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What about the unemployed ?

November 21st, 2008

My article in yesterday’s Fin, over the fold was about the need to prepare for rising unemployment

At the opening of Nevil Shute’s 1957 novel, On the Beach, a nuclear war has devastated the Northern Hemisphere. Australia has not been hit, but a lethal cloud of fallout is gradually drifting southwards.

The current economic situation in Australia feels something like that. The evidence of recession in the US has been clear all year, and the EU and Japan have now joined the decline. Yet the impact on Australia has been slow to arrive and is still modest except in the most directly affected sectors.

Unlike fallout clouds, the effects of economic shocks can be mitigated. The slow-motion unfolding of the current crisis, beginning with the breakdown of the US subprime mortgage market in early 2007, has given our macreconomic managers more time than usual to prepare policy responses.

Even so, it seems certain that the days of strongly growing labour demand are over, and that governments will be faced, once again, with the problem of rising unemployment and diminishing job opportunities. If things go well, the increase in unemployment could be modest. But it would be foolish to discount the possibility of a prolonged global recession with the potential for a return of the double-digit unemployment of the early 80s and early 90s.

The Howard government was content to rely on macroeconomic expansion to generate a painfully slow reduction in unemployment rates, from 8 per cent when it took office to between 4 and 5 per cent ten years later. The labour market programs it inherited from the Keating government were scrapped, and replaced, in due course, by focus-group driven initiatives such as ‘work for the dole’.

Such limited measures will not be adequate to respond to the impending downturn. Consideration of active labour market measures aimed at minimising the impact of any economic contraction must begin now if a sensible response is to be achieved.

There are three main classes of active labour market policy: training, wage subsidies and direct job creation. The choice between them depends, in part, on timing.

Most of the timing, training is the best way of making people more employable. To some extent this is also true when a recession or slowdown is looming. If the labour market is weak, the option of staying in school, or of going back to university or TAFE to enhance your qualifications is more attractive. It’s safe to predict that demand for tertiary education places is going to be quite a bit higher for the next year or more. That provides a bigger opportunity for the government to deliver on its promise of an education revolution.

On the other hand, training programs directed at those who are already unemployed are of little use in recessions. When few employers are hiring, those who do so can pick and choose from a pool of experienced and qualified candidates. A training course of a few months, the kind of thing usually associated with active labour market policy, is unlikely to move an unemployed person to the front of the queue.

The choice between wage subsidies for hiring unemployed workers and direct job creation is more complex. Job creation gets a bad name from silly projects exemplified by the (apparently apocryphal) case of ‘painting rocks white’, so they tend to be a last resort. But the alternative of wage subsidies is least effective during the initial contraction phase of a recession, when employers are cutting back or freezing their staff numbers.

It’s precisely at this time when some well-timed projects could do a lot of good. In this respect the recently-announced assistance to local governments looks like a good idea.

Finally, while there are good reasons for governments to pick up the private sector slack as regards infrastructure investment, it’s important to remember that the days of large gangs of workers swinging picks and shovels are long gone. Physical infrastructure projects have many potential merits, but large-scale job creation is not among them.

The biggest employment gains nowadays come from expanding the services sector, and particularly human services such as health and education. The financial services sector has also been an important source of growth since the 1970s, but the jobs being cut there now are unlikely to return for some years, if they ever do.

As we wait for the full impact of the crisis to make its way south, governments need to prepare a range of policy responses. Monetary and fiscal policy will do their part, but we need imaginative responses to avoid a large increase in unemployment.

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  1. rog
    November 21st, 2008 at 19:39 | #1

    I well remember when the NSW Govt indulged in some “well-timed projects” (eg Darling Harbour, Olympics – both being well established white elephants) – by the time the special interest groups were serviced NSW was left with an enormous debt. The construction industry was grateful for the loosening of the purse strings but unfortunately the NSW govt are now so diminished they have to cut into kids bus allowances.

    Another fine mess you have got us into!

  2. billie
    November 21st, 2008 at 22:58 | #2

    The current job network provision by private provider is very ineffective. There are a lot of corrupt providers who do nothing for their clients – the unemployed. Well that’s a bit harsh they provide a regular government cheque to the owner of the private job provider with no oversight or accountability.

    There has been a big increase in the number of people working in casual jobs, these workers are sinking slowly into poverty away from the gaze of the public eye. In Victoria, hospital nurses are often employed casually as are 10% of teachers on any one day. Emergency teachers were paid $200 per day in 1997 when unemployment benefits were aboout $150 per week. Today emergency teachers are paid $216 per day and unemployment benefits are $251 per week, aged and disability pensioners get $281 per week.

    The government must be hoping that there is an increase in casual work because that allows them to avoid taking any action.

    Can I also complain about the fashion to offshore and outsource our IT, financial, accounting work. We are sending jobs offshore leaving no work for our graduates. Now that the world is in recession its going to be more difficult for Australian graduates to get overseas work experience.

