The government has committed to spending many billions of dollars in stimulating the economy. An important issue is how we evaluate the effectiveness of that spending. An obvious measure is the impact on employment; rather unemployment. Unemployment is currently 5.8% — a level last seen in October 2003. Australian attitudes to unemployment have changed so much that this level is now seen as being high.
It is high; it is high now and it was high in 2003. Unfortunately this figure doesn’t really tell us much about unemployment at all. For example, the participation rate may have changed over time, or the definition of unemployment may have changed.
The notion of unemployment is not just an economic construct; it is a social construct too. How many people are not working out of the population that can be expected to be working? Answering this question requires value-judgements as to what constitutes ‘working’, and who can be expected to be working. As our understanding and acceptance of disability and mental health increases we may decide that certain categories of people may no longer be expected to work.
This gives rise to the criticism that the long-term unemployed are simply being dumped on the disability pension. Some of this may well happen, but how can we be sure? Who is the ‘we’ that makes decisions about definitions of unemployment? The upshot is that the unemployment data are riddled with arbitrary definitions and changes in those definitions over time. This makes time-series comparisons difficult.
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The ABS calculates an Hours Worked variable that is less likely to be distorted by definitional issues, but it may well have other problems. The good thing about this variable is that more hours worked indicates more economic activity, while fewer hours worked means less economic activity. Since the middle of last year there has been a substantial drop-off in the number of hours worked in Australia. This is not unusual or unexpected — the global economy is in recession and the Australian economy has slowed down quite substantially.
What is interesting, however, is that the last few years Hours Worked has been above the long-term trend and Australia has simply returned to trend. That doesn’t mean that Australia won’t overshoot and be below trend, but right now Australian Hours Worked is at the long term trend. That is the fact — the interpretation of that fact is going to be contested.
The government is arguing that their stimulus packages have “saved jobs”. But it is difficult to reconcile that statement with the fact that Hours Worked is at the long term trend. Unless the spending has been so finely calibrated that it has perfectly compensated for a decline in employment it is very unlikely that the stimulus package could deliver this result. In any event there was little unemployment in those areas the government has targeted vis-à-vis construction and education.
It is far more likely that employers and employees have made use of greater labour market flexibility to negotiate reductions in Hours Worked. This is far preferable to laying-off staff – an activity that has substantial fixed costs — and then re-employing them later.
This is one of the advantages of market flexibility; it allows individuals to negotiate terms and conditions that suit local and individual needs. It especially allows them to quickly renegotiate under conditions of unexpected turbulence. Unfortunately, Australia seems to be moving away from greater flexibility in the labour market.
To the extent that decreased labour market flexibility leads to higher unemployment and fewer hours worked this is not a welfare enhancing reform. Had the current global financial crisis occurred next year and not in 2007-8 the employment consequences may have dire. Unemployment at the last recession in the early 90s rose to unacceptable levels and Hours Worked fell dramatically. So far we have avoided this catastrophe but with increased labour market regulation and government intervention we might not next time.
Sinclair Davidson is a professor in the School of Economics, Finance and Marketing at RMIT University and a senior fellow at the Institute of Public Affairs.