Home > Economics - General > Unemployment on the way up

Unemployment on the way up

March 13th, 2009

This month’s unemployment news was the worst so far in the recession, with the headline rate rising from 4.8 to 5.2 per cent and some of the components looking bad as well (part-time replacing full-time employment, for example). The main good point was that the participation rate rose, so that the increase in unemployment was (in an accounting sense) largely due to people entering the work force, rather than to net job losses.

We are still doing far better than most other countries, and, if a global recovery emerges towards the end of the year, could still get by with only a moderate recession.

The government has reacted promptly with the fiscal stimulus[1], and the relaxation of monetary policy has also helped. But there doesn’t seem to have been much action to develop direct labour-market policy responses to unemployment (I discuss responses to unemployment here). And there’s a real risk that a contractionary budget will wipe out much of the benefit of the surplus (My Fin piece on this will be up soon).

fn1. In this context, I thought Turnbull’s response, treating every piece of bad news as evidence that the government’s policies have failed, while offering nothing positive of his own, has been both incorrect and politically tin-eared.

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  1. Jill Rush
    March 13th, 2009 at 07:11 | #1

    The development of tent cities in California in a return to “Grapes of Wrath” Days shows how bad it can be for unemployment.

    At least Australia has a system which links income support, training and employment programs which helps people find new employment and if they can’t doesn’t leave them destitute and without medical care. If the systems are in place then the stimulus packages will be able to take the edge off sharp human distress.

  2. paul walter
    March 13th, 2009 at 09:42 | #2

    Turnbull’s reponse is typical of the values of the milleiu. As typical as the animalistic backbiting treachary and infighting that has undermined his ability to put any case, fair or foul.
    So (perhaps)there is a God after all and what goes round, comes round.

  3. March 13th, 2009 at 09:43 | #3

    Pr Q says:

    The government has reacted promptly with the fiscal stimulus[1], and the relaxation of monetary policy has also helped.

    The govts fiscal and monetary policies are of secondary importance, more props rather than foundations. They can slow a free-fall but not stop it or reverse it.

    The AUS economy is not in free-fall. Nor will it go into one. It has already passed the three most savage stress tests – falls in equity, currency and commodity values – without falling over.

    But the govt would like us to believe that its policy responses are the economic saviour. And certainly there are plenty of Howard-haters and Costello-contempters who are not inclined to disabuse that notion. (No names, no pack drill!)

    The GFC is founded on govt-subsidized and promoted securitization of sub-prime mortgages, used by the Beltway and Wall Street to lever minorities into the property market. It was a collapse in the property sector that triggered recession. Not the other way around, as is usually the case in most recessions.

    The biggest threat to the economy is initially liquidity crisis as high leveraged borrowers are credit squeezed (margin-called) and then forced into foreclosures and bankruptcy causing asset fire sales. Leading to high-level insolvency crisis as financial institutions go belly up needing bail-outs.

    The AUS metro property market, at least in SYD/MEL/CAN, is not sub-prime. We do not have anything like the US degree of securitization or red-lineable minorities. Our residential property is of higher quality thanks to tighter regulation of credit providing institutions, well-heeled boomer land-lords and high-IQ immigrant renters.

    We can thank Howard-Costello, not Rudd-Swan, for that. (At last, a valid reason to smirk.)

    The fiscal stimulus has delivered very little consumption bang for hand-out buck. Probably more than half was used to amortise debt. Nothing wrong with that but it did not do much by the way of “stimulus”.

    “Relaxation of monetary policy” undoubtedly helped quite a bit. But since most mortgagees were not in stress the relaxation of monetary policy has mostly been used to amortise debt. Alot of positively-geared landlords out there having a quiet chuckle to themselves.

  4. Hermit
    March 13th, 2009 at 09:56 | #4

    In contrast to the ‘temporary challenge’ optimists I think this unemployment is permanent unless the welfare and labour market is restructured. Many former socio-economic high flyers will be permanently grounded. One radical idea is to move to a four day work week which will probably reduce average productivity. Compounding the problem of reduced incomes is a predicted return to high food and fuel prices essentially due to Malthusian limits. If so incomes may have to be systematically rationed. For example an able bodied person may get some welfare and some part time work installing insulation.

  5. jquiggin
    March 13th, 2009 at 10:05 | #5

    Ian McFarlane, has argued, pretty convincingly, that it was the anti-competitive effects of the Four Pillars policy that saved us.

    http://business.smh.com.au/business/four-pillars-policy-saved-us-macfarlane-20090302-8mdt.html

    Costello’s contribution was to reduce six pillars to four, and leave it at that, with the strong support of Labor. Assuming we do escape the worst of the recession, I’m calling this as another instance of “a lucky country, led by second-rate people who share its luck”, rather than as brilliant prescience on the part of the previous government.

