Is Labor to blame for the rise in the Australian unemployment rate? – Of-course it is!

There was an article in the UK Guardian (Australian) edition last week (September 27, 2013) which carried the title – Can Labor be blamed for rising unemployment?. The Labor government, which was tossed out of office in Australia on September 14, had been in power since late 2007. They inherited an unemployment rate of 4.4 per cent (which dropped 3 months later to 4 per cent on the tail end of the growth phase), an underemployment rate of 6.2 per cent (total labour underutilisation rate of 10.7 per cent), a participation rate of 65.6 per cent and an employment-population rate of 62.7 per cent. By the time we got sick of them, the unemployment rate was 5.8 per cent and rising, the underemployment rate was 7.8 per cent and rising (total wastage was 13.7 per cent and rising), the participation rate had dropped to 65 per cent (some 114 thousand workers exiting the labour force because of the lack of jobs), and the employment-population ratio had dropped to 61.2 per cent (a loss of 285 thousand relative jobs). The labour force increased by 1147 thousand over this time but employment only rose by 934 thousand, which meant that unemployment rose by 161 thousand more than if the relative scales had been maintained from November 2007. So is Labor to blame for this? Of-course it is – it was the currency-issuing government for 6 years or so. Any rise in the unemployment rate is the fault of the national government because it alone as the complete capacity to offset any reductions in employment arising from other sources such as global financial crisis, the slowdown in the Chinese economy, an appreciated Australian dollar and whatever else. The author of the Guardian article, while mounting a reasonable fight against the conservative view of the changing labour market, feels unable to admit that basic truth. So the Labor Party is obviously to blame because it was in government and could have prevented the rise in the unemployment rate.

The Guardian article is written by Matt Cowgill, who works as a researcher for the Australian Council of Trade Unions, although he is careful to point out that the opinions expressed are his own rather than the endorsed views of the ACTU. However, the views are closely aligned with official ACTU statements and views privately expressed to me by various officials and so the disclaimer is really splitting hairs.

The point is that the ACTU is the peak body of trade unions in Australia and seeks to defend the wages and conditions of union members. It has long opposed the mindless conservative IR claims that workplace regulations (health and safety, job protection, overtime rates, weekend rates, etc) undermines employment.

It is closely aligned with the Australian Labor Party.

For overseas readers, the Labor Party began as the political arm of the trade union movement after severe attacks on union rights by employers in the big strikes in the late C19th. It was a classic social democratic party with socialism as a key national policy platform. So evolution rather than revolution.

It opposed state aid for private education, promoted full employment with liberal social transfers and guaranteed trade union rights (freedom of association etc).

This Australian Labor Party wiki page provided background if you are interested.

The early roots of the party come out of the development of trade union in the 1860s before federation. The problem was that the power elites controlled the legislature and thwarted the attempts by unions to improve the circumstances of the workers.

Then came the 1890 maritime and shearers’ strikes which were dealt with harshly by the employers. As a response to the industrial defeat at the hands of capital, the striking shearers formed the Australian Labor Party in 1891.

By 1899, the first Labor government took office in the State of Queensland. The federal organisation formed in 1901 and ran a platform of democratic socialism although the substance of that ideology has always been questionable despite the popularism.

The commitment to socialism was not very well defined though and the party was not dominated by left-leaning trade unionists. It is often thought that trade unions provide most of the funds for the ALP while the corporate sector funds the conservatives. Examining the data will give you a very different picture of the funding sources and distribution of the major parties.

The fact is that the corporate sector provide a higher proportion of the ALP funds than the unions and only slightly less in absolute terms than what it contributes to the conservatives.

Vladimir Lenin made the following observation about Australia in 1913 (In Australia, Collected Works, Progress Publishers, Moscow, Vol. 19):

What sort of peculiar capitalist country is this, in which the workers’ representatives predominate in the upper house, and until recently did so in the lower house as well, and yet the capitalist system is in no danger?

The Australian Labor Party does not even call itself a socialist party. Actually it is a liberal bourgeois party, while the so-called Liberals in Australia are really conservatives.

Capitalism in Australia is still quite youthful. The country is only just taking shape as an independent state. The workers are for the most part emigrants from Britain. They left when the masses of British workers were Liberals …

The leaders of the Australian Labor Party are trade union officials, everywhere the most moderate and capital-serving element, and in Australia altogether peaceable, purely liberal.

Not much has changed today, except the centre of the political spectrum has moved significantly to the right and the Labor party has gone with it.

But the links between the trade union movement and the ALP via the factions and paths for union leaders to move into Parliament are well-defined. The funding links remain significant.

