‘We are a 5% unemployment economy.’

This morning I heard Andrew Leigh on Sky News AM Agenda make the claim that ‘we are a five percent unemployment economy’. In the context of the conversation this was presumably a ‘good’ thing. To the extent that it could be worse, I suppose, five percent (about 5.2 percent) is a good thing. We could have the kind of unemployment rates that Europe routinely experiences or the nine – odd percent that the US is experiencing. We could, but we don’t, and we shouldn’t. We don’t have the same policy choices and policy failures that account for the high rates of unemployment in Europe and the US.

So what should the unemployment rate be? I reckon a lot less than five percent. The natural rate of unemployment isn’t a physical constant. There is no reason why we should be satisfied with five percent – or simply accept that if the ABS measures (about) five unemployment that there is nothing more we can do. While there will always be people in-between jobs, or unable to work, or wanting to work more or less, and so on ultimately the unemployment rate is a matter of choice. Those policies that government adopts that make it harder to hire and fire, harder to expand businesses, and generally make the economy less flexible contribute to resources being misallocated. In the context of labour markets that means lower remuneration and/or higher levels of unemployment.

It is important to realise that high unemployment rates are often not a personal choice but an institutional choice – that means we should spend more time thinking about how to structure institutions to lower the unemployment rate. Being satisfied with five percent suggests a lack of imagination. (To be fair, Andrew wouldn’t be satisfied with five percent but as a lowly backbencher he would have to parrot the party line.)

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41 Responses to ‘We are a 5% unemployment economy.’

  1. Driftforge

    Sinclair – I suppose the question to ask is ‘Who is advantaged by a having an unemployment rate at 5% or higher’?

  2. Mother Hubbard's Dog

    Well, there is at least one thing you agree with Bill Mitchell on!

    We used to be a two per cent unemployment economy. This is commonly attributed to protectionism. Maybe that wasn’t the real reason.

  3. Why aren’t the Southern Europeans looking at wage flexibility as a means of solving their double digit unemployment rates?

    Jurgen Stark floated the option last month.

    Temporary transfers can play a stabilising role and may be needed – subject to strict conditionality – if a country is affected by a very serious adverse shock. Open-ended transfers, however, are not a mode of adjustment. In fact, they are the opposite. They finance non-adjustment.

    Therefore, the key adjustment mechanism in a monetary union is price and wage flexibility, assuming that cross-border labour mobility is limited. Wages and prices are essential for country adjustments, as they directly impact on the real exchange rate, and thus on a country’s competitiveness. In fact, wages and prices are, by definition, the only remaining component of the real exchange rate that can be adjusted in the absence of nominal exchange rate flexibility.

    Economic flexibility can be promoted by removing the institutional barriers to flexible wage and price-setting mechanisms. If wages and prices are flexible enough and able to adjust to changes in economic conditions, then this will not only speed up the adjustment, but it will also help to avoid unwelcome fluctuations in output and unemployment. In a monetary union, most of the adjustment has to take place through national labour markets. Therefore, wage setting should appropriately reflect the different situations of sectors, of firms and of overall labour market conditions.

    Jurgen Stark – the bad boy of central banking.

  4. Roy Morgan says unemployment is 8.6% and underemployment 15.7%. Details here.

    I know they use a different methodology, but it certainly confirms to me that we should not be satisfied with 5% measured by the ABS.

    If we had a fully flexible labour market, we could aim for zero.

  5. Stephen Williams

    Labor has just done what it did under Hawke / Keating, it has moved many people from unemployment benefits to other Centrelink benefits such as disability etc. I believe that if the unemployment figures if they included all those who are on benefits but could work if they chose would be closer to 10%.

  6. Capitalist Piggy

    According to The Economist, countries with low unemployment rates include the Ukraine (1.5%), Singapore (2.1%), Switzerland (3%) and Malaysia (3%). But the lowest is Thailand (0.4%).

  7. No Worries

    I no longer care for what Andrew Leigh might say after his dishonest local “survey” that he ran on the carbon tax. This took the form of postcards on which you indicate the degree of acceptance of the carbon tax you might hold. Provision to say it was unacceptable was not available. He subsequently made a big announcement about the “overwhelming” level of support in his electorate. Kind of like the “overwhelming” evidence for AGW, and the “overwhelming” consensus.
    The guy is a mendacious little twerp.

  8. TerjeP

    The 5% figure is the national average. We have regions within Australia where the unemployment rate is much higher than that. We should not be complacent.

    In so far as we have a minimum wage it should be customised to the circumstances in each region. Not only does unemployment vary by region but so do living costs. The minimum wage in Sydney should not be the same as the minimum wage in Alice Springs where the labour market and living costs are so different. Obviously the best option would be to have no minimum wage however if we must have one it should be better managed.

  9. Adrian

    NEWSFLASH: Under Howard and WorkChoices Australia was a 3.9 per cent ‘unemployment economy’.