    I’d point out that, while we’ve done OK at the aggregate level, lots of individual Australians who piled into superannuation in 2007 with the vocal and financial encouragement of Costello have done very badly indeed.

  6. TerjeP (say tay-a)
    March 13th, 2009 at 10:06 | #6

    We are still doing far better than most other countries, and, if a global recovery emerges towards the end of the year, could still get by with only a moderate recession.

    I blame our current status in this regard on Australias advanced level of neoliberalism (relative to much of the developed world). Our lack of bank regulation and intervention relative to the USA has obviously been a good thing. Not that you’ll hear about it.

  7. March 13th, 2009 at 10:24 | #7

    I am not sure I follow this. We have to some extent ambiguous but basically negative news with regard to employment. We also have a government and a central bank that have indeed carried out the initial, most obvious steps of monetary easing and a fiscal stimulus (necessary but not, as I think we can acknowledge, well-structured).

    What we have not had is, as John himself points out, more narrowly defined jobs-oriented action. We have also blown the surplus. All of this is part of John’s post. The conclusion that one is led to make is that the government has attempted to respond in a creative way but basically failed to do so. Instead, they have fallen back on some kind of a religious belief in money (if we pump money in, no matter how or where, it will the economy is the basic philosophy of the way the stimulus was packaged. What? Why? Don’t you need at least a degree of allocative efficiency?) and doomsday rhetoric.

    Now, apparently when Turnbull points this out it is negative and tin-eared? Isn’t this the conclusion that comes out of your own post, John?

  8. jquiggin
    March 13th, 2009 at 10:52 | #8

    Ilya, the criticisms are coming from opposite directions. I said the government has made a good start but needs to do more. Turnbull opposed the stimulus package, and has proposed no measures of his own.

  9. TerjeP (say tay-a)
    March 13th, 2009 at 11:07 | #9

    The measures that make sense now are the same measures that always make sense. The government ought to minimise it’s burden on the economy by spending wisely and minimally, running a lean tax policy, removing regulations that add more cost than benefit, simplifying compliance etc. The steps necessary to achieve good government are much the same whatever the times. And in terms of a social safety net this already exists but still needs the same reforms that it needed before.

    Our political outlook is too fixated on the idea of crisis. Everything is a crisis requiring a massive infusion of this or a big wack with that. This isn’t the way to achieve good outcomes.

  10. Alice
    March 13th, 2009 at 11:09 | #10

    The retrenchments have only just started this year and unemployment is being revised up daily by someone or other. Isnt it a bit premature to say Australia has “done OK” in this crisis?

  11. March 13th, 2009 at 11:19 | #11

    John, #8, clarified, thanks. I do agree that Turnbull’s position is ultimately untenable. Negative criticism only works for a time but is not sustainable in the long run.

    Terje, #9, re crisis mindset: exactly, this is Rudd’s and Swan’s modus operandi (plus the rhetoric, very poor effort on that front). Everybody needs to calm down a bit and start formulating a set of non-emotive policies, designed to cushion the country through the crisis as much as possible but which also have some longer-term productive value. This is of course much more difficult than simply pumping money into the economy without a second thought.

  12. March 13th, 2009 at 11:28 | #12

    # 5 jquiggin Says: March 13th, 2009 at 10:05 am

    Ian McFarlane, has argued, pretty convincingly, that it was the anti-competitive effects of the Four Pillars policy that saved us.

    The present housing affordability crisis is flip side of our absent financial crisis. This is the fundamental factor. All else – prudential, financial and fiscal policies – are incidental or accidental.

    Its true that the absence a domestic M&A frenzy certainly helped AUS’s financial system from becoming the gigantic Ponzi scheme that emerged in the US. Steve Sailer is, I believe, one of the few who has pointed out the correlation between the CRA and merger-mania in the US financial system. THis facilitated dis-intermediating securitization of risky sub-prime loans, with the resulting top-heavy Masters of the Universe toppling over taking the RoW with them.

    But AUS did not have a massive amount of Jose-come-lately Greater Fools flocking to the property market who could be easily fleeced by Wall Streets predators and parasites. I know that sounds harsh. But I was there in 2006 in Las Vegas and Los Angeles and I saw it happen with my own lyin’ eyes. (Bi-lingual touts flogging condos on the Strip.)

