I read an article in the Financial Times earlier this week (September 23, 2023) -…
The US Bureau of Labor Statistics released underemployment data for the US overnight. The results are disturbing and follow the same trend that is now common in Anglo countries – these economies, even in good times are increasingly generating marginal employment with low pay and job security, and, most importantly, deficient hours of work relative to the preferences of the workforce. But underemployment presents an added danger as we enter this current downturn.
While underemployment in Australia is now higher than official unemployment (but not for long), the US Bureau of Labor Statistics reports that there were about 7.8 million part-time workers who would rather be working full-time as of January which is a huge 65 percent increase in the number over a year earlier. Firms are clearly trying to trim hours first before they sack the workers to see if they can ride through the revenue falls. This is the first demand-side adjustment that occurs along with scrapping full-time jobs. So many workers will be offered reduced hours, four-day weeks and similar arrangements as the firms contract.
I have written extensively about this problem. One aspect that is not often appreciated as we head into this downturn is that this will be the first major negative cyclical event that we have experienced where underemployment will be a factor from the outset. Involuntary part-time work was not a major issue as we went into the 1991 recession. That recession saw underemployment spiral upwards and it has never recovered (see earlier blogs) but that happened during the downturn.
The second major difference this time is the huge debt burden being carried by the household sector which was absent in 1991. The workers are more than ever on the precipice of financial disaster and small variations in employment conditions will be more significant this time around than in the past.
During the growth phase, workers have been scraping for every hour of paid work they can get to service their massive debts. Yet the incidence of high underemployment (more than 600,000 in Australia) demonstrates that the policy framework failed to deliver outcomes that met the desires by workers for extra working hours. The major culprit has been the Federal Government who insisted on running such obscene surpluses that aggregate demand has never been allowed to reach the levels sufficient to fully employ the available labour force.
So we start the current downward spiral with huge underutilised labour resources being embodied in our part-time workforce (and the 500,000 or more unemployed). And, to exacerbate that vulnerability, the same workforce is precariously hanging onto solvency under the strain of their massive debt holdings as their wealth gets diminished by the day due to the collapse of the financial system.
The problem now is that as the firms cut back hours further – workers will take home less money – and go closer to bankruptcy. This becomes a vicious cycle because as workers suffer loss of earnings the proportion of discretionary income falls. They cut back on all spending other than the nominal obligations they have to the debt merchants. Ultimately, this squeeze becomes impossible and default and home loss follows. I predict this will be a much bigger part of this downturn than occurred in 1991 or before.
The problem is compounded by the huge debt burden because the underemployed don’t have much to fall back on – they have “maxed-out” credit cards, have huge mortgage payments and even a few less hours per week for some households will be highly problematic.
The prospects for older workers are also bleak given that the crisis has flushed out significant portions of their super fund entitlements. Some, who were victims of the shonky financial planning industry have lost all. But all of them do not have enough time to recoup their losses.
Personal risk management requires savings. The only way the non-government sector can save overall is for the government sector to be in deficit. That is just a matter of national accounting. As households try to save more, firms will cut back working hours even further. The only sector that can remedy the spending gap is the government sector. They must run bigger deficits than they are contemplating at present.
As an aside, tomorrow I am presenting a Keynote speech at a conference in Sydney on ethical conduct in the public sector. My contention is that our Federal government has delivered a failed state because it has behaved unethically by refusing to use its policy capacity to deliver full employment – an obligation that it is duty bound to honour under a number of international treaties, conventions and covenants. I might post a summary of my argument on Friday if I get some time.