Invisible cuts to the middle class

Official employment data is failing to catch underlying trends that look set to see unemployment rise above 6 per cent in 2013, and middle class ranks wounded.

With the help of Brian Redican of Macquarie Bank today I want to attempt an answer to the question that is troubling a great many Australians: Why is official unemployment around 5.1 per cent when all around middle income Australia we see retrenchments?

I must warn that the answers reveal that the low unemployment masks a looming decline in middle class Australia and an unfortunate transformation of our social fabric. You will need to understand this if middle Australia dominates your customer base. But in addition, the answers will also not help Tony Abbott and the Coalition.

Because of the importance of this commentary I will publish it over two days.

Let’s start with an apparent complete absurdity. One of the areas which showed increased employment in the latest labour statistics was media. Yet it was a period of dramatic retrenchments in most sectors of the media.

But media is not alone. As Redican points out in his remarkable research paper "Invisible Unemployment 11”, employment in industries like finance, telecommunications and real estate have also been rising dramatically and, although in the latest statistics they slipped fractionally, employment in these industries remains at very high levels. Yet, like media, finance, telecommunications and real estate are the very industries where some of the deepest middle class labour cuts are being made.

In the words of the late Julius Sumner Miller, once we ask the question "why is it so?" we are on the way to understanding what is happening to our society and what the inevitable next events will be.

We need to start with how the statistician calculates unemployment.

Each month a survey is sent to 28,000 households, who are asked if they were employed (for at least one hour); not employed but actively looking for work (and ready to work); or not employed and didn’t look for work in the previous week. These three categories determine whether someone is employed, unemployed or not in the labour force.

Once a person completes the survey they are surveyed for eight consecutive months. In most years it works well but in the current environment it can seriously delay unveiling a growing trend.

Before looking at what’s happening in our 'high employing' industries there are two understandable demographic events taking place which depress unemployment. First Redican explains that as people hit the ages of 55 and then 60 and 65, the proportion remaining in the workforce tends to drop sharply (i.e. the participation rate declines). And because so many more people are now entering these age groups Macquarie estimates that there were more than 50,000 people leaving the workforce in 2012, compared to around 20,000 a decade ago.

This simply means that the economy can generate 30,000 fewer jobs each year and still see no increase in the unemployment rate. That process is nearing its peak as the baby boomers move through to retirement.

At the youth end the fact that more people are staying in education has also resulted in a big decline in the participation rate. The youth unemployment rate is currently almost 17 per cent, but if the participation rate hadn’t fallen it would be over 20 per cent. Again this depresses unemployment levels but, of course, eventually these students will graduate and try and join the workforce. If they can’t get work they will be unemployed.

These two ‘abnormalities’ can be easily understood. What’s happening to boost employment in media, finance, telecommunications and real estate is harder to fathom. But let’s take a hypothetic newspaper sub-editor as representative of retrenched bankers, investment bankers, telecommunications and real estate executives/sales people – all of whom are going through a similar nightmare.

Retrenched, they arrive home with a pile of retrenchment cash so they are not eligible for Centrelink. The sub-editor will start up as a 'freelancer', the banker, real estate or telecommunications executive might use the term 'consultant'. They are looking for work but they see themselves as 'employed'. All four industries attract people who are 'working' in this way.

Of course, other retrenched people take some time off. Either way the labour survey does not pick them up as 'unemployed'. But with living costs high eventually the money runs out because the "charade jobs” rarely generate more than token amounts of income.

It’s a middle income time bomb ticking below the surface, which in 2013 is going to erupt taking unemployment beyond 6 per cent causing interest rates to fall much more sharply than most expect. It will reduce the ranks of the middle class.

Tomorrow: The community signs that confirm this trend, and why the Coalition should be worried.

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