The Australian Bureau of Statistics (ABS) announced yesterday that the unemployment rate was 5.7% — down from 5.8% the month before. It is probably too early to crack out the bubbly; that difference is within the margin of error (and the standard error of that estimate is large). But on the positive side, things could have been much worse. We believe that flexible labour markets have contributed to keeping the official unemployment rate down. There are substantial costs associated with sacking staff and naturally business would like to avoid those costs as best it can. This requires the flexibility to reduce working hours, to ‘casualise’ workers, to job share and the like. All up markets perform better when they are flexible than when they are not.

The last 15 years or so have seen massive changes in work practices in Australia. The very notion of a full-time job has been challenged. The idea that someone works 7.2 hours per day for (about) 254 days a year is still the norm but there is far more diversity in employment now than there ever was before. This is all good.

Unfortunately, it makes historical comparisons difficult. There are more people with part-time jobs and it is difficult to compare that over time. Some people are very happy to work part-time, while others would prefer to work more. Of course, many full-time employees would like to work less. The point being that diversity makes generalisation difficult.

To try to better understand what is happening in the labour market we have been looking at the ABS series on Aggregate Hours Worked (table 19 Cat. 6202). At present that figure is at the long-run trend. What we have done is create a variable we call the “effective full time unemployment rate”. We calculate this making the assumption that all employees are full-time workers who work 7.2 hours per day for 254 days per year. We are able to calculate the number of full-time employees that would generate the total number of hours worked. By comparing this to the ABS data on the size of the Labour Force we are able to calculate what the unemployment rate would have been if all workers were full time employees. The graph shows a comparison between our measure, the official ABS calculation and the difference between the two measures of unemployment.

The red line is the ABS measure and the pink line is our measure. To be sure both of these measures are estimated with some error, and have more or less unrealistic underlying assumptions, and the like. Yet they probably represent the two extremes that the unemployment rate could take on. The yellow line is the difference between the two. The point to notice is that the gap has tended to get larger since the mid-1990s.

The exception being the period around 2000; this saw a massive increase in hours worked and is probably related to the Olympic Games, the Y2K bug and the introduction of the GST.

There are two possible explanations for the gap increasing. First it may be due to measurement error and data collection and definition changes. Second it could be due to increased labour market flexibility.

We do not discount the first possibility at all. Definitions of unemployment have changed over time and errors do occur, but we suspect changing work practices and labour market reform is likely to have played a larger role.

During the economic crisis Australian unemployment has not increased to recession levels. The current official rate of 5.7% is a massive improvement on what was expected. Our measure, however, shows something quite different. The effective full-time unemployment rate based on hours worked is almost at the maximum (13.8%) last seen during the early 1990s recession. This suggests that but for the labour market liberalisation of the past 15 years or so that unemployment may well have been much higher than we have actually experienced.

Sinclair Davidson is a professor at RMIT University and a senior fellow at the Institute of Public Affairs. Ashton de Silva is a lecturer at RMIT University.