Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin

Jobless rate still on track

Australian Financial Review,

September 30, 1996

In an analysis undertaken in 1993, and published in my book, Work for All with John Langmore, I concluded that 'under current policies, unemployment is likely to remain above 8 per cent for the rest of the century'. The strong employment growth experienced during 1994 and early 1995 made it seem likely that this prediction would be rapidly falsified, but so far, rates have remained stubbornly above 8 per cent.

The 1996-97 Budget Papers contain estimates of employment growth until the financial year 1999-2000. Employment is expected to grow by 1.25 per cent in the coming financial year, by 2 per cent in each of the following two years and by 2.25 per cent in 1999-2000. This implies a cumulative growth in employment of 7.5 per cent. The annual trend rate of growth in the labour force, determined by population growth and the long-term upward trend in participation rates is around 1.5 per cent or 6 per cent over 4 years. This leaves net growth of around 1.5 per cent. Between half and one-third of any net increase in employment is absorbed as members of the million or so 'hidden unemployed' return to the labour force. This implies a net reduction in unemployment of between 0.75 per cent and 1 per cent. Thus, on these estimates, the unemployment rate in June 2000 should be between 7.5 per cent and 8 per cent. Since the growth is loaded towards the end of the period, it is doubtful whether the 8 per cent rate will be reached before the turn of the century (arguments that the century does not end until Jan 1, 2001 will be respectfully ignored).

There is of course, a huge range of uncertainty in estimates of this kind. For short periods, it is possible for employment to grow much more rapidly or much less rapidly than would be expected on the basis of observed GDP growth. For example, I made my original prediction at the end of a period of 'jobless growth'. I, and others, misinterpreted this period as a sign that micro-economic reform had permanently increased the rate of labour productivity growth and therefore the sustainable rate of economic growth. Thus, my analysis was based on assumed output growth rates of 4.5 per cent and labour productivity growth rates of 2.5 per cent. Over the long term, both these estimates appear about 1 per cent too high.

The period of jobless growth was followed by a period when employment growth was very strong, and productivity growth correspondingly weak. This period commenced before the One Nation program was introduced, though the program probably helped to accelerate employment growth and particularly to reduce long term unemployment somewhat.

We might therefore anticipate either favorable or unfavorable shocks in the relation between employment growth and GDP growth. On the output side, however there is only downside risk. There seems to be little likelihood that either Treasury or the Reserve Bank will permit 'unsustainable' growth rates in excess of 4 per cent for any long period. On the other hand, there is every risk that either an external shock from, say, a Japanese financial crisis, or an internal collapse triggered by the cumulative effects of tight monetary and fiscal policy will push the growth rate down towards zero and perhaps below. If that happens, we will be looking back at the days of 8 per cent unemployment with nostalgia.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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