While all the green shooters out there are constantly searching for signs that things are improving the fact is they are typically focusing on financial variables. So they feel good that the share market is recovering a bit (for the time being). But I almost always focus on real variables and then more usually on the labour market. Employment is the connection that the vast majority of us have with the economy and the distribution system and the quality and quantity of employment is a crucial indicator of how well things are travelling. The latest data out today reinforces the data from last week and shows one thing and one thing only – the labour market is sick. It also points to the urgent need for a third stimulus package which unlike its predecessors should be “job laden”. If the Government fails to take responsibility in the coming weeks and funds direct job creation projects on a massive scale then the situation will worsen and we will be stuck with high rates of labour underutilisation for the next several years.
On the positive side, I think the debate is shifting in Australia. Just today, I have been invited to give keynote/panel speeches at three major events around Australia the coming weeks – to talk about employment, low wages, the role of the public sector in job creation, the scope for job guarantees and regional employment imperatives. The invitations came from different groups representing a broad cross section of our society. I am also going to address a Greens National Conference in Adelaide later this month on these issues. So I think there is a gathering momentum to force these issues into the public debate.
The shift in the debate will require the Government to start answering questions such as:
- Why aren’t they using their fiscal capacity to directly create public sector employment?
- Why aren’t they ensuring that there are jobs available for the most disadvantaged workers
- Why are they relying almost entirely on supply-side (neo-liberal) labour market programs which have failed us in the past?
If I can play a small role in pushing this debate forward so that the Government does start to take more responsibility for job creation and less for plasma TV production then I will feel better.
A Financial Review journalist asked me today about the participation rates. There is a view out there that the fact participation rates have not fallen since the downturn began is a sign that things are not as bad this time around.
Since the downturn started (in labour market terms the low-point unemployment rate of 3.9 per cent was in February 2008), labour force participation has risen from 65.4 to 65.5 per cent (persons). For males, it has dropped slightly from 72.6 to 72.2 per cent which for females it has risen from 58.4 to 58.9 per cent. The journalist was advancing the idea that this has been a gender-biased recession to date – against males. The data suggests that so far.
To put this in perspective, in December 1989 the low-point unemployment rate for that cycle was 5.6 and things became grim after that. By the time the unemployment rate had risen by 1.8 per cent from this low-point (so a similar situation as now) participation had also risen.
Over the entire recession (December 1989 to December 1992 – where unemployment peaked at 10.9 per cent). male participation fell from 75.2 to 73.6 per cent; female participation remained constant at 51.7 per cent; and total participation fell from 63.3. per cent to 62.5 per cent. Clearly, the participation rates are higher now overall which reflects the length of the growth period we have just exited.
However, during the 1991 recession (which dragged out in labour market terms until December 1992 and the unemployment rate remained above 10 per cent until March 1994 despite GDP growth resuming in 1992), total participation also rose in the first several months of the slowdown and reached 63.8 per cent in April 1991 as GDP was plunging.
The following graph shows the labour force participation rates indexed to 100 at the start of the 1991 and 2009 downturns. The actual base months are December 1989 and February 2008, respectively, which represented the low-point unemployment months in the respective cycle. In 1991, labour force participation actually rose more (blue line) than in the current downturn (red line). At a similar point in the cycle (months after the low-point) you would not say there was very much difference between the two episodes. The deterioration set in after several months (about the point we are approaching in the current cycle).
So the point is that we should not feel comfortable now looking at participation rates given their behaviour in the last recession.
So far the “added worker” effect is dominating the “discouraged worker” effect. The former suggests that households add hours of work (typically the second breadwinner – female usually) as the economy deteriorates to ensure family income is maintained as the primary breadwinner loses hours or their job. The latter suggests that ultimately people give up actively seeking work as vacancies dry up and they “drop out of the labour force” using the official definitions applied by the national statistician. In the early part of the downturn the former effect dominates.
This is likely to be reinforced by the fact that in the early stages of the downturn full-time work drops sharply and firms replace labour with part-time hours. They also try to hang onto labour by cutting hours rather than sacking the workers. This is clearly going on in the Australian labour market at present.
The stimulus package was more focused on the service sector than on the goods-producing sectors (such as manufacturing). The relative fortunes of these two broad sectors is having a gender effect.
The following table shows the employment changes since the low-point month of February 2008 to May 2009 (taken from the ABS Labour Force Survey). It is clear that to date males are losing full-time work faster than they can get part-time work, while females have enjoyed growth in both segments of the labour market.
