I have been travelling for most of today so I have to keep this post…
Today the ABS released the Labour Force data for December 2009 and it confirms that the Australian economy is still recovering under the steam of the fiscal stimulus. Total employment has grown by three times more than expected and participation is constant. Which means that unemployment has started to fall although underemployment hasn’t budged. While the media commentators today (including myself) have been fairly upbeat I have been reminding the public in media interviews that I have done that broader labour underutilisation (sum of unemployment and underemployment) remains at 13.5 per cent. But optimistically the trend is now looking as though the aggregate unemployment rate may have peaked. So it is now to start looking beyond the peak.
The summary ABS Labour Force data results for December are:
- Employment increased 35,200 (0.3 per cent) with full-time employment accounting for 21 per cent of the increase.
- Unemployment decreased 10,600 (-1.6 per cent) to 639,400.
- The official unemployment rate decreased 0.1 percentage points to 5.5 per cent.
- The participation rate remained steady at 65.2 per cent but is still well down from its most recent peak (April 2008) of 65.6 per cent. So the approximate number of workers that have dropped out due to falling hours of work in the downturn (that is, the rise in hidden unemployed) is 71 thousand persons.
- Aggregate monthly hours worked decreased 1.0 million hours (-0.1 per cent) which is still 0.7 per cent below the September 2008 peak.
- Total underemployment (ABS persons-measure) remained constant at 7.8 per cent.
- Total labour underutilisation (sum of official unemployment and underemployment) declined in line with the fall in the unemployment rate to 13.5 per cent.
- Total labour underutilisation for 15-24 year olds remains at 26.3 per cent. Our gift to the next generation courtesy of an idle government.
Most of the press reaction has focused on the next Reserve Bank meeting in February and most commentators are now saying that it is inevitable that interest rates will go up again.
I gave an interview on for national ABC News Radio program this afternoon (you can hear the audio here) and was asked whether I thought the unemployment rate had now peaked. Each month the press seek an answer to this question. I noted that employment had grown for four consecutive months now which had to be considered a trend.
So unless we get a further negative shock coming from the world economy or the government gets pressured into a really harsh May 2010 budget I am of the view the the unemployment rate has peaked.
I also told the Financial Review today that I thought that the recovery would be marked by a rise in underemployment as unemployment shrunk. Over 2009, full-time work overall contracted by 37.5 thousand while part-time employment rose by 149.6 thousand (see next Table).
During the recovery period after the very deep 1991 recession, it took 15 years and a few months to get the unemployment rate back to what it was before the downturn began (in November 1989 the low-point unemployment rate was 5.5 per cent and it took until January 2004 to get back to that level). Most of the growth in employment in that period was part-time and biased towards the lower end of the hours spectrum.
As a consequence the claims that the economy was adding jobs during the recovery failed to reveal that while unemployment was falling it was being replaced by rising underemployment, such that at the top of the boom (February 2008) the latter was higher than the former adding up to a total labour underutilisation rate of around 8.9 per cent after 16 years of growth.
So I expect the same will happen in the current recovery given that the labour market has been significantly deregulated over the last decade (and the new government has not reversed the changes as significantly as they should) and it is now much easier to get rid of workers without cost.
I was also asked today by several journalists whether the calls by the Federal Opposition to immediately wind back the fiscal stimulus was responsible given the better than expected labour market data. I replied that a harsh May budget would set us up for a double-dip recession because private spending remains fairly weak.
Yesterday’s housing finance data from the ABS also showed that the housing market is not heading into an “red hot” asset bubble. That data was contrary to the “asset bubble terrorists”, who now think the slightest upward movement in prices is the signal that hyperinflation is about to descend on us.
The following table summarises the net changes (000s) over the last two calendar years. The downturn started impacting negatively in March 2008. I have already drawn attention to it in the prior discussion.
Things to note before we get too euphoric about today’s figures.
Unemployment is now higher by 118.3 thousand persons compared to how we started 2009. Unemployment rose by 3 times the magnitude that it increased in 2008 as the downturn was gathering pace.
All of the net change in employment in 2009 (112.1 thousand) were part-time jobs given that full-time work fell by 37.5 thousand in 2009.
Males were the big losers in 2009 – losing 56 thousand full-time jobs which were replaced two-fold by 108 thousand part-time jobs – but with higher rates of underemployment and reduced pay outcomes and reduced job security.
The following graph updates my 3-recessions graph. It depicts how quickly the unemployment rose in Australia during each of the three major recessions in recent history: 1982, 1991 and now 2009. The unemployment rate was indexed at 100 at its lowest rate before the recession in each case (June 1981; November 1989; February 2008, respectively) and then indexed to that base for each of the months until it peaked. It provides a graphical depiction of the speed at which the recession unfolded (which tells you something about each episode) and the length of time that the labour market deteriorated (expressed in terms of the unemployment rate).
