Australian Labor Government abandons its roots

Last night (April 13, 2011) the Australian Prime Minister Julia Gillard gave a speech to the right wing think tank – the Sydney Institute – entitled The Dignity of Work. The Sydney Institute has taken positions in the past which include supporting the labour market deregulation (removal of trade union privileges); financial deregulation; need for budget surpluses in times of prosperity; privatisation; welfare reform (emphasising private solutions); the expansion of private education at the expense of public education and more. So it is a strange place to give a lecture on the dignity of work. The labour market policies which the Sydney Institute has supported have undermined workers’ rights, held back the growth of real wages, and been responsible for a massive redistribution of income from wages to profits over the 20 or 30 years.

While my political commentary is in my guise as a layperson (not being a political scientist), the choice of venue given the tenor of the speech was deliberately designed to play into the hands of the conservative neo-liberal element in Australia.

The Labor Party, now in federal government, formerly the political arm of the trade union movement and formed during the 1890s when there was massive industrial turmoil, is now a neo-liberal organisation that demonstrates by its actions that it only seeks to manage the 24-hour news cycle and dance to the tune set by the constant opinion polling with one goal in mind – to remain in power.

They now will turn society on the most disadvantaged people in our society by constructing false dichotomies – for example, those who want to work and those who want to “bludge on the taxpayer” – just to stay in power.

They talk about opportunity for all and equity yet they are boasting a legislative agenda that denies the opportunity for a million people to work and enjoy independent income security.

This speech is a disgraceful but artful demonstration of how far from their roots the Labor party has strayed. And their political day of reckoning has already started. They lost the federal election and clung onto government courtesy of some independents who are really conservatives. They lost the Victorian state election last year and a fortnight ago were decimated in the NSW state election (with a record swing against them).

The point is that the conservatives will never embrace them because the politicians are not members of the elite clubs and networks. The progressive voices (such as it is) is withdrawing support and, instead, backing The Greens, even though that party has neo-liberal macroeconomic policy stances which would negate their capacity to pursue their progressive social and environmental agenda should they ever got power.

So by following a neo-liberal path, the Labor Party are guaranteeing their demise as a party that can govern in its own right. Unfortunately, it hasn’t come quickly enough for my liking.

The Prime Minister provided some neo-liberal gems last night when talking about welfare dependence.

She said:

The long term story of the Australian economy is a story of strength. A story of twenty years of continuous growth.

Not true, December 2009 real GDP declined by 0.9 per cent and in December 2000 it declined by 0.4 per cent. But moreover even at the peak of the last growth cycle (February 2008), the total labour underutilisation rate (sum of unemployment and underemployment) was 9.9 per cent which was an underestimate of the total number of workers prepared to work who were unable to find it.

The current rate is 11.9 per cent. Over the growth cycle the Australian economy largely substituted casualised part-time jobs for unemployment. I do not call reducing unemployment by creating underemployment much of a trade-off.

Overall, the Australian economy does not present itself as a story of strength that is inclusive and capable of creating opportunities for all. It is not a strong economy that wastes 10 per cent of its available workforce (at least) even in the best of times.

Gillard continued:

And our economy is not just creating wealth, it is creating work as well.

More than thirty thousand jobs last month, more than 750 000 jobs since Labor took office.

The figures she quotes are net employment changes. In fact, the economy creates many more jobs than the stock measures in the Labour Force indicate. At the same time, it also destroys thousands of jobs every month. The labour force figures she is referring to are net. I will come back to a discussion of gross flows (job creation and job destruction) soon.

She went on to lay out the “mining boom of the century” rhetoric that is now a daily occurrence in Australian public discussions. We are allegedly going to be all wealthy as long as we reduce public net spending and attack those on welfare to make room for the mining sector which by any measures provides very little direct work and adds (with multipliers) around 5 per cent to national income (real GDP growth).

Gillard then said:

If we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again. That means hard decisions lie ahead.

This was in reference to an article that the Treasurer wrote last weekend which I plan at some stage to comment on. The way they have skewed the message of Keynes is rather breathtaking. It also hinges on their promotion of the erroneous NAIRU-version of full employment. According to this idea the Australian economy is now at full employment and staring at the inflation barrier.

Last time I examined the data we had around 1.5 million workers at least without enough work and core inflation was falling.

But if you say something enough someone will start to believe you. The government is promoting the myth that we are full employment (or extremely close to it) because it gives them – in their version of the world – the justification for pursuing budget surpluses.

Gillard said:

We are entering a period of record fiscal consolidation.

We will keep a tight rein on spending to return the Budget to surplus … We have put in place a strict spending cap, which will limit average annual real spending growth to around ¾ of one per cent from 2010-11 to 2013-14.

