Now the OECD is saying there is a jobs crisis

The OECD, the organisation that has spearheaded the abandonment of full employment in all its member countries since releasing the supply-side blueprint in 1994 – The Jobs Study, has now finally realised that things are very bleak in labour markets across the World and is saying more action is desperately needed. All their rhetoric in the last decade about making labour markets resilient and flexible through active labour market programs has not apparently stopped the major economies from going belly up.

Governments must act decisively on jobs, was the headline and it wasn’t written by me. It comes from the OECD Secretary-General Angel Gurría who said that:

Governments must act fast and decisively to prevent the recession turning into a long-term unemployment crisis … Employment is the bottom line of the current crisis. It is essential that governments focus on helping jobseekers in the months to come …

According to estimates in the just-released Employment Outlook, the OECD thinks that the unemployment rate for the OECD in general (the 30 richest countries) will get close to 10 per cent by the end of 2010.

They estimate that there will be aroound 25 million unemployed across their member countries by that time as a result of the downturn. 15 million jobs have already been lost since the downturn began in North America in late 2007.

The next graph shows the OECD Harmonised Unemployment Rate for Australia, the OECD as a whole, the G7 countries and OECD-Europe from January 1998 to July 2009. So already Europe is close to 10 per cent and the UK and the US are catching up fast.

They OECD are now arguing that the policy imperative is clear and requires more government stimulus:

A major risk is that much of this large hike in unemployment becomes structural in nature … This unwelcome phenomenon occurred in a number of OECD countries in past recessions when unemployment remained at a new higher plateau compared with the pre-crisis level even after output returned to potential, and it took many years, if ever, to bring it down again to the pre-crisis level.

The OECD demand that governments must introduce policy changes that will stop long-term unemployment from rising. While they acknowledge that the stimulus packages have had a positive impact in this regard, the net result is unsatisfactory, given their unemployment estimates.

The problem with their recommendations, however, is that they just cannot escape from the “training” “supply-side” emphasis. They want more job search assistance despite the fact that you cannot search for jobs that are not there!

They want skill formation fostered but fail to acknowledge that this is only effective (outside of general skill development) within the context of a paid-work environment. That is, you also need to generate jobs.

They also want “social safety nets” reinforced to prevent poverty from accompanying the unemployment. But a far better strategy is to generate jobs in the first place then you need much reduced welfare support.

The specific Australian briefing had this to say:

Australia’s fiscal stimulus package seems to have had a strong effect in cushioning the decline in employment caused by the global economic downturn. Estimates in the OECD Employment Outlook 2009 suggest that employment in Australia is likely to decline by between … 150,000-200,000 jobs, less by the end of 2010 than if no fiscal measures had been taken. This is due to both the relatively large size of the fiscal package (5.4% of 2008 GDP, third largest after Korea and the United States among OECD countries) and the degree to which employment responds to fiscal stimuli such as tax cuts or public expenditure; this is typically higher in countries, like Australia, where a relatively large proportion of domestic demand is met by local production. As a result, employment is projected to fall only slightly from its 2008 peak.

So 200,000 jobs – what impact would that have had on the unemployment rate? I did some simple calculations (not having time to work through all their scenarios and reconstruct their temporal projections) which will give around the same results as those done using the OECD modelling framework.

I assumed that the federal stimulus packages started to inmpact positively on employment in December 2008. I projected in a linear fashion a lower employment after that so that by August 2009 (again not exactly aligned with the OECD timing) total employment was 200,000 less than it actually is. I then recomputed the unemployment rate assuming that the labour force would be invariant to the different employment levels (which it wouldn’t because participation would have fallen a bit) and that the hours-adjustments (the rising underemployment) was also invariant (which it wouldn’t be but the differences are not going to be very large).

The following graph shows you what the unemployment rate would have been under these assumptions and timing profiles of the lower employment. So instead of 5.8 per cent in August 2009, the Australian overall unemployment rate would have risen to around 7.6 per cent if the job loss projections in the absence of fiscal intervention are anything to go by.

The OECD, however, make some very pointed observations about Australia (all the dot points are direct quotes):

• Adjustments to working hours may have prevented more widespread job losses, but are also leading to growing discontentment among workers.
• Youth unemployment is also rising quickly.
• Unemployment is a key driver of poverty in Australia.
• Adverse labour market conditions can also prompt an increase in claims for disability benefits as job seekers become discouraged or long-term unemployment affects their health.

In relation to the first point they say that:

… There are now almost 885000 underemployed workers – part-timers who want to work more – in Australia, an increase of 23% from the same time two years ago.

In other words, we are really seeing an underemployment recession this time around. In part, this reflects the underlying trends in the Australian labour market towards increased casualisation. But it also tells us that the fiscal expansion has not underwritten aggregate demand at the level necessary to support higher levels of employment (in both persons and hours). In that sense, it has failed despite helping save 200,000 odd jobs.

The concentration on youth unemployment is interesting. This is an organisation that has at various times in the last 20 years published material denying that youth unemployment was a problem.

Now they are saying:

The unemployment rate for 15-19 year olds is almost three times the adult rate at 16.4% (seasonally adjusted). Around 130000 young people neither work nor are enrolled in full-time education, an increase of 35000 since the same time last year.

The problem they raise is that vulnerability to unemployment when the economy goes into a downturn is twice as high among the young workers relative to prime-aged workers. This is particularly the case where educational levels poor. In Australia, our secondary school retention rates are “well below those of other advanced countries”.

I gave a talk today to the CEDA Infrastructure Conference in Newcastle and this was a point I emphasised. My own region is even worse off in this respect than the rest of Australia.