    Instead our property market is of fundamentally higher quality – well-heeled boomer owners and high-IQ renters. The unprecedented immigration rate creates a massive under-catered for demand for metro accommodation in the industrially secure cities of SYD/MEL/CAN.

    This was a Howard-Costello (and probably Frank Lowry) policy. Not that much to do with the mining boom. More about getting bums on seats for retail and realty turnover.

    Of course a return to double-digit interest rates would see our bubbly housing market popped with a bang rather than whimper. But that does not seem to be on the horizon.

    Pr Q says:

    Costello’s contribution was to reduce six pillars to four, and leave it at that, with the strong support of Labor.

    This does him insufficient justice. Costello was Treasurer when (post-1997) the Wallis Committee’s prudential regulatory reform recommendations were implemented. This probably prevented a repetition of the standard entrepreneur-led commercial property bubbles with gigantic holes in the CBD. (Except in the Gold Coast, of course. C’est plus ca change, eh?) A case of once-bitten twice-shy for the less glitzy parts of the market.

    Pr Q says:

    I’d point out that, while we’ve done OK at the aggregate level, lots of individual Australians who piled into superannuation in 2007 with the vocal and financial encouragement of Costello have done very badly indeed.

    Acknowledged. Its a relief for me to say that well-heeled whitey is perfectly capable of being the Greater Fool if a sufficiently juicy carrot is dangled.

    Howard-Costello’s biggest economic stuff-ups encouraged wasteful speculation in property and equity markets:

    – the halving of the CGT rate on RIP

    – waiving income tax on the great 2006-07 superannuation asset dump

    There has and will be falls in asset prices as a result of this. But not a crash, I venture to predict.

    Pr Q says:

    Assuming we do escape the worst of the recession, I’m calling this as another instance of “a lucky country, led by second-rate people who share its luck”, rather than as brilliant prescience on the part of the previous government.

    Forgive me but this does sound like someone who has chewed a few sour grapes over a wrong call. Pr Q has been making gloomy predictions about asset price bubbles for almost a decade. So, on a much less-brainy level, have I.

    We were both right, indeed werent bearish enough, when it came to the RoW. But we were too bearish in regards to AUS.

    Sometime late last year I realised that AUS property market was a different kettle of fish. Mostly after a long bout poring over Christopher Joye’s very professional work on this problem.

    Undoubtedly our biggest stroke of luck is the PRC, both as regards cheap capital and consumer imports and dear mineral exports. Pr Q correctly identified this some years back (cant find the link). But this opportunity was well-managed by Howard-Costello.

    Luck, as we know, evens out in the long run. Eleven plus years (including Howard-lite “mini-me” Rudd) is an awful long lucky streak.

    Jack Nicklaus anecdote: Nicklaus holed out in chipping practice three times in a row. An on-looker exclaimed “Gee your lucky!” Nicklaus turned to him, face streaming with sweat, and replied: “Yeah, and the more I practice the luckier I get.”

  13. David Peetz
    March 13th, 2009 at 12:16 | #13

    John,
    Regarding this comment:
    “The main good point was that the participation rate rose, so that the increase in unemployment was (in an accounting sense) largely due to people entering the work force, rather than to net job losses.”

    I think that the rise in the participation rate is not so much due to people entering the workforce, as to people not leaving it.

    The sharp drop in the value of superanuation assets has led a number of people to rethink their retirement plans. Some have re-entered the wokforce after having just retired because the value of their nest egg was diminished so much (I know that is happening in the mining industry at least). More commonly, people would have delayed their retirement plans for a year or three until they have built up enough again to retire.

    February figures aren’t out yet. But between January 2008 and January 2009, the change in the participation rate for age groups below 45 ranged from a drop of 3.8% to a v small rise of 0.2%. But for all age groups over 45 the part rate rose, for 55-59 year olds by 1.2% and for 60-64 year olds by 3.1%.

    (Over the previous 12 months, to January 2008, participation rates for all age groups rose by between 0.1 and 1.6%, and the older age groups rose by no higher than the younger ones.)

    Of course sampling error might play in role in monthly figures, and we await more data, but these numbers are consistent with the ancdotal evidence.

    So I suspect the rise in the part rate is probably due to retirements no longer offsetting (seasonally adjusted) new entrants into the labour market. The unemployment rate may end up higher than anticipated in no small part due to countercyclical (rather than the normal procyclical) movements in the participation rate during this recession.

  14. Ikonoclast
    March 13th, 2009 at 12:25 | #14

    The behaviour of Turnbull has left me wondering. Is he a dolt or does he just think we are dolts? His lowest common denominater populism works against all logical attempts at analysis of the crisis.

