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John Quiggin

Fallout can be mitigated

John Quiggin Australian Financial Review

20 November 2008

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.

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

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

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