Last week’s Labour Force data also revealed that the 15-24 year olds are bearing the brunt of Australia’s downturn, particularly females. A staggering 27.1 per cent of young females and 25.7 per cent of young males are either unemployed or underemployed.

If we are worried about the rising dependency ratio and the intergenerational challenges in front of us then casting our youth off in this sort of fashion from skills development, stable work and incomes is the worst thing we could do. This parlous state arises from the on-going failure of fiscal policy to provide enough jobs and sufficient working hours for those who want them (see my blog on that data release).

The OECD also note that while our tax and transfer system:

… reduces the risk of poverty among working households by three-quarters … [it is] … less successful in tackling poverty in jobless households.

Anyway, my policy recommendation is to introduce all the things the OECD wants to but to make sure there are enough jobs in the first place. Then training initiatives achieve harmony because they are within a paid-work context.

Then the transfer system can be modified and not relied on to keep people out of poverty.

Then hundreds of thousands of workers will avoid going onto disability support benefit as a substitute for unemployment. In the 1991 recession many older men took this option to save face given they had no chance at all of finding work (as a result of the age discrimination that bedevils this country).

So the starting point should be a Job Guarantee and then the government can see what else it can do.

But if you thought Australia was in bad shape at present (which it is) spare a thought for Britain. Data out yesterday in the UK supports the OECD conjecture that job creation is desperately needed.

The UK Office for National Statistics data shows that official unemployment is now at its highest level since June 1995 and the unemployment rate in Britain is 7.9 per cent and rising.

The Office for National Statistics say:

The number of people in employment was 28.89 million in the three months to July 2009, down 217,000 from the three months to April 2009 and down 600,000 on a year earlier. The number of people in full-time employment was 21.31 million in the three months to July 2009, down 297,000 from the three months to April 2009 … The number of people in part-time employment was 7.58 million in the three months to July 2009, up 80,000 from the three months to April 2009.

So no joy there. This dynamic map shows the evolution of the UK labour market since the crisis began – regional variations along a one-way street.

A commentator in the Guardian yesterday said that “there was little to suggest that the increases in unemployment were slowing” in Britain.

The Trade Union Council boss was quoted as saying:

There are now over a million people out of work for more than six months, one in three of them under 25. There are no signs of recovery here. This is not the time to take risks with policies that could make unemployment worse. It might look rosier in city dealing rooms but out in the real world unemployment is the number one issue.

Other commentators blamed a lack of lending by banks on the continuing deterioration in the British economy. But as we know they will only lend when there is confidence among the banks that there are credit worthy customers lining up to spend. That will only happen when some spending floor is put in the economy and that requires even further fiscal stimulus.

Just when you get that clear, you then read this nonsense by Paolo Totaro in this morning’s Sydney Morning Herald – Rebound in the wind, but Britain faces crushing debt, where she claims that while the green shoots are shooting right across Britain the “prognosis is less rosy.”

Falsely representing herself to readers as someone who knows something about macroeconomics, she says:

Like the US, Britain was burdened by a whopping deficit well before the credit storm enveloped the world. A year later, the enormous investments needed to bail out its banking sector have led to a ballooning of public sector debt, highlighting that recovery will be slow and, in the long term, a strategic, measured road out of recession may be healthier than the much vaunted rapid bounce.

As if that wasn’t bad enough, she quotes the Royal Bank of Scotland chief executive as saying:

… that a gradual reduction of debt – in the public sector, households and in businesses – had to be the priority to avoid a “Japanese-style lost decade” or, worse, a second down period or so-called “W-recession”.

Didn’t the RBS go broke or something and take huge handouts from the British government! I guess now they have pocketed the largesse, to hell with the unemployed who that bank and others helped make jobless, through their irresponsible lending policies.

Apparently the “British figures are scary” and public debt will “peak at about 80 per cent of GDP before falling again as tax payments return and growth revives” but could “explode to twice that – to 180 per cent of GDP inside 10 years – if dramatic measures are not taken swiftly.”

So where do you start with that? Nowhere. It is clearly just a journalist repeating what she has heard some bankers say or whatever. It has very little economic substance at all.

Of-course, if Britain’s sovereign government voluntary chooses to restrict its fiscal policy in such a way that it issues public debt $-for-$ in line with net spending, then debt will rise. So what? It can stop restricting itself in this way or just have higher public debt. There is no solvency issue and the debt presumably is being held voluntarily by non-government investors who see it as a good risk-free income. Next question?

Further, the level of public debt should have zero implications for the trajectory of the recovery if the government understood the fiscal capacities it possesses. What she is saying is that the pressure will be on the UK government to cut essential spending to wind the debt back. The only way they can pay down the debt is to run surpluses.

They are so far off being able to do that, even if they wanted to, given the state of capacity utilisation and the unemployment data we discussed above.

If they try to wind back net spending now, then far from avoiding a Japanese-style lost decade, they will create one. As sure as night follows day, a W-shaped, double-dip-recession will follow not long after they try to “consolidate their fiscal position” (the latter terminology is a very OECD piece of jargon – meaning abandoning fiscal responsibility in favour of pursuing budget surpluses).

Anyway, the daily media hysteria is gathering pace.

Media commentary today

I also gave a talk on the national ABC radio program today – The World Today. The segment was called OECD warns of jobs crisis. You can listen to the segment via the ABC site and read the transcript.

The other guests quoted were the OECD Secretary General Angel Gurria, The Federal Treasurer and the Federal Deputy Opposition leader whose name I have forgotten (deliberately).

I also spoke at length with local ABC radio about the situation in my region (which is the largest coal export port in the World). I will write about this another time.