Record high underemployment in Australia

The latest unemployment figures for Australia show a number of worrying indicators.

• A rise in unemployment overall (to 5.9% of the workforce)
• A record high in underemployment (1.1 million people are employed but want to work longer hours)
• Falling numbers of full-time jobs 

This all helps explain why wages growth in Australia is also at record lows. There is simply too much supply in the labour market for wages to rise. This may be because of a number of reasons, for example, an increasing workforce (immigration and more young people joining the market than older ones leaving it), or lower demand for goods and services made by Australians leading to less demand for workers. 

The prospect of falling Aggregate Demand (AD) is clearly a possibility. At present the rise in commodity prices is helping to boost exports, assisting modest AD growth, but isn't really employing any more people (because its the value not the volume of exports which is rising).

This is going to present difficult policy options for the Government (budgetary/fiscal policy) and the Reserve Bank of Australia on interest rates.

The Guardian covers the story here

A danger for Australia's economy

The ABC today report that the level of Australian household debt has reached 187% of disposable income. This is, they say, the highest in the world.

The problem is that this means that many households are close to not being able to afford to pay their debts (and interest) and buy the goods and services they need. If there was a rise in interest rates, or rise in unemployment this would see more and more households 'running out of money'.

The effect this will have on Australia is that Consumer spending would fall, leading to a lower level of Aggregate Demand (AD). This would put downward pressure on economic growth and could push Australia into its first recession since 1981.

Admittedly this is the 'disaster' scenario. There are other factors that simultaneously affect the economy. However it provides a constraint on the Reserve Banks ability to raise interest rates and should warn the government that further budget cuts and tax rises could combine to cause the recession everyone seeks to avoid.

Debt is a fact of life. It makes sense to borrow to buy a house. There is, however, a limit to the amount of debt a household can take on - the amount they can repay. If banks think households have reached their ability to pay then new loans will start to dry up and consumer spending will fall, leading to that fall in AD we feared. In that situation monetary policy becomes less effective, because lowering interest rates won't help much.

This is an important piece of background to Australia's current economic situation.

OECD data suggests Australia has high household debt, but not the highest

The ABC covers the story here

Are incentives irrelevant?

Finland has begun an experiment where it will pay unemployed citizens a fixed monthly sum. The idea is based on a 'universal basic income'. Other countries are going to start similar experiments.

The idea of a basic minimum income, regardless of economic activity, is one that is very attractive to those who are concerned with addressing inequality. It is controversial because opponents say it will simply encourage idleness.

Traditional supply side economic theory says that if the difference between in-work and out-of-work income is too small then there is too little incentive to take up job offers. People remain unemployed until a better offer comes along. When the difference is large then the unemployed jump at a job offer, therefore governments have cut the real value of the unemployment benefit sine the 1980's.

Supporters say that it is more important to deal with inequality which has risen continuously since the 1980s. This was not promised by supply side theory which said that the initial the rise in inequality would be reversed due to faster economic growth. (Unkindly some say this is the 'trickle down' effect, but actually they envisaged faster productivity growth and so higher wages throughout the economy.)

Others point to the fact that the system is very cheap to administer. There are no tests, no adjustments (even if the recipient finds work) and so minimal clerical effort. Therefore government expenditure is partly offset by lower costs of administration.

It's something you may want to watch.

The Guardian covers the story here

The new VCE study design has downplayed the study of inequality. However at IB it is an important economic goal. There is an IA in this one that looks at the effects on LRAS and AD. Read the article carefully, I have not put in every important detail here.

Unemployment figures and policy

There have been a lot of stories on unemployment recently - see my posts on Australia's unemployment figures hiding the true state of the economy for example. Below is a link to one on US unemployment.

US unemployment is falling as the economy adds jobs. This has led the US Central Bank - the Federal Reserve Bank of America - to suggest interest rates will rise. Why? Because inflationary pressures are likely to be building, monetary policy works with a long lag and a small rise now should help prevent a problem in a couple of years. (Note more rate rises will certainly be needed over the next year.

See if you can find an article that doe not do too much of the analysis for you to use as an IA source.

The BBC article is here

A minimum wage for South Africa

South Africa has struggled with unemployment for many years. Until 1994 there was not an accurate figure, but it was thought to be as high as 40% and  it has never been less then 20%. In addition those in work earned low wages, often as 'day labourers' often working just one or two days each week.

It is perhaps surprising in a country with a background of inequality and low employment that no minimum wage has been established. It is now proposed that one is set.

There are arguments for and against this measure.

It will establish a wage floor that will protect the low paid from exploitation. This is very important when people are desperate for work and employers will allow competition to cut wages to below a 'living wage' level. (In effect the profits of firms are being raised through this.) It will also go some way to reducing inequality in the labour market.

Against it are the point that it might lead to more unemployment if the rate is set too high. Also it does nothing to raise the income level of those who do not work.

