction. Two times zero is zero.

    Now, lets look at your example for motivating income tax cuts and cuts in services tax. I’ll take the government sector out (ie zero taxes)

    Your example of someone working an additional 5 hours (possibly at an extraordinarily boring job) to buy 1 hour of accountancy services brings out a problem with ’services’ – some of them are too expensive relative to others. Those on relatively low incomes (and potentially very boring jobs) might act exactly contrary to what you want, namely instead of working an additional 5 hours, as you want, they may wish to work fewer hours than what they are currently working ‘in the market’ to have time to provide services ‘in-house’. (elementary economics: opportunity cost).

    If that is a more efficient use of their time then it sounds like an economic improvement to me. They work less and get more. Some would call that a productivity improvement. In fact if I could stay home and have more I would. Why should we make policies that stop people maximising their utility in this manner. It would seem that you would see some merit in a policy that abolishes weekends or evenings off.

    If tax cuts make people stay home more than great. Obviously that would imply that such people want more time at home.

    I wonder how long it will take for business lobby groups to learn that the optimal strategy is not to lobby.

    Me too.

  13. James Farrell
    February 20th, 2006 at 22:50 | #13

    Chris

    The German Federal Statistics Office publishes unemployment data according to the 1982 ILO definitions, and this is used in all reputable international comparisons. But the Federal Employment Agency also publishes numbers of officially registered unemployed, which are probably used in the domestic discourse to some extent. You can work up to 15 hours in Germany and still be registered. Against that, some hidden unemployed would not be registered, but I expect that on balance the Employment Agency’s figure would be higher.

  14. February 20th, 2006 at 23:10 | #14

    Thanks for that, James.

    Must try to ferret the Agency figure out. It might give us a rough margin to guess the real Oz rate (15 hours strikes me as a reasonable first guess minimum standard, in the real world; but then again, what about a say, 40 hours equivalent comparison?).

  15. James Farrell
    February 20th, 2006 at 23:39 | #15

    An alternative is to get underemployment on the agenda, even if you keep the figures for it separate. There has been work on this of course, for example by Roger Wilkins at the Melbourne Institute (pdf file). An outfit called at Newcastle CofFEE also looks into these matters, for example here. DD would know more, I’m sure.

  16. Ernestine Gross
    February 21st, 2006 at 18:02 | #16

    Terje,

    1. No, there is no requirement that the prices paid for tooth brushing services provided by A1 and A2 are the same (2 contracts).

    2. My question was not whether you consider the situation I described as realistic in your eyes but whether or not it satisfies the conditions of your theory.

    3. Pitty, you let the tax argument slip only because you consider the described situation as unrealistic. (Tax argument: think of transfer pricing).

    4. Your own assessment of the likelihood of the described situation occurring implies that there is a limit on the job creation via outsourcing of services. It is also yet another reminder that growth in GDP is not necessarily a meaningful ‘economic growth’. (I would consider GDP to be a meaningful economic indicator if the ‘structure of the economy’ remains approximately unchanged.)

    5. Incidentally, the mutual tooth brushing business example is consistent with theoretical models of economies with complete markets.

  17. Terje Petersen
    February 22nd, 2006 at 02:36 | #17

    1. okay.
    2. it does not violate any conditions of the theory that taxation discourages trade.
    3. Huh?
    4. I have no real disagreement with you on this.
    5. It is still an unrealistic example with which to explore behaviour. Perhaps its absurdity has some merit, but the point of it escapes me.

  18. Ernestine Gross
    February 22nd, 2006 at 09:53 | #18

    1. In an earlier post you suggested the price for the mutual teeth brushing service would be the same. I suggest many people would consider your suggestion as corresponding to a ‘fair price’. To make the 2 prices consistent with my item 5, (ie two different commodities) one requires that either 2 units of time are involved or 2 locations. Many people would consider this as ‘contrived’. I suggest many people would put forward the same argument in relation to the new industrial relations laws. (The underlying reason is just not as obvious as with the tooth brushing services example.)