From the start of the downturn to the 21-month point (to December 2009 – the length of the current deterioration since February 2008), the official unemployment rate has risen from a base index value of 100 to a value 141 – a 41 percent rise. At the same stage in 1991 the rise was 69.9 per cent and in 1982 83.7 per cent, and both indexes were still rising. So things are clearly very different this time.
While the unemployment rate was tracking the severity of the 1991 recession up until month 16, it is now clear that it is rising more moderately compared to the rate of decline back then. Note that these are index numbers and only tell us about the speed of decay rather than levels of unemployment. Clearly the 5.5 per cent at this stage of the downturn is lower that the unemployment rate was in the previous recessions at a comparable point in the cycle.
The graph suggests that we might have seen the peak of the unemployment rate – that is, in the absence of any further negative shocks and as long as the fiscal stimulus is not prematurely wound back. That would be a very good result and it would be hard not to credit the effectiveness of the fiscal stimulus.
One of the hallmarks of this recession has been the sharp decline in hours worked as firms reacted to the falling sales by adjusting their offering of hours rather than laying off workers. This decline in hours worked started to reverse in September (as employment resumed growth) but in the last month 1 million hours have been lost.
All the lost hours were in female employment – especially evidenced by the significant loss of full-time work in December (8.6 thousand jobs). Further, males are now commanding an almost equal share of the growth in part-time work which further reinforces my view that the recovery will not reduce underemployment.
Broad labour underutilisation
What about underemployment? The ABS published their fourth-quarter data for 2009 for underemployment and broader labour underutilisation (the sum of unemployment and underemployment). Remember this understates the full extent of labour underutilisation because it ignores the hidden unemployment (who are not counted in the labour force).
The following graph my 2-recessions graph for broad labour underutilisation (as measured by the ABS). It compares how quickly the broad labour underutilisation rose in Australia in the 1991 recession and the current episode. The broad labour underutilisation was indexed at 100 at its lowest rate before the recession in each case (November 1989; February 2008, respectively) and then indexed to that base for each of the quarters until it peaked. It provides a graphical depiction of the speed at which the recession unfolded (which tells you something about each episode) and the length of time that the labour market deteriorated (expressed in terms of the unemployment rate).
The shorter duration of the current downturn is significant relative to the protracted meltdown in 1991.
The following table was constructed from the ABS Labour underutilisation by Age and Sex data as at December 2009. It shows the underemployment rate and the broad labour underutilisation rate (in percent) for the difference age and sexes. It also shows the percentage point change between February 2008 and December 2009 and the change in December.
The points to note include there has been no change in underemployment in the last month and it remains at 7.8 per cent. However, underemployment for the 15-24 year olds has risen (all due to the sharp rise in female youth underemployment).
A journalist asked me today whether I thought the youth labour market was improving (given there was a modest reduction in their unemployment rates in December). I noted the juxtaposition between the joblessness result (a good one) and the rising underemployment. It is likely that youth underemployment will rise in the recovery as the bias towards part-time job creation is maintained.
Further the youth participation rate fell which means the reductions in the cohort’s unemployment is ambiguous.
Broad labour underutilisation remains stuck at 26.3 per cent for the 15-24 years aged group and this is still being largely ignored by government policy. I consider this the worst legacy (burden) that we are leaving our future generations.
The trend towards consistent employment growth is now fairly clear. In that sense it suggests that we are looking beyond the peak of the downturn now into the recovery phase.
This is a much better outlook than we were looking at this time last year. What will not please the neo-liberals is that the Australian economy has been kept afloat by net government spending.
The significant rise in the budget deficit underwrited aggregate demand and prevented the labour market from following the path it took in 1991. You can see from the first graph presented that the turning point (when the rise in the official unemployment rate started to flatten out) coincided with the early impacts of the fiscal packages.
You cannot escape that conclusion.
But just because the policy intervention has significantly reduced the damage, it remains that we have added 160 thousand extra persons to the unemployed pool and underemployment has risen by nearly 2 per cent. When the recession started in February 2008 in Australia, we were already burdened with a total labour underutilisation rate of 8.9 per cent.
So even at the height of the last boom we were wasting a huge quantity of available and willing labour resources. At that point we should have been running deficits but were obsessed with increasing the federal surplus.
My view is that a further fiscal expansion is required to really eat into this labour underutilisation now that growth is resuming. I am about the only commentator in the public debate here now who is saying this.
So I am either crazy or actually understand the way the monetary system operates and realise that the government still has the capacity to drive the economy to an inflation-free full employment state even though its budget deficit has risen as part of its response to the crisis.
I err on thinking the latter assessment is correct.
That is enough for today!