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Why unemployment won't rise this time

10 Aug 2009 THE AGE
It appears Australians are working fewer hours, which beats losing their jobs.

THE unemployment rate's refusal to rise isn't as good as it looks. But when you think through the unfamiliar issues, you see that the pluses outweigh the minuses.

This is a strange recession that's not proceeding in the way economists expected it to, going by the economy's behaviour in previous recessions. And there's nothing stranger that the behaviour of unemployment.

The long-running fall in job vacancy advertisements, combined with earlier signs of weakness in confidence and activity, led economists to expect a reasonably rapid rise in unemployment.

But we learnt last week that the rate for July of 5.8 per cent was no higher than for the previous month, which was up just a sliver from the 5.7 per cent rate in March.

Why is unemployment rising so slowly? Because the level of total employment is virtually unchanged in the past year. (The rise in unemployment since July last year is thus explained by the growth in the labour force, particularly young people leaving education and being unable to find a job.)

But if it all sounds too good to be completely true, it is. "Total" employment comprises full-time employment plus part-time employment, and it turns out that a fall of about 190,000 in full-time jobs has been offset by a similar rise in part-time jobs.

That's not a good deal. It means that, overall, fewer hours are being worked and being paid for. And new figures published by the Bureau of Statistics confirm that the total number of hours worked per month fell by 3 per cent over the past year.

Fewer hours of paid work mean households have less income to spend  which is hardly good news for the strength of consumer spending over the rest of this year.

To put the problem another way, although we've had little rise in unemployment over the past four months, we've had a big rise in under-employment  people not being able to work as many hours as they'd like to.

(To date, however, we haven't had much of a fall in the rate at which people of working age are participating in the labour market, either by working or actively seeking work. This says we haven't yet had a great increase in "hidden unemployment" caused by a rise in the number of "discouraged jobseekers" leaving the labour market.)

The most popular explanation among economists for the slow rise in unemployment and the lack of decline in total employment is that rather than laying off some of their staff, many employers are preferring to put all of them on shorter hours. This would show up in the statistics as a fall in full-time employment but a rise in part-time employment.

Note that no one can prove from the figures that this is the dominant explanation of the phenomenon. It could be that the fall in full-time employment is largely unrelated to the rise in part-time employment.

But the fact that an unusually high proportion of the additional part-time jobs are going to men (who account for most of the loss in full-time jobs) makes me suspect there's a fair bit of truth to this explanation.

It's also consistent with what a lot of employers are telling the Reserve Bank when it does its informal "liaison" consultations with big firms and industry groups.

Why would employers change their behaviour in this way? Perhaps because, having so recently grappled with shortages of skilled labour, employers are more anxious about hanging on to experienced staff. It may also be that older employees, conscious of the inadequacy of their superannuation savings, are more resistant to the idea of being bundled off into involuntary early retirement.

The interesting but unfamiliar question that arises is: is this a helpful or unhelpful development?

Let's say an employer of 100 workers faces a choice between laying off 10 of them or cutting everyone's hours by 10 per cent. His reduction in total hours worked would be the same and the reduction in his wage bill would be much the same. (Actually, there are quite high costs in the short term associated with making workers redundant.)

So what difference does it make? From an equity perspective, it's fairer to spread the burden of the fall in demand for the employer's product equally between all workers than to pick 10 per cent for lay-offs.

But what about from a macro-economic perspective? If the decline in wage costs and wage income is the same either way, what difference does it make?

You can argue that, on balance, the job-sharing (or burden-sharing) approach is better. For one thing, having fewer workers spending months or even years out of work reduces the cost to the economy (and the individual worker) from "hysteresis"  the atrophication of skills and motivation.

For another, it's not just a question of how much income workers have to spend, it's also a question of how they change their spending behaviour in response to loss of income.

I think you can argue that 10 unemployed workers are likely to cut their combined spending by more than would 100 workers suffering what they expect to be a temporary 10 per cent cut in income  more so if the 90 remaining workers in the first case fear they too may get the chop.

But perhaps the biggest difference would be in the effect on the psychology of consumers and business people generally. Increases in underemployment get far less publicity than increases in unemployment.

If you believe that news of rising unemployment  or, more powerfully, stories on the TV news about mass lay-offs at factory X, complete with footage of upset workers streaming out the gates  makes people more anxious about losing their own jobs, and thus more inclined to tighten their belts, then the job-sharing alternative is better.

The point is, "confidence" is such a powerful determinant of the severity of recessions that the less you do to shake it the milder the recession will end up being.

That's true even if the apparent avoidance of higher unemployment isn't as good as it looks.

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