    2. and 3. I don’t doubt that you wanted to have a theory from which it follows that taxation discourages trade. But your argument is not a theory but a hypothetical example. I constructed an example, which many people would find ‘absurd’ (because it is not the custom, but PPPs were not the custom 25 years ago). But my example allows for ‘tax induced trade’. Say t = .5, tax free threshhold = $100, A1′s taxable income is $1000 without the tooth brushing service and the tax is .5(900) = 450. A2′s taxable income is $0. A2 charges $100 for the service, A1 charges $1. A1′s taxable income becomes $801 and the tax payable becomes .5(801) = $400.5. A2′s tax payment remains at $0. Their combined tax payment is reduced. This is an example of the tax implication of ‘transfer pricing’. You may say this is not ‘fair’ and many would agree with you because the prices are not ‘arms-length. Yes, but only because something is not ‘fair’ doesn’t mean it doesn’t happen. Where are the ‘arms-length’ prices determined with ‘individually negotiated AWA’s'? and for those of CEOs and those of trades among interrelated companies? I would suggest that your example does not exclude the possibility that the person has to work longer hours in order to pay for what is customarily a necessity and this would not be considered as ‘fair’.

    4. –

    5. I am introducing the notion of ‘custom’ because observations on ‘behaviour’ are difficult to separate from ‘custom’. Changes in the institutional environment may bring about changes in behaviour. Its up to you to form your opinion on the merit of an ‘absurd’ example. I had in mind several topics that are recurring in debates on the blog.

  19. Terje Petersen
    February 22nd, 2006 at 13:34 | #19

    Ernestine,

    1. No I did not say it would be the same. I assumed you were saying it was the same. I had to make some assumptions because I really did not understand your example.

    2 & 3. Yes it was a hypothetical example. Although your inference that I have a theory about tax and trade is correct.

    4. -

    5. Yes I have formed an opinion. You are being absurd or at least unnecessarily difficult. Perhaps you will say something to change my opinion however that is where it stands at present.

    6. Do you find that when you explain concepts to your students a lot of them look confused?

    Regards,
    Terje.

  20. Ernestine Gross
    February 22nd, 2006 at 14:53 | #20

    Terje,

    1. o.k. you assumed the price is the same. This does not change the argument that the number of prices depends on the institutional environment. I believe the aspect of ‘fairness’ is an interesting one. I have yet to meet one person who categorically objects to the idea of a ‘fair exchange’ in trade. The difficulty seems to be how to achieve ‘fair trade’. Institutions are designed by humans. They are not like ‘natural laws’ such as water always runs down-hill. The absurdity of my example does not lie in the activity chosen (mutual teeth brushing) but that there are empirical observations for each of the implications I’ve drawn from the example.
    2 & 3 —

    4. —

    5. –

    6. I did not treat you as a student. Should I change my premise?

  21. February 22nd, 2006 at 23:24 | #21

    I suppose this is a good place to remind people of my favourite starting point to address unemployment, a Negative Payroll Tax which works out in the long run like the negative income tax approach Harry Clarke mentioned, only with more immediate effects and less need for a new equilibrium to be reached first. To make it more interesting, here’s the text of an email I just got from someone else who’s following it all up:-

    Dear mr Lawrence,

    As you refer to professor Swales on your website,
    you might be interested in the below.