  10. Dangph

    Why aren’t the Southern Europeans looking at wage flexibility as a means of solving their double digit unemployment rates?

    Because people would riot in the streets, led on by the socialist nutjobs. A well paying, secure job that doesn’t exist is apparently better than a not so good job that does exist.

  11. Capitalist Piggy

    But Adrian, in the early Whitlam years it was even lower than that, at once stage it was 2.1%. But then things went pear-shaped and by November 1975 it hit 5.4%.

  12. thefrollickingmole

    I do somtimes subject myself to the following test when someone is unemployed.

    “Would I like that person making my hamburger at McDonalds”. Alarge number of times the answer is a resounding NO!

    Pensions for carers is a bit of a rort in some sectors of the community as well.

  13. Annabelle

    Wouldn’t it be more informative to talk about the PARTICIPATION rate? Its harder to manipulate. How high would unemployment be if we counted do-little training schemes, disability pensioners who could probably do some sort of job etc?

  14. M Ryutin

    I also seem to remember that 2% was the long- term ‘full employment’ figure. That the 2% was the ‘unemployables’ for various reasons and that going below that 2% figure led to bidding up the price of labour etc and thus to be avoided if possible.

    If it is now actually 5% there are a lot more people who for various reasons have a new explanation for being unable to work than did the previous generations. Is it the ease of ‘disability’ and other pensions? New technology changes?

    It does seem, though, that some studies are required rather than just cop this supposed ‘new (and arbitrary) “reality”.

  15. Because people would riot in the streets, led on by the socialist nutjobs.

    That’s increasingly my view, policy options that would work are off the agenda because the political class don’t want to upset the fictions they have allowed to build up in the electorate. You’d expect this from the left but the fact centre-right parties have been complicit in stoking these unrealities is an utter disgrace.

    It is a reflection on how decrepit and craven the European political elite have become that public discourse is so circumcribed it excludes those measures capable of doing a great deal to restore full employment.

    If you were being optimistic you would take the view that reality is too hard to deny in the long run and here we are at the end of a very long run, so something’s got to give … eventually.

  16. TerjeP

    A lot of the 5% is churn rather than long term unemployment.

  17. Rodney

    In 1960 we had about 80,000 invalid pensioners. The population has a little over doubled. The DSP batalions number at least ten times that.
    There are thousands of Govt regulations impeding employment apart from the minimum wage. I have seen no sign that any of them are likely to be simplified let alone abolished.

  18. Winston Smith

    According to the criteria, I can claim the TPI pension today.
    Why the hell would I? Why would you want to rot when you can contribute?

  19. JC

    Labor has just done what it did under Hawke / Keating, it has moved many people from unemployment benefits to other Centrelink benefits such as disability etc. I believe that if the unemployment figures if they included all those who are on benefits but could work if they chose would be closer to 10%.

    Is there any clear evidence for this? Are there stats that show the movement. I’m not doubting it as I think it’s true, however it would be nice to post the bullshit back to Andy Leigh.

  20. Rebel with cause

    Not to mention the destructive impact that unemployment has on the individuals mental wellbeing. Moreover, unemployment has a negative impact on society at large – some of the welfare recipients one sees roaming the streets must create large externalities through their violent and aggressive behaviour.

  21. JC

    I know they use a different methodology, but it certainly confirms to me that we should not be satisfied with 5% measured by the ABS.

    If we had a fully flexible labour market, we could aim for zero.

    That’s exactly spot on. It would be zero in a fully flexible market.

  22. Chris M

    Roy Morgan says unemployment is 8.6% and underemployment 15.7%

    That seems about right. Also there are a large number that are unable to get employment in the field they are expertise or training in.

    As an employer this is not so bad as when hiring it enables a broader selection of potential workers, many willing to work for less. Yep Labor shafts the worker again.

    And what about the governments hypocrisy – their minimum wage is about $8 per hour yet they insist any private business must pay at least double this or not hire.

  23. TerjeP

    And what about the governments hypocrisy – their minimum wage is about $8 per hour yet they insist any private business must pay at least double this or not hire.

    Can you give some more details.

  24. Milton Von Smith

    “To be fair, Andrew wouldn’t be satisfied with five percent but as a lowly backbencher he would have to parrot the party line.”

    That’s a copout. In what way does the “party line” constrain Leigh from expressing the view that less than 5 per cent unemployment is desirable?

  25. Chris M

    Can you give some more details.

    The dole.

  26. Mother Hubbard's Dog

    The dole.

    Hmmm. The average recipient of unemployment does … let’s see … approximately 0 hours of work each week. 0 hours at $8 an hour, that’s … $0. That can’t be right.

  27. Peter Whiteford

    Lets consider some facts. Welfare receipt fell strongly from the late 1990s until the GFC – have a look at http://www.news.com.au/business/massive-drop-in-the-welfare-numbers/story-e6frfm1i-1225841894890 for example.