So classic neo-liberal rhetoric not remotely connected to the narratives provided by Keynes despite the Labour leaders trying to use his name as a symbol of progressiveness. It is sickening really how far this lot will go to revise history just so they can run their narrative that they are the party of the workers and equity.

They abandoned that status some years ago (after 1975).

Gillard then said something that I could agree with (at one level):

When the private sector was in retreat, the government stepped forward to fill the gap and over coming years as the private sector recovers strongly, it is the right time for the government to step back.

If government doesn’t step back when the private sector employs more people, spends more money and builds more projects, we will be chasing the same scarce resources, driving up prices and adding to the inflationary pressures arising from the investment boom.

If the economy was at full employment (that is “chasing the same scarce resources”) and private spending growth quickened and the public-private mix of resource usage was advancing public purpose then yes – the government has to allow its budget deficit to fall (either cyclically and if that is not enough to ease back behind the demand-pull inflation barrier then discretionary cuts (in the structural component) have to be made.

If, if and if!

The point is that private spending growth per se does not automatically signal that the fiscal position has to become contractionary (that is, cut back net public spending).

While the economy has idle productive resources then cutting back net public spending is vandalism and contrary to public purpose.

So when the Prime Minister followed that claim with the conclusion that “(t)he time for government to step back is in this Budget” I conclude they are acting contrary to all the ideals they claim they stand for and which historically they actually represented in policy space.

Now is definitely not the time to be cutting back. Real GDP growth is flat and well below that required to absorb the unemployed back into work and provide more hours of work for the underemployed.

The Labour Market is still not performing strongly and … there are 1.5 million available workers (approx) idle!

The speech rattled on about “hard decisions to prevent greater pain in the long term” and how we need to “bolster productivity and balance growth”. All largely meaningless blather.

But the most offensive part of the speech – the macroeconomic ignorance notwithstanding – came when she came to discussing welfare reform.

Despite claiming earlier we were at the inflation barrier, she acknowledged that many regions (within our major and regional cities) have very high unemployment rates.

She then said that the Government was about providing actions:

… to increase participation.

I keep getting asked about this in Radio interviews – it goes something like this:

Interviewer: How are we going to get these idle Australians to participate?

Bill: You mean the unemployed?

Interviewer: Yes.

Bill: They are already participating … to be unemployed you have to pass strict activity tests.

Interviewer: But they are not working but can work …

Bill: By participating they are indicating a desire to work immediately. The point is there are not enough jobs.

Interviewer: But there are plenty of jobs …

Bill: In what part of outer space are you talking about!

I am really annoyed by this deliberate misuse of terminology with the aim of vilifying people who are victims of an economy that doesn’t produce enough jobs and is being held back from doing so by a neo-liberal federal government who could provide the requisite jobs virtually without delay.

The UNEMPLOYED ARE PARTICIPATING – THEY JUST CANNOT FIND ENOUGH JOB BECAUSE THERE AREN’T ENOUGH BEING GENERATED.

The Prime Minister claimed that she believed that:

… everyone who can work should work.

Agreed.

Then:

The social and economic reality of our country is that there are people who can work who do not.

Agreed.

Then:

We know there are 230,000 people who have been unemployed for more than two years.

That there are 250,000 families where no adult has been working for at least one year.

And that the youth unemployment rate is still double the overall unemployment rate.

Agreed. Ask yourself why?

She then said that:

It’s not right to leave people on welfare and deny them access to opportunity. And every Australian should pull his or her own weight.

It’s not fair for taxpayers to pay for someone who can support themselves.

First, it is not right “to leave people on welfare and deny them access to opportunity”. Which the current Government policy is achieving by running excessively tight fiscal positions.

Second, “every Australian should pull his or her own weight” if they can and if there is an opportunity to do so.

Third, Australian taxpayers support no-one but themselves and their families by virtue of their private spending decisions. Please read my blog – Taxpayers do not fund anything – for more discussion on this point.

But in general, the Federal government should not provide income support to anyone who can support themselves.

But that is as far as our understandings converge.

Gillard then signalled that “the Government will put improving work incentives in our tax and transfer system” starting with the upcoming May budget.

So standby for an all out attack on those on unemployment benefits – which this government has kept below the poverty line. Please read my blog – Why are we so mean to the unemployed? – for more discussion on this point.

So it is getting easier to obtain a job in Australia?

In February 2008, the previous cycle reached its low-point in terms of the unemployment rate (4 per cent). The recession saw it rise 1.8 percentage points to 5.8 per cent by May the following year (2009) and it hovered around that rate until October 2009. It then has steadily falling back to 4.9 in March 2011.

But does this mean it is now easier to get a job in Australia? The answer can be found using Gross Flows analysis.

In this blog – What can the gross flows tell us? – I outlined the way in which we can use gross labour flows to assess developments in the labour market. For more technical information, please see this blog – The labour market is turning … down!