The reality is that the trade union movement has been losing its way for years now and it is not only because it has been seen as a blokey club with racist, sexist and homophobic overtones. The unions have lost support because they haven’t been doing what their principle raison d’etre calls for – to protect workers and their families.

Instead, trade unions have allowed the party that is meant to represent their interests – the ALP – to govern as if it is an agent of capital.

History tells us since the neo-liberal period began (last three decades), the ALP has been in government twice and in both periods, workers endured real wage cuts, loss of wage share and entrenched unemployment and underemployment.

Please read my blog – A new agenda for our union movement – for more discussion of this point.

The other point is that the Labor Party has traditionally been accused by the conservatives (Liberals aided in coalition by the National Party, a rural interests party) of being poor economic managers – spendthrifts with no fiscal discipline. This was of-course just a way of attacking their social policy which was considered as important as economic policy.

In the 1980s, the Labor Party changed direction dramatically – as did many social democratic parties around the world. It responded to these criticisms by becoming more neo-liberal in intent than even the conservatives. In the 1980s it led the way in privatising public enterprises, promising a new world of lower prices and higher employment. The opposite occurred.

It wasted billions of public money on private-public partnerships which only allowed the private property developers to dictate the direction, location and form of public infrastructure development. Please read my blog – Public infrastructure 101 – Part 1 – for more discussion on this point.

As am example, we ended up with a mass of clogged up toll roads in our cities and a degraded public transport system at a time when major investment should have been poured into the latter.

It also cemented as part of its national policy psyche the neo-liberal myth that federal governments have to run budget surpluses to maintain confidence with the amorphous “international investors”.

The Guardian article seeks to attack the view being presented by the conservatives who are now in Government that the rising unemployment rate is the fault of the revisions to the labour laws that the Labor Government made.

The conservatives had previously lost power in 2007 being their zealousness in attacking the most basic working conditions and rights got ahead of what a normally conservative electorate was prepared to tolerate. The Work Choices legislation was thoroughly rejected at that election and Labor set about restoring some decency to working conditions etc.

The problem was that its version became known as “Work Choices Lite” because it left the door open for caprice and dishonesty on behalf of the employers to continue to undermine working conditions. There were some protections provided but in my view the Labor government failed badly to reverse the decline in the wage share and to restore a more reasonable balance between worker and capital.

But despite this, the conservatives constructed any change towards giving workers more entitlement (and the changes were not great) as being anti-growth, anti-employment and end-of-the-world-as-we-know-it sort of stories.

Matt Cowgill covers that conservative mania very well and I agree with his arguments almost completely.

He points out the moving-deck-chairs-style of argument that the conservatives employ when prosecuting one of their manic arguments.

So at some point industrial relations reform would cause “wages breakout” (didn’t happen), Then when it was obvious that was going to happen the conservatives “switched their focus to productivity”. But the data didn’t help their argument very much especially when “Labour productivity grew faster in 2012 than it had in a decade”.

Never daunted, the conservatives finally found a time series that was deteriorating – and as Matt Cowgill says:

The argument now is that Australia’s rising unemployment is the fault of the Fair Work Act.

This tactic is not restricted to Australian industrial relations. Think back over the last five or six years and the different prophecies that have come out of the conservative think tanks and media.

We were told that interest rates would soar because of the deficits.

We were told that inflation would accelerate into hyper inflation.

We were told that the US would run out of money (not to be confused with the nonsense that is going on at present).

We were told that households and firms would spend up big if the national governments imposed austerity. The opposite has happened where austerity has been imposed.

And all the rest of the dire warnings. One after another. All data-rejected soon after they were made. But all without any conceptual foundation in terms of the way the modern monetary economies work.

If you read back to 2008, 2009 (and my earlier academic work) you will see I (and my MMT colleagues) consistently rejected these warnings well before the data was available to refute them.

So now the conservatives in Australia are claiming that the rising unemployment is the direct result of job protections, penalty (overtime, weekend) rates, wage levels in general including minimum wages, and other laws governing freedom of association and the rest of it.

Some of the old ministers (from the previous conservative regime) who haven’t got used to the fact that they are no longer in power and deserted the ship as it was sinking in 2007, are now baying from the sidelines about the need for the new government to get tough on industrial relations protections etc.

It is pathetic to watch but I have this hypothesis that the newly-elected conservative government is using its mates outside (like Peter Reith and Alexander Downer) to rattle the can and demand outrageous things of it, and then it responds with something slightly less outrageous but outrageous nonetheless and appears to be moderate.