    This is also in the context of an ageing population where the large baby boomer generation started to turn 50 from 1995 onwards, putting upwards pressure on DSP numbers. Population ageing plus the increase in the age pension age for women has meant that the number of people on DSP has risen, but the total proportion of the working age population receiving any social security payment has fallen substantially. Also see http://inside.org.au/growth-of-disability-support-pension-numbers/

    Basically we still have a lower proportion of working age people reliant on social security benefits than at nearly any time since the late 1970s, although not quite so good as in 2008. Also if you look at the employment to population ratio we are about 0.8 per cent below our pre-GFC peak.

    I certainly believe that we can lower unemployment and should aim for higher employment and less involuntary part-time work, but the idea that governments are manipulating these figures to disguise unemployment has little basis in reality.

    Chris M – like Terje I am intrigued by your suggestion that the government can pay some people about half the minimum wage, and would love to see some details.

  28. Chris M

    Peter I am pointing out the hypocrisy of the government mandated minimum wage versus the government unemployment benefit.

    The government is telling these people no, no we will not allow you to work in a job paying $12 or even $14 per hour – you must refuse those illegal underpaying jobs and instead we will pay you $8 per hour to do zip.

  29. Chris M

    As in $320 a week or whatever it is at these days for a single person.

  30. When you take into account Work For The Dole, the government actually pays dole recipients $21 per hour. ($320 for a 15 hour work week).

  31. Peter Whiteford

    Actually it’s $230 a week.

  32. Boris

    ” Those policies that government adopts that make it harder to hire and fire, harder to expand businesses, and generally make the economy less flexible contribute to resources being misallocated. ”

    This is one part of the equation. The other is that perverse insentive often create disinsentives for people to seek real work.

  33. I found his interview interesting so far as him saying it was a good thing to save 200 000 jobs. I would far prefer that there was an extra .2% unemployment rather than saving jobs at the rate of more than $200 000 a piece.

    “Business, unions and welfare groups have overwhelmingly welcomed the federal government’s plan to spend $42 billion to keep the economy afloat in the face of the global recession.” http://www.sbs.com.au/news/article/1007545/stimulus-package-gets-thumbs-up

    Now we have a debt to pay back.

  34. It’s $243 per week, and $60 rent assistance. So $303 per week in total.

  35. correction: extra 2% unemployment.

    But still think was waste of money and it was mining boom mark II not the stimulas that saved those jobs.

  36. .

    Actually it’s $230 a week.

    I suppose the healthcare concessions etc are worthless? Rent assistance? Discounted travel? Discounted utilities? Discounted legal services, training and priority placements on job matching?

    Of course, we wouldn’t desire such a high level of support if we didn’t tax ourselves out of prosperity – Syndey housing has a total tax rate between 75%-85% and we wonder why there is little investment, choked supply and housing unaffordability. Well duh.

    This is also in the context of an ageing population where the large baby boomer generation started to turn 50 from 1995 onwards, putting upwards pressure on DSP numbers.

    No, let me correct that for you. As Andrew Norton has pointed out, the proportion of people on the DSP has risen five fold since its inception. Simply these people cannot get a job and are sick of the job diaries and other bullshit.

    I never think it is appropriate or correct to blame the unemployed for their situation, nor would I even mind if the unemployed got a little more with the elimination of poverty traps and a more flexible labour market, but let’s not delude ourselves into how wonderful the job market is outside of mining and mining services.

    As for the stimulus – Rudd claimed 120 000 jobs were saved. $358k per job saved temporarily before amortisation. It’s an absurd idea to think that would help anyone. It’s no different to industry policy except that it isn’t persistent (save for amortisation).

    We would have been better off giving anyone coming off work $70k on a FIFO basis, and that is egregiously expensive.

  37. Peter Whiteford

    To get the $60 a week in rent assistance you have to be paying $130 a week in rent.

    The proportion of people on DSP may have risen fivefold since 1908 when it was introduced, but I was referring to what is going on now. Up until 1996 changing demographic strucures acted to reduce the growth in DSP receipt. after 1996 it acted to increase it. what you need to look at is age-specific rates of receipt – these have risen from a very low base to a still low level for people under 40, but have declined significantly for people over 50.

  38. .

    To get the $60 a week in rent assistance you have to be paying $130 a week in rent.

    Peter you pay that even in “lower bumfuck”. Try getting a place in Sydney for under $250 pw.

    The DSP simply hides unemployment figures. Every single Government paints a much rosier picture of economic performance than what is really happening. The proportion has risen because structural unemployment is higher. We were once the richest nation on earth.

  39. Peter Patton

    dot

    I always think like the unofficial unemployment rate should only really be looked at for the trend. Otherwise, best to look at it alongside the participation rate, which I think is the more important data from a macro perspective.

  40. Peter Patton

    We were once the richest nation on earth

    As of 3 months ago, we are once more!

  41. Peter Patton

    A lot of the 5% is churn rather than long term unemployment.

    Apart from remote/regional Aborigines and drug addicts, there is no real “long-term” unemployment to speak of in Australia.

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