One way of viewing the labour market is in terms of the gross flows that occur each month between the different labour market states. Just focusing on net results such as how much employment changed by obscures the fact that there is continuous flow going on with workers moving between full-time and part-time jobs, unemplyoment and not in the labour force (that is, non-participation). These strength of these flows and their direction vary over the business cycle.

Gross flows analysis allows us to trace flows of workers between different labour market states (full-time employment; part-time employment; unemployment; and non-participation) between months.

We can see also compute so-called transition probabilities. In this context, transitions are changes of state (for example, a shift from unemployment to full-time employment) and the probabilities which are computed for each of the these changes are called transition probabilities.

So if a transition probability for the shift between full-time employment to unemployment is 0.05, we say that a worker who is currently employed full-time has a 5 per cent chance of becoming unemployed in the next month. If this probability fell to 0.01 then we would say that the labour market is improving (only a 1 per cent chance of making this transition).

The following table – Gross Flows matrix – shows the schematic way in which gross flows data is arranged each month – sometimes called a Gross Flows Matrix. Here FT refers to full-time employment, PT to part-time employment, U to unemployment and N to not-in-the-labour force. The subscripts t and t-1 refer to the current month and the previous month, respectively.

The element FT to FT tells you how many people who were in full-time employment in the previous month (t-1) are in full-time employment in the current month (t). Similarly the element FT to U tells you how many people who were in full-time employment in the previous month (t-1) are now unemployed in the current month (t). And so on. This allows you to trace all inflows and outflows from a given state during the month in question.

The transition probabilities are then computed by dividing the flow element in the matrix by the initial state. For example, if you want the probability of a worker remaining unemployed between the two months you would divide the flow (U to U) by the initial stock of unemployment, U_t-1. If you wanted to compute the probability that a worker would make the transition from full-time employment to unemployment you would divide the flow (FT to U) by the initial stock of full-time employment, FT_t-1. And so on. So for the 4 states we can compute 16 transition probabilities reflecting the inflows and outflows from each of the combinations.

We can also consider the transitions in terms of the major aggregates as presented in the following Gross Flows Matrix. For example, the element EE tells you how many people who were in employment in the previous month remain in employment in the current month. Similarly the element EU tells you how many people who were in employment in the previous month are now unemployed in the current month. And so on.

The transition probabilities in this case are also computed by dividing the flow element in the matrix by the initial state. For example, if you want the probability of a worker remaining unemployed between the two months you would divide the flow (U to U) by the initial stock of unemployment. If you wanted to compute the probability that a worker would make the transition from employment to unemployment you would divide the flow (EU) by the initial stock of employment. And so on. So for the 3 Labour Force states we can compute 9 transition probabilities reflecting the inflows and outflows from each of the combinations.

So is it getting easier to get a job in Australia? Julia Gillard just thinks it is a problem of welfare system design. I think the entrenched unemployment is a problem of not enough work.

The following table shows the aggregate (9-element) gross flows matrix for three transitions: (a) February 2008-March 2008 – which was the turning point in the last business cycle; (b) September 2009-October 2009 – which was the month that the unemployment rate peaked in the downturn; and (c) February 2011- March 2011 – the latest data available.

An employed worker is now more likely to remain employed than in February 2008 (as the cycle was turning). They are no more likely to become unemployed and are less likely to leave the labour force.

For an unemployed worker, they have less chance now of gaining a job than in February 2008 (0.234 compared to 0.263) although things have improved a bit since the trough (0.209). They are much more likely to remain stuck in unemployment. Their labour force exit likelihood is now lower.

The following dis-aggregated gross flows matrix allows us to decompose the employment transitions in and out by full-time and part-time to get a better idea of whether things are really improving for the unemployed.

The transitions between the employment states are similar when compared to February 2008 although full-time workers are more likely to remain in that state.

An unemployed worker is now much less likely to enter full-time employment compared to February 2008 (0.098 versus 0.11) but more likely to enter part-time employment (0.136 compared to 0.132).

They are more likely to remain unemployed though 0.548 compared to 0.543.

Things have improved slightly since the bottom of the trough but are still not as favourable as at the top of the last cycle and at that point we still have nearly 10 per cent of our available workers unemployed.

Conclusion

Which ever way you cut it, the fact is that there are not enough jobs at present and the unemployed are less likely to gain employment than at the peak of the last cycle.

In an environment where the macroeconomy fails to generate enough jobs it is fraudulent to claim you are advancing opportunity by attacking welfare support and making the life of those without work even more miserable than it already is.

The fact that a Labor government is running full steam ahead of “welfare reform” is evidence that they have lost the connection with their roots. They have adopted the neo-liberal policy paradigm which is anti-equity and anti-public.

That is enough for today!