Why unemployment is heading to 6%

Yesterday's lower employment data is the start of a trend driven by five separate forces – one that will make it feel like a recession in much of the country.

The problem with Europe is that it makes ordinary crises look, well, ordinary. There is an unfolding employment disaster going on in Australia, but compared with Greece and Spain, Portugal and Ireland, we’re doing just great.

Yesterday’s labour force figures revealed a big and unexpected drop in employment in December. After holding staff levels steady for 12 months, businesses have started laying people off.

As discussed here on Wednesday (Lights out on a jobs bonanza, January 18) banks, retailers and manufacturers are all now cutting employment. To that, you can add cafes, restaurants and the Commonwealth public service – thanks to Labor government policies.

The so-called "modern award” system under the Fair Work Act is imposing intolerable weekend penalty rates on the hospitality sector. Many restaurateurs are saying that they simply can’t employ as many staff as they used to and are either shutting up shop or doing it themselves.

Meanwhile politics, rather than economics, is motivating the government to get its budget back to surplus earlier than either necessary or previously intended; with softer tax revenues because of weaker than expected commodity prices, and this requires public sector staff cutbacks.

Normally that would be a matter for celebration, but right now government is just another sector cutting back employment.

We tackled the Acting Treasurer and Employment and Workplace Relations Minister, Bill Shorten, on these matters in our KGB interview with him yesterday, and it was clear there will be no change to either fiscal policy or the Fair Work legislation.

So there are now five separate reasons the unemployment rate will go above 6 per cent this year:

1. Bank funding costs are rising, which means they will cut staff and not pass on the full extent of any official rate cuts – muffling the effect of monetary policy;

2. Consumers are saving more and when they do buy stuff it’s increasingly online, so shopkeepers need less staff;

3. The Australian dollar will remain above parity because Australia’s government bonds are among the highest yielding AAA securities in the world;

4. Cafes and restaurants are being forced by Labor Party legislation to pay uneconomic weekend penalty rates;

5. The federal government is unnecessarily returning the budget to surplus next year, which will require retrenching public servants.

There will not be a recession in Australia because investment in mining and energy projects in WA and Queensland will keep national output in the black, but for most of the country it will undoubtedly feel like one.

The Reserve Bank will keep cutting interest rates but this will have absolutely no impact because first, the banks will dribble out only part of them; second, there are a lot more savings now than there used to be, for which a rate cut is an income cut; and third, because mortgage holders will use any reduction they get to increase principal repayments, and leave total repayments where they are.

But at least we’ll all be able to watch what’s going on in Europe and still feel like the Lucky Country.

Follow @AlanKohler on Twitter

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