Unemployment, Inequality and Public Responsiblity
The Hidden Truth about Unemployment
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Model for full Employment - Introduction
Unemployment, inequality and public responsibility
Professor William Mitchell
Director, Centre of Full Employment and Equity
The University of Newcastle
E-mail: Bill.Mitchell@newcastle.edu.au
Australia’s long period of full employment that followed World War 2 came to an end in
1975 when the federal government abandoned its responsibility for maintaining demand
at levels sufficient to ensure that employment growth absorbed the growing labour force.
Subsequent discretionary monetary and fiscal policy decisions have meant that the
Australian economy, like most others, has been prevented from generating enough jobs to
employ the available labour.
The same policy decisions have also not allowed the economy to generate enough hours
of work to match the preferences of the employed. The result has been persistently high
unemployment and rising levels of underemployment. In 1972 there were more job
vacancies than unemployed. Now there are around 8 unemployed for every job vacancy.
The unemployed cannot search for jobs that are not there!
Despite the long period of robust economic growth since the early 1990s recession, the
Australian economy did not remotely approach full employment. In the last four
economic cycles low point unemployment rates have been 4.6 per cent (June 1976), 5.5
per cent (June 1981), 5.6 per cent (November 1989) and then 6.0 percent in September
2000.
The low point unemployment has steadily ratcheted upwards over successive cycles.
Despite one of the stronger growth rates in the 1990s among OECD economies, the
unemployment trend remains positive. The problem is even worse when one broadens the
measure of labour wastage.
In May 2002, the official unemployment rate was 6.3 per cent. The labour market
indicators developed by the Centre of Full Employment and Equity (CofFEE) at the
University of Newcastle show that if estimated hidden unemployment (workers who want
work but are not actively looking) is included the rate of labour underutilisation jumps to
8.6 per cent. Including the underemployed (part-time employees who desire more hours
of work but cannot find them) pushes the wastage rate to 12.5 per cent.
The cumulative costs in terms of foregone output and the social malaise related to
unemployment are huge and dwarf the costs of alleged microeconomic of inefficiency.
Accompanying the persistently high unemployment in most countries has been increasing
levels of economic inequality. This has manifested in terms of declining employment
opportunities for the least skilled and a wider dispersion of upgrading bonuses which reduced income inequality (and poverty rates). These bonuses
were in the form of productivity improvements, increased working time and labour force
participation rates, occupational upgrading, and rising average earnings for the most
disadvantaged in the labour market.
The considerable labour market deregulation and microeconomic reform since the late
1980s has not only created job losses overall but has also exacerbated inequality. More
fractional employment opportunities with less earnings security are now being forced
onto the employees.
The indicators of poverty in Australia have shifted as a result. In the 1970s, the main
group at risk was the aged without home ownership. Now the youth, the unemployed, the
underemployed and the low-paid service sector workers are the groups at risk. Increasing
numbers of older workers are also induced into premature retirement by disability and
other pensions as a consequence of the lack of available work.
Economists offer several explanations to link joblessness to the rising inequality. First,
technological change has been biased towards higher skilled workers. There is some truth
in this but it does not explain the large shifts away from unskilled job opportunities.
Second, increased competition through trade from low wage countries in Asia has led to
declines in manufacturing in the older industrialised nations. While valid, the shift against
the unskilled has also occurred in the non-traded services sector. Third, significant
changes have occurred in the industrial relations and wage determination machinery that
have disadvantaged the lower paid workers. The growth in individual agreements in
Australia has disadvantaged full-time employees who can earn higher mean and median
wages with correspondingly less inequality under collective agreements. Further,
employees receiving awards only are subject to relatively low wages, as compared to
other employees in the same occupation or industry. Finally, labour market changes
referred to as ‘bumping down’ whereby as job opportunities for lower skilled workers
shrink and more skilled workers enter the labour force the less qualified are driven out of
traditional employment areas by the more skilled employees.
The overriding problem has been the overall lack of jobs and the structural changes that
have occurred have merely exacerbated this situation.
The mainstream response calls for even more labour market flexibility and is epitomised
by the 1994 OECD Jobs Study. But the Federal government’s market-type systems of
employment services and training recently praised by the OECD do not create paid-work
opportunities. Full employment has been replaced with full employability as the
legitimate goal of government. Research from a number of countries suggests that
training programs do not reduce unemployment but rather reshuffles the queue.
The orthodoxy argues that, with the unemployed now more work ready as a result of the
Intensive Assistance offered through the Job Network, further reductions in award pay
conditions and a push towards more common law settlements of industrial disputes will help generate new jobs. The current push in Australia towards substantially relaxing
unfair dismissal legislation is in this vein.The proposal to reduce the relative wage of the unemployed (less skilled) is really just the
traditional wage cutting argument that was discredited during the Great Depression.Research fails to substantiate the hypothesis that wage inflexibility accounts for the
joblessness of the least-skilled. Research also fails to find “wage elasticities” large
enough for relative wage cuts to represent a cure.
The accompanying welfare attacks on the unemployed merely reinforce the underclass
status that joblessness has brought.
What can be done about it? A renewed commitment to full employment requires the
Federal government to abandon its obsession with budget surpluses, which really just
squeeze the wealth of the private sector. Only net government spending can fill the
expenditure gap left by the private sector.
Further, the whole thrust of active labour market policy is predicated on the belief that the
long-term unemployed represent a structural bottleneck that can only be addressed by
supply initiatives like training and welfare reform. But the long-term unemployed benefit
from long periods of demand expansion because firms will lower their hiring standards
and pay the training costs rather than leave positions vacant. Several studies have found
that long-term unemployment is not a separate problem from unemployment in general.