It is about shifting the so-called “centre” of the debate, even further to the right. In that sense, it squeezes any future Labor Government that just plays by the polls as the out-going government did.

The Labor Party has to show leadership now and start to challenge the polls and push the “centre” leftwards. Some very large heavyweights are going to be needed and unfortunately the current players will not prove to be up to the task.

So while the conservative push is pathetic it is also extremely damaging to the long-term interests of workers, refugees, indigenous people, and the natural environment.

Matt Cowgill says:

This new line of attack from the agile IR advocates raises the question: is Labor’s Fair Work Act to blame for the rise in unemployment? It won’t surprise you to learn that I think the answer is a resounding “no”.

The reasoning he offers is that, first, “(i)n the first year of the Fair Work Act, the unemployment rate fell from 5.9% to 5.2%. The year after that it fell further, to 5%”. The data is factual.

Second, he admits that the rise in the wage share in “the 1970s and early 1980s” caused unemployment – the excessive real wage (relative to productivity) story about the effects of the profit squeeze on unemployment.

I agree with this assessment but it is important to frame the claim correctly because it impacts on how we answer his basic question about rising unemployment now.

The sharply rising unemployment in the latter part of the 1970s and early 1980s had something to do with real wages growth exceeding productivity growth. There was a clear squeeze on profits and the rate of return on capital fell. This led to a decline in the investment ratio and that flowed straight into a decline in aggregate demand.

While the conservatives would invoke neo-classical marginal productivity theory to say that the excessive real wages reduced the demand for labour directly, the truth is more that it was a decline in aggregate demand that undermined employment growth.

However, that is not the full story either. The OPEC oil price shocks around that time pushed the inflation rate up to very high levels and in 1975 (the last year of a Labor government) the budget debate started to be dominated, for the first time, by claims that the problems were all due to an excessive deficit.

This was the first federal budget in Australia, where deficit fetishism really emerged and the conservative government that took over in 1975 (and lasted to 1983) started a process of fiscal cutbacks although the automatic stabilisers were always running against them due to the slow growth they created.

The cuts in public employment (particularly youth employment0 and the loss of spending overall also contributed to the rise in unemployment during this period.

The phrase that “trade unions could not afford to be too successful” became apposite. It was an acknowledgement that we live in a capitalist world and if the desired rate of return on capital is threatened then capitalists will retaliate and cut investment spending.

That is certainly what happened.

Third, the Guardian article then says that this distributionally-based rise in unemployment doesn’t fit today’s facts” because:

Labour’s share of income is below, not above, its typical levels. Inflation is low and contained. Unemployment is rising, off a relatively low base, but remains below the level in many other developed countries. The relationship between economic growth and changes in unemployment doesn’t seem to have changed in recent years. Neither has the relationship between job vacancies and unemployment – a relationship that economists often use as a measure of the “efficiency” of the labour market.

My major criticism of the article is that is tries to appease the centrist position of the Labor party, which as noted above is, in fact, a right-wing view of the world.

Unemployment is not rising off a low base. It is rising of an entrenched base around 3 per cent above true full employment. His so-called “low base” is the neo-liberal standard rather than anything inevitable or natural.

It is the rate that emerged when national government abandoned its commitment to full employment and focused its attention on supply-side activism as the main focus of its labour market policies.

Further, comparing us to the failed states of the US, the UK and even worse the Eurozone is pathetic. The fact that they have higher unemployment rates than us is no cause for celebration.

We should be asking: Is our unemployment rate as low as it can realistically get? If no, then there is policy failure HERE.

If the rest of the world is more caught up in neo-liberal hysteria or not as fortunate to benefit from the budget deficit-driven Chinese growth then that is no solace to us.

All it says is that we should send funds to their workers to help them through the bad times. We have done this in the past by the way – during the big strikes in the late C19th in Britain – our workers raised funds to help them extend the strike. We got paid back by the British capitalists but that is another story.

Finally, Matt Cowgill says that:

Most observers have put the recent rise in unemployment down to a slowing in economic growth, which in turn is due to turmoil overseas, a slowing Chinese economy and a bumpy transition away from mining-led growth, and an Aussie dollar that has stayed stubbornly high. Reith and his fellow advocates ignore all these factors and instead point to that reliable scapegoat, labour laws.

Sure enough, these factors have generally undermined aggregate demand.

But, again, the author is to cautious – clearly not mentioning the role of the Federal Government at all. If we were to accept his version of events, the rising unemployment rate is all down to external factors, which are beyond out control.

This is a line that some progressives are pushing because they think that if they criticise the outgoing Labor government they are playing into the hands of the conservative forces in politics.