    I’m sure more than half the electorate knows this isn’t “Rudd’s Recession”. By taking such a spurious basic position, Turnbull denies himself the opportunity of making valid criticisms of Rudd’s responses. Valid criticisms do exist for Rudd’s response is not perfect.

  15. March 13th, 2009 at 12:42 | #15

    Since posting this at “responses to unemployment,” I have found that Nobel winner Edmund Phelps made suggestions similar to those of Professor Kim Swales at about the same time, which he wrote up in a book “Rewarding Work” (pun intentional, I’m sure). The book isn’t fully available on the internet, although google books has chunks, but you can get the gist of Phelps’s proposals from a statement he gave to the US National Commission on Economic Growth and Tax Reform on 29.9.95.

    Under present circumstances I would recommend implementing the Swales variant for Australia, since that taps into the GST which is already in place, only without raising the GST rate to keep it short term revenue neutral/long term budget neutral. That way there would be a stimulus effect. Instead, some other change(s) should be made elsewhere in the whole tax system to rebalance things, ideally as an “automatic stabiliser” that would cut in as, when and if things picked up. It would preferably work in a way that provides incentives for the sort of private saving that actually does flow through to genuine investment. My main submission to the Henry Tax Review will incorporate this.

  16. Bruce Littleboy
    March 13th, 2009 at 13:03 | #16

    One way to target stimulus to small business would be to raise the revenue threshold at which GST is payable.

  17. March 13th, 2009 at 15:54 | #17

    In essence the Keynsian-Minsky solution requires the government to regulate two antagonistic yet vital functions to remain in operational balance:

    – financial: begin long de-leveraging to safe gearing ratios, requires increased private saving

    – fiscal: remain spending at full-employment growth levels, requires increased public spending

    Because private sector incomes are, by definition, not growing fast enough to finance higher saving and spending at the same time it follows that the public sector must take up the slack by increasing public spending and debt.

    Public debt therefore substitutes for private debt, leaving the overall long term debt level in balance. (Implying a long-term rise in tax rates to cover the short term increase in public indebtedness.)

    Razor gangs are therefore NOT indicated.

  18. Alice
    March 13th, 2009 at 19:30 | #18

    A non working mum I know is looking for a job because her husband is worried about his. Dont forget the reserve army when the going gets tough in the labour force as a reason for the increase in the part rate. We women – are resilient creatures. We know when to pitch in and we can see it before the economic pundits, plus we are usually cheaper so they substitute us in down times! Did anyone ever say women dont have a handle (the main handle) on the purse strings in most households??

  19. TerjeP (say tay-a)
    March 14th, 2009 at 22:26 | #19

    I’m sure more than half the electorate knows this isn’t “Rudd’s Recession”. By taking such a spurious basic position, Turnbull denies himself the opportunity of making valid criticisms of Rudd’s responses.

    Yes but it is the other half of the electorate that knows next to nothing about government, economics or politics that decides elections. “Rudds Recession” is good politics even if a bit rough with the truth. However Rudd is more than keen to blame it all on John Howard which is also rough with the truth. Neither side is terribly interested in an informed public debate.

  20. Monkey’s Uncle
    March 14th, 2009 at 22:58 | #20

    Jack says “The AUS economy is not in free-fall. Nor will it go into one. It has already passed the three most savage stress tests – falls in equity, currency and commodity values – without falling over.”

    But one of the biggest stress tests, especially on household budgets and balance sheets, will be a significant fall in real estate values. This has only just begun in much of the economy, but almost certain has a lot further to go.

    As for the fall in commodity values, this has not entirely filtered through the economy yet. It won’t be until the end of the current financial year that many resource contracts will be up for renewal, and so the effects of a sharp fall in commodity values will be seen.

    As a nation highly dependent on exporting natural resources, and with a highly leveraged household sector and high levels of foreign debt, Australia was always going to be more vulnerable to a global economic downturn. The notion that Australia is somehow in a stronger position than other countries was always a crock designed to fool a naive populace.

  21. Monkey’s Uncle
    March 14th, 2009 at 22:59 | #21

    typo: the second sentence of the second paragraph should read “this has only just begun in much of the country, but almost certainly has a lot further to go”.

  22. sdfc
    March 14th, 2009 at 23:19 | #22

    April is when the iron ore and coal contracts are up for renewal MU. Rio and Xtrata have reportedly negotiated thermal coal contracts with a Japanese customer in which it has accepted a 44% cut on current levels. So look out.

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