It seems unlikely that the minimum wage proposed is too high as the government appear to be starting at a low wage, perhaps with the idea of raising it over time. It seems more likely that it will force businesses to pay more to workers and prevent them from exploiting the large pool of competing labour they draw on.

There will be winners and losers in this, but it does seem a long overdue measure.

The BBC cover the story here

The concept of a minimum wage arises in the micro section of the IB course, but the concept of inequality is part of the macro course. Therefore this is something that could easily be turned into a Macro IA. Consider also the effect of AD of raising wage levels and the effect on AS of raising firms costs.

Australian wages growth at record low

The growth in wages in Australia is about half the rate it was four years ago at 1.9%. In a stark contrast to the period of the 1970's and 1980's this is a cause for concern.

During the 1970's Prices and Incomes policies, where governments tried to limit pay rises to control inflation, subdued wages growth would be the cause for celebration. This is because firms costs are closely linked to the prices they charge as wages make up a significant proportion of those costs. Therefore the low rise in wages indicates that inflation in Australia is likely to stay low for now.

In fact inflation is so low that it is a significant cause for concern. It indicates a low level of Aggregate Demand (AD) growth, which is threatening Australia's overall economic growth.

The cause of this low wage growth has several roots. One is the end of the mining investment boom of course and the adjustment of the economy to non-mining sectors. However usually low wages growth is associated with rising unemployment (the Phillips Curve relationship) and in Australia unemployment has been trending downwards.

As noted in several other posts the unemployment figures are misleading. In fact there is growing part-time work and underemployment. In addition the participation rate is falling as people leave the labour market. This is making the unemployment rate look lower as it is calculated using the formula:

Unemployed

                   Employed + Unemployed     x 100

As those not participating in the labour market are counted as neither employed or unemployed the falling participation rate leads to a lower recorded unemployment rate (i.e. they would be unemployed if looking for work).

The ABC provides an excellent commentary with data on this story below.

The ABC story is here

This is an excellent subject for IA's in macro. Note the ABC article has too much analysis to be a good base article, but there should be plenty of articles out there that deal with the story without spoiling the chance to analyse what is going on.

Exploring Australia's unemployment rate a little more

Australia's unemployment rate is falling. That should be good news. However as pointed out a couple of posts ago this is not as straightforward as it seems.

The labour market is complex and what appears to be a substantial fall in unemployment masks a rise in part-time work, a fall in the participation rate and sharply different experiences of workers based on age and gender.

This article analyses the figures, using plenty of data in charts. The conclusion is that headline figures can appear good, but mask a serious problem.

As I made many relevant points before on Queensland I won't write much here. It is critical that you read the article to the end however.

The Guardian article is here

This is an article that provides vital information for VCE candidates on what is happening to unemployment in Australia.

IB candidates are also able to use this as an example and look at the key issues of measuring unemployment and should also consider how such unemployment can be cured. Note this article is not suitable for an IA as it is an analytical article - it does the job the IA should do, but there should be other articles out there on the latest unemployment figures (hint hint).

What is the best way to achieve equity?

Equity is a measure of fairness, and therefore a matter of opinion. The difference of opinion extends beyond what the best distribution of income is to how we should achieve it.

Some people believe that the way to achieve equity is through evening up in-work income. That can be done by raising minimum wages and taxing incomes progressively. Others believe that the best path is to pay benefits to those who require additional income. Both approaches will help reduce income inequality.

In Australia there is presently a debate between government and Trade Unions on the setting of the minimum wage. Australia has for many years had a very high minimum wage, but it has been falling in terms of the proportion of average wages this represents.

The Trade Unions want the minimum wage raised so that it is maintained at 60% of average incomes. The government does not want to commit to that because it fears that this may raise unemployment. (That would be cause real wage unemployment where the minimum wage in some industries is set above the market equilibrium.)

This is actually an argument of equity vs efficiency. There is no doubt that a high minimum wage promotes equity, the difference in take home pay will be made smaller. However it may harm efficiency.

Markets work through incentives. Earning  higher profit incentivises  firms to lower costs and improve quality in order to sell more products. It is a similar issue with workers, they are incentivised to work through wages. Higher wage rates attract more hours of work from workers.

If the minimum wage is too high there are two possible detrimental effects.
1. Firms cannot pay different rates of pay to different workers below the minimum wage
 A worker who is more productive should earn more than one who is less productive. However if both workers value to the firm is less than the minimum wage then both receive the same wage or, possibly, neither is employed.

2. The incentive to work harder and achieve improved skills and position is removed when there is equality in payment. The rational choice is to do the easier job yet get paid the same. Any move towards greater equity in income risks enhancing this effect and the economy suffers.

Overall this means that the economy is denied the competition it needs to achieve productive and allocative efficiency and as a result resources are misallocated.

There is no right answer to the question of the 'best' distribution of income. The trade-off between equity and equality is a real one though and must be considered in any policy proposal.