I see it a little differently but then I don’t work for an organisation that is historically and practically closely interlinked with the Labor party.

My role as an academic is to be an independent commentator. Neither side of politics likes me at all. And to some extent that is the way it should be if I am to remain independent and attack bad policy irrespective of which party is in power.

The fact is that the previous Labor Government is entirely to blame for the rising unemployment. How can I say that?

Simple, as private employment was contracting for all the reasons that Matt Cowgill and others mention, the Government could have increased public employment.

The fact it refused to do that because it was pursuing its budget surplus obsession sources the rising unemployment squarely in the decisions it made.

Clearly, external shocks occur all the time and Australia is more open to them (given our trade openness) than many nations. But we also issue our own currency and the Government can buy whatever is for sale in Australian dollars whenever it chooses – including all idle labour resources.

Its role is to offset private spending fluctuations to ensure that aggregate demand remains at a level consistent with full employment. It has abandoned that role just as the conservatives have. Both oversee higher unemployment rates as a consequence.

The rising unemployment is not because of workplace regulations but because the Federal government started undermining economic growth from 2011-12.

In its most recent incarnation as government, Federal Labor had a strong majority after swamping the conservatives in the 2007 election. Soon after the global financial crisis hit and, while it introduced a very successful stimulus package, it failed to educate the populace as to the advantages of deficits.

They were cast as short-term aberrations and that the holy grail of fiscal management remained the production of a surplus. As a result, under constant criticism from the rabid conservatives, it withdrew the stimulus before the economy had regained its confidence and growth poise and, on a daily basis, promised to deliver a budget surplus by this year.

It did this because it considered that would allow them to wear the “badge of fiscal responsibility”. Its is fair to say that the Government has become obsessive about their desire to deliver a budget surplus at all costs.

The Federal Labor government became so caught up in the fiscal austerity narrative that the neo-liberals had imposed on failing economies everywhere that it deliberately pushed the unemployment rate up.

It thought that if it maintained its pursuit of a budget surplus the electorate would reward it for being a responsible fiscal manager. However, the electorate is more concerned about real income growth and employment opportunities and the government’s current strategy undermined both.

Further, the strategy was doomed from the outset, but ideology triumphed over economic understanding. They failed to get their surplus (by a long way) but in trying they pushed up the unemployment rate.

Please read my blog – The Labor government under Rudd-Gillard failed the most basic test – for more discussion on this point.

In this blog – Australia – the good and bad of the Economic Policy Statement – I noted that the most up to date information tells us how much the Australian government was undermining growth.

On Page 27, the detailed sectoral forecasts are presented, which allow us to assess how much contraction came from public final demand last year and the change in discretionary policy in the current fiscal year.

Private final demand was forecast in the May 2012 Budget to be 4 per cent and that is now being revised down to 3.5 per cent. We will know about the actual result in the common month when the June-quarter National Accounts is released.

For the current fiscal year (2013-14), private final demand was forecast in the May 2013 Budget to be 3.5 per cent and this has been revised down to a low 2.25 per cent with only a small improvement in the 2014-15 year now expected (2.5 per cent).

But the really interesting admission in the document is that public final demand contracted over fiscal year 2012-13, by 3 times more than they had forecast in the May 2012 Budget. In that document, they pursued a contraction in public final demand of -0.5 per cent but they now admit it will be -1.5 per cent, at a time that private final demand is also growing more slowly than predicted.

In other words, they admitted that fiscal policy has been sharply pro-cyclical – that is, working with the cycle, which in this case means it has been causing the economy to slow faster than it otherwise was slowing due to a contraction in the pace of growth in private demand.

That is why the unemployment rate, which they forecast in the May 2012 Budget to be 5.5 per cent is now at 5.8 per cent and rising. It is also why their May 2013 Budget estimate for the unemployment to be 5.75 per cent in 2013-14 has been revised upwards to 6.25 per cent, a level that they claim will persist at least through to the end of June 2015.

The following graph shows the contributions to real growth of federal government consumption and investment spending (in percentage points) since the December-quarter 2007 to the June-quarter 2013. On the right-hand axis is the unemployment rate (green line).

The rapid decline (to negative) of capital investment is a major part of the slowdown in aggregate demand at present and the rise in the unemployment rate.

Conclusion

I think it is time for Labor Party sympathisers to come clean about how bad the last 6 years of Labor government have been in economic terms.

I don’t see this as giving the conservatives any solace at all. They will make the situation worse but both sides of politics in Australia are obsessed by neo-liberalism.

That ideological obsession is to blame – not external factors or whatever. The more people who have influence in the media and the public debate openly recognise that the better.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.