The debacle of the Australian Bureau of Statistics (ABS) being unable to publish reliable monthly seasonally adjusted labour force data does not hide the trend of deterioration in unemployment over the past couple of years.
The most recent labour force data, as published, suggests the unemployment rate has been about 6% for the past three months and the 6.1% unemployment rate for September is the highest in more than a decade. There are no signs in other indicators that suggest this will be the peak in unemployment and there are plenty of unfolding trends that point to the unemployment rate going higher still in the months ahead.
What is most disconcerting at the moment is a lack of policy resolve to do anything about it.
A few years ago, Australia had an unemployment rate well below 5%, a strong rate of economic growth that delivered new jobs, and decent increases in real wages.
Full employment was reached for the first time in a generation. Indeed, in the period from 2005 to early 2009, the unemployment rate was in a broad 4% to 5% band.
The global banking crisis came along and threatened to hit Australia hard to the point where the Treasury was forecasting the unemployment rate to spike to above 8%.
But due to an adroit fiscal stimulus package from the government and aggressive interest rate cuts from the Reserve Bank of Australia (RBA), the economy maintained resilience and unemployment remained below 6% right through the crisis, while most other industrialised countries saw unemployment rates reach 10% and sometimes much more.
It was this Keynesian fiscal approach in Australia that, ironically in the eyes of the anti-government debt zealots, influenced credit rating agency Fitch to upgrade Australia to triple-A. In making the upgrade in November 2011, Fitch noted Australia’s “high value-added economy, strong political, civil and social institutions and its flexible policy framework”. This meant that all three major ratings agencies, the others being Moody’s and Standard & Poor’s, gave Australia the highest possible rating for the first time in history.
At the moment, the economy is in the early stages of a disinflationary funk. That means real GDP growth is likely to be sluggish – perhaps 2.25% to 2.75% on average for the next year or two. The freefall in the terms of trade with commodity prices cascading lower will erode national income, and for many it will be one of the toughest economic environments since the recession of the early 1990s.
The domestic economy is simply not providing sufficient offset to these negative external influences. Consumer spending is subdued, dogged by persistently weak consumer sentiment while housing and business investment is not adding much at all to growth.
This means that the unemployment rate is all but certain to remain high unless there is a policy response.
The Abbott government shows little interest in tackling unemployment. Tony Abbott has not made any significant mention of the rising unemployment rate and policies aimed at lowering it in any press conferences, speeches or in parliament in at least the past three months.
The treasurer, Joe Hockey, is similarly uninterested, and to date has failed to note any policy changes designed to tackle the rising unemployment rate. Indeed, Hockey seems more determined to reach an arbitrary and economically irrelevant goal of a budget surplus ahead of any policy strategy to address the economic and labour market weakness.
Getting rid of the carbon price and mining tax, policies the government has suggested might improve the outlook for labour hiring, have close to zero impact on the level of employment, according to most reliable econometric models. And now with the labour market so weak that real wages are falling, there is the prospect of a vicious cycle unfolding where consumers cannot increase their consumption due to falling real wages and deteriorating job prospects, those poor job prospects in turn dampen wages which in turn dampens spending and so on.
There is a strong case for some policy stimulus to rebuild the growth prospects for the economy and with it, to arrest the deterioration in the labour market.
The RBA can cut interest rates but is seemingly obsessed with elevated house prices in Sydney and Melbourne and is unwilling to see the case for easier monetary policy.
For the government, a recasting of policies that take account of the labour market would also seem appropriate. Perhaps it could tighten the tax expenditures associated with superannuation and negative gearing. The revenue here would affect a section of the economy that is not income and spending constrained, yet could provide the money needed to underpin growth and employment elsewhere in the economy.
It would be most unfortunate if the poorly constructed labour force data from the ABS masked a genuine deterioration in the labour market that the RBA and government have misunderstood or ignored. If so, when the data are sorted out some time in the months ahead, there might be a lot of policy catch-up to do if the unemployment rate is to ever get below 5% again.