To put this is perspective relative to 1991, the following three graphs compares the evolution of employment for males, females, and all persons from the low-point unemployment rate month (noted above) for each cycle. The blue line is the low to high unemployment rate period for the 1991 recession and the red line is the period since February 2008. The horizontal axis are months since the low-point.
You can see that males are following the same downward trajectory as in 1991 although the loss of employment is not yet as severe. Full-time losses were more severe in 1991.
The next graph is for females. It shows that at a similar stage in the cycle (measured in months since the low-point which may not be a similar stage defined in other terms), females are faring better this time. In part, this is due to the strange behaviour of female full-time employment this time. In 1991, this fell away sharply along with male full-time work. The current behaviour needs further research.
The final graph shows the same dynamics for persons (total employment). It reinforces the fact that something happened around the 9th or 10th month into this downturn that has held employment up relative to the 1991 downturn. The early stages of each downturn saw employers shedding full-time work overall but more than replacing it with part-time employment. It wasn’t until the demand constraints were considered to be worse than first considered that employers starting shedding labour overall in 1991.
But I suspect the stimulus packages which came early into the downturn and were fairly substantial have extended the period in which firms are prepared to carry workers instead of firing them. This is referred to as labour hoarding. It was largely absent in the 1991 recession but then the Government failed to react until it was too late – remember the “soft landing” rubbish that was fed to us then as an excuse for the Government to do nothing.
Anyway, with all that in mind, today’s labour market data indicates that the labour market is deteriorating further. While so far employers might have been prepared to adjust hours instead of persons in meeting the waning aggregate demand, the ANZ Job Advertisements Series shows that vacancies (evidenced by job advertisements in newpapers and on the Internet) are falling away sharply.
The total annual decline to June 2009 has been 51.4 per cent with the advertisements declining by 6.7 per cent in the last month alone. It is also the 14th consecutive month that the series has fallen. The following graph shows the ANZ series and the extent of the recent plunge.
The next graph shows the very strong (scatter) relationship between the ANZ series (horizontal axis) and the official unemployment rate (vertical axis) since 1999. So when the job ads fall we would expect the unemployment rate to rise. The simple quadratic regression reported suggests that the unemployment rate will rise marginally in the June (data out soon).
The spokesperson for the ANZ said that the close relationship between the job ads series and the unemployment rate is not as obvious at present. He said:
It doesn’t tell us whether corporations are firing workers or shedding labour … The official numbers are performing a lot better than what the job ads, or indeed many business surveys, are telling us you would have expected to have seen, and that’s telling us that corporate Australia is hoarding labour, that it’s holding onto skilled workers, that it’s trying to weather this economic storm, that it’s doing that by reducing hours but it’s not, at this stage, actually laying off workers.
And that is being borne out by the broader labour market indicators published by the ABS which I show in the following table. The slack is being borne by rising underemployment (UE) at present. The broad indicator is the sum of UE and the official unemployment rate (UR). The sharp rise in the broad measure since February 2008 is indicative of a failing economy. We now have around 13.4 per cent of our willing workers underutilised.
The employment gains made since the downturn began in volume do not equate to quality. The labour market is creeping along with increased casualisation, lower pay and low productivity growth. Further, this situation cannot persist. If aggregate demand continues to lag then firms will start retrenching workers in increasing numbers which will work to reinforce (or multiply) the downturn. Even part-time employment would start to fall under this scenario.
Meanwhile the other data that came out today shows that inflation is not a problem – rather that deflation threatens. The latest private survey data released today from the . The TD-Securities/Melb Institute series suggests that inflation rose 0.4 per cent in June but fell by 0.3 in May and was flat in April. Taken as an annualised rate the so-called inflation ggauge rose by 1.4 per cent which is the lowest in this series history (albeit the history is not very long – mid-2002). Given the annual rate of inflation in May was 1.5 per cent, the June estimates show that inflation is falling.
The current situation is consistent with a labour market teetering on the edge of a serious decline. It indicates that the stimulus packages to date have probably helped prevent a major deterioration. But the nature of the stimulus is such that it will peeter out in the coming months and was not very “job laden” or “job rich” in the first place.
I consider that another major expansionary package will be needed sooner rather than later if the Government is to assume its proper responsibilities to defend jobs. The next package will have to be orientated to large-scale job creation or things may look pretty bleak this time next year.