Date created: 28 November 1996
Last modified: 18 November 1997
Maintained by: John Quiggin
John QuigginMay 1, 1996
The recent statement by Employment Minister Vanstone abandoning any target for unemployment has received very little attention from economic commentators, presumably because most of them share the government's view that unemployment is an issue of no importance. By contrast, a suggestion that the Reserve Bank should abandon or relax its 2 to 3 per cent inflation target would be greeted with outrage.
The previous government's target of 5 per cent unemployment by the year 2000 was little more than wishful thinking. With the exception of the very modest Working Nation program, cut substantially in the 1995 Budget, the Keating government took no action to achieve its goal. Nevertheless, as a French cynic put it, hypocrisy is the tribute vice pays to virtue. The very existence of the 5 per cent target was a reminder of how poor the government's actual performance was. The fact that unemployment was well above the government's target level also served to discourage the use of 'blame the victim' tactics and attempts to balance the Budget at the expense of the unemployed. The latter approach was a central element of Fightback and will presumably be resurrected now.
Since the government has no explicit target on unemployment, it is necessary to look at the detail of the revised Budget projections to make some suggestions as to how unemployment will move. The Willis Budget projected employment growth of 2.5 per cent over the next few years. On optimistic assumptions about participation rates, and assuming uninterrupted growth for the rest of the century, this was barely sufficient to achieve the 5 per cent unemployment target. The revised estimates include projected employment growth of 2.0 per cent. The trend growth rate of the labour force is about 1.5 per cent per year, resulting from growth of 1.2 per cent per year in the population of working age and a long-term increase in participation rates. Hence, the net supply of new jobs will be sufficient to employ about 0.5 per cent of the population each year. Not all of these new jobs would normally go to reduce measured unemployment. As members of the present government pointed out during the election, Australia has a huge problem of hidden unemployment. As many as a million people who would like to work, and would be ready within a month are not actively searching, either because of the state of the labour market, or because of short-term obstacles such as illness. A net increase in employment 0.5 per cent per year will be offset in part by the return of hidden unemployed workers to the labour market. The net reduction in unemployment is therefore more likely to average 0.3 per cent per year. Even on the assumption of no adverse shocks, this means that unemployment will still be above 7 per cent by the year 2000.
The Treasury estimates are based on the assumption of no change in fiscal policy. However, assuming the estimation exercise has any validity, they should incorporate Treasury's best estimates of the impact of labour market reform. Thus, the publication of these estimates represents an admission that the various measures put forward during the election campaign as an anti-unemployment strategy, notably including the repeal of unfair dismissal laws, will either have no effect or will make matters worse.
This is evident in the discussion of industrial relations policy. It is clear that the Reserve Bank and Treasury believe that the labour market reforms proposed by the government are consistent with wage stability only in the context of depressed demand and high rates of unemployment. The Reserve Bank in particular has upped the ante, demanding a more contractionary policy stance in response to labour market reform.
It should not be suggested that, within its proposed policy framework, the government has no options to reduced measured unemployment. Here as in so many other areas, New Zealand has led the way. The NZ government cut unemployment benefits sharply in nominal terms in 1991, as well as restricting eligibility. The result was a flight from unemployment benefits to more attractive forms of support such as invalid pensions as well as a growth in all forms of hidden unemployment. Cuts in unemployment benefits do not translate directly into reductions in measured unemployment. However, recipients of unemployment benefit are much more likely to engage in active job search, and therefore to be classed as unemployed, than are recipients of an invalid pension. The statistical success of this policy may be seen from the fact that, even though New Zealand has had a much poorer record than Australia in employment creation over the last decade, the measured unemployment rate is now a couple of percentage points below that prevailing here.
John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.