  3. November 22nd, 2008 at 10:15 | #3

    I suppose I ought to repeat my comment at Weekend Reflections here:-

    After seeing JQ’s opinion piece in yesterday’s [Thursday's] AFR, I saw a chance to beat one of my favourite drums so I sent in the following letter:-

    John Quiggin’s article “Fallout can be mitigated” (20.11.08, page 70) asserts that “the alternative of wage subsidies is least effective during the initial contraction phase of a recession, when employers are cutting back or freezing their staff numbers”.

    This depends on just what sort of subsidies are implemented and how. Professor Kim Swales of the University of Strathclyde has worked on an approach that applies properly packaged tax breaks to GST in a virtual subsidy. It would not only encourage new hiring down the track but would have a constructive immediate effect, reducing incentives to cut or freeze staff numbers as employers would lose their tax breaks on existing staff or new hires if they did so.

    Professor Swales’s research indicates that not only would employment be encouraged but government budgets would be unaffected and GDP would actually increase – the typical outcome of a Pigovian approach to market failures, here imperfections in the labour market.

  4. stove
    November 22nd, 2008 at 19:31 | #4

    From recent experiences in my own life I can attest to the truth of what Billie has said in #2. Some of the private job agencies are OK, but some are disgracefully lax at doing anything for their clients, who are put in the position of needing to “pull teeth” in order to get action. And the casualisation of the workforce increases, with every appearance of inexorability. How does anyone not a merchant banker (or, I suppose, a tenured academic) plan ahead in financial terms?

    Perhaps we should all go and live in India or Bangladesh, as do, it seems, nine-tenths of the telemarketers who ring me up, and nine-tenths of the customer service staff who (eventually) answer the phone when I ring about my bank account.

  5. TerjeP
    November 22nd, 2008 at 19:50 | #5

    There are three main classes of active labour market policy: training, wage subsidies and direct job creation. The choice between them depends, in part, on timing.

    John – There are other option that we should be willing to look at. ie Tax cuts and labour market deregulation. Now is a really good time to reduce payroll taxes.

    It would not only encourage new hiring down the track but would have a constructive immediate effect, reducing incentives to cut or freeze staff numbers as employers would lose their tax breaks on existing staff or new hires if they did so.

    PML – I’m not generally a fan of subsidies. However having probed you on this argument a while ago I think that all things considered it does have merit. Given that we do have payroll tax I think that a simpler approach might be to simply make the tax free threshold for payroll tax proportional to the number of employees.

  6. gerard
    November 22nd, 2008 at 22:09 | #6

    It’s safe to predict that demand for tertiary education places is going to be quite a bit higher for the next year or more. That provides a bigger opportunity for the government to deliver on its promise of an education revolution.

    A bigger opportunity to FAIL to deliver this revolution, which is more likely. Tertiary education hasn’t even seen a restoration under Rudd, let alone a revolution.

  7. November 23rd, 2008 at 08:42 | #7

    TerjeP (why the “P” these days?), making the tax free threshold for payroll tax proportional to the number of employees would make things less bad but it wouldn’t provide the (virtual) Pigovian subsidy effect. The market imperfection of a disconnect between the hire and fire decision and the burden of unemployment on the economy through unemployment benefits would remain, so there would still be today’s bias towards unemployment.

    You are of course right about subsidies in general, but special cases like undoing imperfections or deliberately buying particular things for strategic reasons do exist. That last can be considered a special case of an imperfection, where the market doesn’t bring out what’s needed to insure against the risk of losing a resource.

  8. swio
    November 23rd, 2008 at 13:47 | #8

    The last major recession in Australia was back in the early 90′s when the idea of high paid and high skill jobs moving to India was in its early stages. Working in IT in Australia today I can tell you that at alot of companies have so much work done out of India that moving work there is almost second nature.

    I had a think about what my company would do to its IT workforce if it suddenly had the need to cut costs by downsizing. I realised that they would get rid of local contractors. Most companies have lots of highly paid (and easily sacked) contractors who could be let go with no redundancy costs at all. If they perform vital work that still needs to be done then that work could be done in India for around 20% less than here.

    In short, a nasty recession in Australia would see lots of high paid contractors suddenly unemployed and at least some of the work they do moved to India.

  9. billie
    November 24th, 2008 at 07:41 | #9

    swio’s comments hide the fact that so many IT jobs have already gone to India the Australian IT industry is but a shadow of its former self. What do retrenched IT staff do? Many of them retired early, some started their own IT companies, some moved into other fields and some now grace the long term unemployed. Almost all live on less income than they could have expected if they had remained employed until retirement age.

    In 1992 Telstra was responsible for a quarter of all money spent on IT in the country. Telstra alone had more than 100,000 employers, all with technical degrees or trades. Telstra also indirectly employed sub contractors who also had technical skills. I estimate that 125,000 skilled IT jobs have left Victoria since 1992.

    Do I think the current downturn will increase the numbers of students studying at university? Yes parents want their children to have a well paid career but as HECS fees increase and skilled jobs disappear or go offshore, people are starting to check whether that teaching or business degree from University of Ballarat appeals to potential employers. These days graduates from lesser universities often have to work part time casual jobs to build up their skill levels to gain a permanent job, so if they graduate at age 22 they are about 27 or 28 before they start permanent work.

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