    Regards,

    Thomas Cool / Thomas Colignatus
    http://www.dataweb.nl/~cool/

    Forwarded Message:
    > To: [email protected]
    > From: Thomas Cool
    > Subject: DRGTPE on unemployment and taxes
    > Date: Tue, 21 Feb 2006 23:48:59 GMT
    > —–
    > Dear professor Swales,
    >
    > I happened to see some of your work, and conclude that you would be
    > interested in some of my work, for example on the tax void and the
    dynamic
    > marginal tax rate, and the impact of differential indexation of the
    > minimum wage on stagflation. Easiest is that I refer to this link:
    > http://www.dataweb.nl/~cool/Papers/Drgtpe/Index.html
    >
    > Sincerely yours,
    >
    > Thomas Cool / Thomas Colignatus
    > http://www.dataweb.nl/~cool/
    >
    > (Your links:
    > http://en.wikipedia.org/wiki/Minimum_wage
    > http://www.faxfn.org/03_jobs.htm
    > http://en.wikipedia.org/wiki/Kim_Swales
    > http://homepages.strath.ac.uk/~hbs96106/teaching%20staff/kim%20swales.htm
    > http://member.netlink.com.au/~peterl/publicns.html#ECONOPTS)

  22. Terje Petersen
    February 23rd, 2006 at 00:26 | #22

    6. If you are trying to teach me something then yes. As you have previously remarked yourself we are all students. If I can learn something from you then I am most open to the opportunity. Unfortunately you frequently make points that just baffle me.

    I don’t seek to pass judgement as to whether the cause of this communication issue is with you or with me. I rarely manage to figure out if you are debating me because you disagree, if you are trying to learn from me or trying to teach me. I would prefer that the motive was one of the latter two and that any debate was merely incidental to the process.

  23. Steve Munn
    February 23rd, 2006 at 00:35 | #23

    I was interested to see a Tim Colebatch article in yesterday’s “The Age” that notes a decline in the number of full time employed 15-64 year olds since the Howard government was elected. The decline is small but I find it surprising.

  24. February 23rd, 2006 at 02:39 | #24

    No surprise Steve Munn, it is almost impossible to get staff. Potential employees are being chased down by employers, much in the manner of a lebanese restaurant operator chasing down stray bull terriers.

    Monday night is the favourite night, recruiters swarm through my place offering jobs to almost everyone who is sitting at the bar. I have had to bar most other publicans from my place, as they are only trying desperately to poach my staff.

    In such a climate it would be downright amazing if numbers of unemployed had not shrunk.

  25. Ernestine Gross
    February 23rd, 2006 at 17:47 | #25

    Terje,

    I don’t find it easy to reply. But, given your frankness, I feel I ought to.

    Lets start with the easy part. I didn’t say we are all students, I merely spoke for myself. I recall having said something to the effect that it is difficult to be an economist because there is a fine line between contributing to society on the basis of one’s knowledge and remaining non-dogmatic. Everybody is a member of ‘the economy’ and therefore every individual has some (private) information which an ‘economist’ couldn’t possibly have. Still, economists do have some knowledge which not every member of ‘the economy’ has. In a later communication with James Farrell I said something to the effect that in addition to the objective of being non-dogmatic there is the problem of perceptions.

    In my posts, I essentially apply economic knowledge, which the supply siders and economic rationalists ignore, to show up holes or contradictions in their story. So my posts have nothing to do with you as a person. Its entirely up to you whether you want to think through the puzzles or not.

  26. Terje Petersen
    February 25th, 2006 at 14:01 | #26

    Ernestine,

    I am all for puzzles. It is just something in the way you frame things that often makes me miss your point. Often I can’t even find the contradiction that you are hinting at. In the example in this thread I am still clueless as to what you were getting at. Something about brushing other peoples teeth to be sure, however there are obviously a few leaps of logic that are obvious to you but completely obscure to me. So whilst I appreciate any help in seeing flaws in theories the help to date has not helped much.

    I also try and make others see the contradictions in their position. It seem to haver very mixed results.

    Regards,
    Terje.

  27. Ernestine Gross
    February 26th, 2006 at 19:44 | #27

    Terje,

    On an earlier thread you volunteered the information that you are an engineer. On a more recent thread you volunteered the information that you are a paid-up member of the political arm of some libertarian party.

    I suppose your last revelation solves a puzzle.

  28. terje
    February 26th, 2006 at 20:32 | #28

    What puzzle is that then?

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