Further, the government must increase its own employment. What is not often noted is
the impact of the decline in public sector employment growth in Australia. In 1973, the
public employment share was around 3 per cent higher than it is now. That amounts to
more than 600 thousand jobs being lost today. In both Australia and the USA, labour
force growth and private employment growth have averaged around 1.9 per cent per
annum since 1970. The major difference between the countries is that public employment
growth in the USA has been proportional to labour force growth whereas in Australia
public employment growth has averaged a paltry 0.6 per cent per annum. This difference
translates into our higher unemployment rate.
While a vibrant private sector is essential for a healthy economy it will never provide
enough work for those who want it. Public sector job creation is the only way we will
return to full employment and reduce economic inequality. The countries that avoided the
high unemployment in the 1970s (like Japan, Switzerland, Austria, Norway) all
maintained a sector that acted as an employer of the last resort.
During the 1950s and 1960s, the public sector played this role in Australia with many
labour intensive opportunities being always available to absorb the low skill workers
when private sector demand was slack. The abandonment of that capacity is largely why
we have had persistently high unemployment and the rising inequality.
A positive step would be for the Federal Government to replace Work for the Dole,
which the Department of Employment and Workplace Relations admits is a welfare
compliance program, with a Job Guarantee instead. The extra cost of paying the
unemployed the safety-net wage is not high and the wasted labour could be given jobs in
community and environmental development areas. The gains in self-esteem and
independence would alone be worth the change.
The hidden truth about unemployment
Professor Bill Mitchell
Director, Centre of Full Employment and Equity
University of Newcastle
E-mail: Bill.Mitchell@newcastle.edu.au
The official unemployment rate is the number most of us look at to see how well the
economy is utilising its willing labour resources. The ABS releases its June figures today.
Unemployment is wasteful so a lower number is good, right? Well, not necessarily! The
unemployment rate is just the tip of the iceberg.
The Centre of Full Employment and Equity (CofFEE) at the University of Newcastle has
developed a set of indicators, which measure all forms of labour wastage. By moving
beyond a narrow focus on ‘official’ unemployment, we provide a much clearer picture of
how things are going. The picture is not pretty.
The labour force comprises all those over 15 years who are either employed or
unemployed. A person is employed if they work at least 1 hour in the survey week. So a
person working part-time who would like to work more hours is counted as ‘employed’
even though they want to work and produce more. This ‘underemployment’ is an
additional form of labour wastage.
And people who really want to work but have given up looking because there are so few
jobs are classified as “not in the labour force” and not counted in the unemployment data.
Economists call these people the ‘hidden unemployed’ because, again, their willing
labour is being wasted.
Why does it matter how we measure the amount of labour wasted? The message from the
CofFEE indicators is simple. In May 2002, the official unemployment rate was 6.3 per
cent. If we add an estimate of hidden unemployment the rate of labour underutilisation
jumps to 8.6 per cent. Once we add the underemployed the wastage rate soars to 12.5 per
cent.
So what is the cost to the economy of squandering 12.5 per cent of available labour? A
conservative estimate is that we are giving up $39 billion per year in lost potential output.
This is around 6 per cent of GDP or $147 week for every Australian family.
The story of the 1990s is that as the official unemployment rate has fallen slowly, the
level of underemployment has risen sharply. Yet just this week, the Canberra-based
Access Economics were telling us that things were looking good.
Access has claimed that Australia will hit “generational low” unemployment rates of less
than 5.8 per cent within the next year. But even the most cursory glance at the data
exposes this claim as nonsense. A generation is around thirty years. So let’s take the time
machine back to 1973 for a reality check.
In 1973, the unemployment rate was 2.3 per cent. Underemployment and hidden
unemployment barely existed. Young people had the prospects of secure, full-time
employment leading to secure and rewarding careers. There were apprenticeships for those with technical skills and plenty of unskilled work for those without qualifications or
a ticket.
In 1973 there were more job vacancies than there were unemployed. Today, eight
unemployed people compete for every job going.
A generation back we lived in a prosperous society in which prosperity was more equally
shared. A number of our elderly lived in poverty but poverty did not afflict the young, the
unemployed and the underemployed as it does today.
In the decade to 1973, real wages grew at an annual rate of 3.5 per cent. For the last 10
years real wages have grown at less than half that rate and an increasing share of our
productivity growth has been siphoned off to profits.
So far from applauding politicians or consultants who say that an unemployment rate of
5.8 per cent is a good thing, we should be ashamed that current policies are depriving our
children of the opportunities that many of us enjoyed in our formative years.
For the Hunter, this shame is magnified because our unemployment is around twice the
national rate. A conservative estimate of the total labour underutilisation rate for the
region runs around 20 per cent!
We might have a great league team but our labour market performance is abysmal. My
colleague, Phil O’Neill recently argued a similar line in this paper. We are not reporting
our research to talk the local economy down. We are reporting data that demands a
drastic and different policy response.
While a vibrant private sector is essential for a healthy Hunter economy it will never,
repeat, never provide enough work for those who want it. Public sector job creation is the
only way we will return to full employment and that means budget deficits.
In 1973, the public employment share was around 3 per cent higher. That amounts to
around 500 thousand jobs being lost today.
The bottom line is clear. Don’t believe politicians or economists who tell you that the
labour market is in good shape or that we cannot afford the public jobs. They are lying
and the time has come for action. The cost of doing nothing is just too high.
