Date created:27/8/04
Last modified:27/8/04
Maintained by: John Quiggin
John Quiggin

Jobless still cast shadow

Australian Financial Review

17 June 2004.

The issue of unemployment has ceased to rank among the principal concerns of voters or political parties. In the most recent Newspoll about voters' concerns, unemployment ranked seventh, just ahead of taxation, though it was still judged as an important concern by 60 per cent of respondents. To judge by political discussion, the issue has a priority even lower than this.

Political debate over employment and unemployment is confined almost entirely to the question of job security. The government has long argued that current protections against unfair dismissal discourages job creation. By contrast, Labor seeks to extend many of the rights of permanent employees to the rapidly-growing proportion of the workforce employed on a casual basis. Labor has also proposed Youth Guarantee aimed at reducing youth unemployment.

With these modest exceptions, both parties are prepared to rely on the policy judgement of the Reserve Bank to provide the macroeconomic conditions for reductions in unemployment. The Bank in turn, while far less dogmatic than some of its counterparts overseas, has adopted a strategy focused primarily on inflation targeting, with stability in output growth as a secondary objective.

This general pattern of benign neglect might seem justified in view of the recnet announcement that the rate of unemployment has fallen to 5.5 per cent, the lowest since 1981. There are, however, a number of reasons why we should not be so complacent.

First, the two figures aren't comparable, particularly as they relate to unemployment among men, still the primary earners in most Australian households. Since 1982, large numbers of men have withdrawn from the labour force, going on to disability benefits, early access to the age pension, involuntary early retirement, or simply falling through the cracks and disappearing from the statistics.

The most clear-cut case is that of disability benefits. Changes in the workforce have meant that even quite mild disabilities make it virtually impossible to secure and hold a full-time job. These changes have more than offset legislative measures aimed at reducing discrimination against people with disabilities.

Adding in those on disability benefits would roughly double the measured unemployment rate today. By contrast, making the same adjustment in 1981 would have added only a couple of percentage points. The comparison would look even worse if other forms of hidden unemployment were taken into account.

Even on the official statistics, the pace of reduction has been painfully slow. After peaking at 11 per cent in 1992, the rate of unemployment fell to 8 per cent in 1995. It has taken nearly ten years to achieve a reduction of only 2.5 percentage points.

And even this reduction has been achieved only following one of the longest expansions in Australia's history. This expansion cannot be relied upon to continue forever.

There is, of course, a self-congratulatory view that the length and robustness of our expansion is due, not to good luck and the good macroeconomic judgement of the Reserve Bank, but to the greater flexibility of the economy arising from microeconomic reform.

This is not the first time such a view has been put forward. Most recently, the impressive boom experienced by the United States in the 1990s was explained in much the same way. Since US labor markets are considerably less tightly regulated than those in Australia or anywhere else in the developed world, this view had a lot of appeal.

It did not, however, prevent the US from going into recession in 2001. And, despite the relatively mild impact of that recession in output, it has not permitted a rapid recovery in employment, which is still far below the level prevailing in 2000.

And it's not necessary to look abroad to see how dubious this argument is. Exactly the same claims about flexibility and dynamism were being made on the eve of the 'recession we had to have'.

The third and final problem is a more direct legacy of neglect. Apart from the brief experiment with the Working Nation program in the early 1990s, Australia has no significant experience with active labour market policy. Labor cut Working Nation back in the 1995 budget and the Howard government scrapped it completely in 1996. The subsequent evaluations were hatchet jobs, designed not to find out what worked and what did not but to show that whole program was a waste of money.

As a result, if we are unfortunate enough to experience another recession, we will have to start from scratch in responding to the resulting unemployment. We had all better hope that the housing bubble deflates slowly and smoothly.

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

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