How much influence do governments have on unemployment?

Australia's 10-year unemployment high has brought on a political blame game. This kind of rhetoric has become par for the course with economic data releases, but is it justified?

As expected, a political game ensued following Australia’s latest round of employment data, which hit a 10-year high.

Jumping on the news, opposition leader Bill Shorten used the data to poll the Abbott government on its future plans.

"The Abbott government has got serious questions to answer," Mr Shorten told the media.

"What is the jobs plan of the Abbott government? What are they doing to stop the tens of thousands of jobs that are either going overseas or just disappearing?"

And in reply, Treasurer Joe Hockey told the press that the figures are a “unfortunate reality of six years of Labor government".

"They are not unexpected but they indicate the size of the challenge we have before us," he said.

This kind of rhetoric has become par for the course with economic data releases. Regardless of what the figures actually say, they ultimately end up becoming ammunition for each party’s political agenda.

This all begs the question: to what extent do governments actually affect unemployment? Is Shorten or Hockey justified in their posturing?

The graph below shows employment growth under the past six prime ministers. We have used a 12-month lag to indicate the fact that prime ministers inherit economic conditions – good and bad – when they take office and it typically takes time before their policy initiatives begin to influence the broader economy. As such the Abbott government has not yet had an effect on employment.


(Click to enlarge)

Historically the employment performance of governments has been outside government control. For example, employment during the Hawke era benefited from changing social norms, with female participation in the work force rising sharply. The Howard government benefited from not one but two resource booms, which contributed strongly to 22 years of consecutive economic growth.

On other occasions the government has played a more active role. For example, employment during the Keating and Howard governments benefited from widespread competition reforms. Alternatively stimulus measures by the Keating and Rudd governments helped to boost employment during difficult times.

However, from month to month, the influence of governments on employment is typically overstated – usually by politicians themselves.

Besides government employment itself, the biggest influence that government has on employment is through reform and regulation and providing an environment for businesses to operate in that encourages investment. Often though Australian governments find themselves beholden to economic forces far beyond their power to control or even influence – even if they won’t acknowledge that during their monthly battles.

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