The Guardian covers the story here

This matter is of value to VCE students as the minimum wage is a key part of policy for the goal of equity. For IB students this has wider implications including the causes of unemployment and supply side policy.

Unemployment - the headline figures can disguise the truth

In Australia the rate of unemployment has generally been falling. This is usually good news, but there are other subtle points to consider, such as the situation in Queensland where the fall in unemployment might be hiding a more serious problem.

The unemployment rate is measured from a base figure of those people of working age who are looking for work or in work. This group are participating in the labour market, those who choose not to or cannot work are disregarded. The proportion of working age people active in the labour market is therefore called the participation rate.

The fact some people decide not to look for work can affect the unemployment figures and the article below gives an example of this. Unemployment in Queensland is falling, but some claim that this is because some people are so fed up with not finding a job they are simply giving up. If you are not seeking work you are no longer counted as unemployed and the unemployment rate appears to fall.

The discouraged workers as they are known are still without work. The participation rate has fallen and, in the case of Queensland, the number employed falls, but the unemployment rate also falls.

This could indicate a very serious problem with a number of people simply becoming detached from the labourforce, suffering all the personal costs of unemployment, but receiving none of the help the unemployed should receive. In addition the economy is loosing out on all the output those people could produce if they were in work.

Australia's participation rate, since 2011 there has been a downward trend

The ABC cover the story here

This story applies equally to IB and VCE students. The problems of unemployment and the difficulty measuring it is a core concept. There are also links to economic growth and supply-side economics as those not working represent a loss of output and those not seeking to work a serious restraint on aggregate supply.

International Trade benefits the world, but not everybody in the world

Adam Smith and David Ricardo gave economics the theory of International Trade by 1817 (Smith 1776) and what they said remains the basis of the reason economists favour free trade over protection.

The theory says that countries should specialise according to their comparative advantage and as a result overall production will rise and these gains in output will be redistributed through trade (i.e. swapping of goods and services).

To achieve specialisation a country must grow some industries while others shrink (those in which other countries specialise). The result will be more jobs in some industries and less in others.

The loss of jobs is regrettable and is referred to as an 'adjustment cost.' Economists are fully aware of this cost and could explain to those who are now unemployed the overall benefit of the process. It will not be a popular message with the unemployed.

The World Bank is reported to have written a report confirming Smith and Ricardo's conclusions. The growth of free trade (Globalization) has led to overall more jobs, but some have lost out. They estimate 20% of job losses in some areas, like the USA, are due to free trade.

The problem is that there is no guarantee that a country will gain as many jobs through their specialization as they lose. Portugal is a good example. They have lost many jobs to lower cost manufacturing nations (such as Eastern Europe and China), but don't have the comparative advantage in high tech and knowledge based industries they need to replace those jobs.

So the World Bank report is basically saying Smith and Ricardo were right.

The BBC covers the story here

'Remove dole payments after sixth months' call presumes a cause

A Queensland LNP MP is calling for unemployment benefits to be ceased to people under 45 after six months. The aim is to reduce government spending so it can be given to those with large superannuation funds instead - a reason sadly beyond our remit here.

The MP suggests that if somebody knows they will cease to get unemployment benefit then they will indeed get a job. This is of course assuming that those who are unemployed are voluntarily unemployed.

Since the 1980's governments have worked to improve incentives to work through supply-side policies. This has included lowering marginal income tax rates, so that people keep more of what they earn, making working more attractive. Governments have also reduced the real value of unemployment benefits to again make work more attractive relative to unemployment.

The theory is often expressed in terms of 'search costs'. Lowering income tax rates and reducing unemployment benefit makes the cost of 'searching' for new work more costly (in an opportunity cost sense) and so workers will therefore accept a new job more readily, probably one which does not match their ideal job, but it gets them back to work. This would be seen as an increase in economic efficiency.

There are a couple of issues with the MP's proposal. Firstly there is the tricky issue of involuntary unemployment (caused by structural or cyclical factors). The proposal will strand those who genuinely cannot find work. They will most likely have to move on to other benefits because their income is so low, meaning the savings to government will be minimal anyway.

Secondly there is the impact on the distribution of income. The unemployed are, by definition, the lowest income earners and this proposal makes them even worse off. The people who would benefit from the MPs proposed use of money saved would be from the higher income deciles, those with large superannuation savings. The effect on the distribution of income would be to make it more unequal (a higher gini co-efficient).

The New Daily covers the story here

This story has application to the goals of macroeconomic policy and their conflicting nature (equity vs efficiency). Both IB and VCE students can use this as an example of policy.

Australian May Unemployment

With all the election hype the unemployment figures for May were released last week and little attention was paid to them. They show an interesting trend.

The full figures are given below in the link, but as can be seen employment is up (very slightly) and unemployment down, although the unemployment rate stayed at 5.7%.

What you should notice is that employment is rising at a slower rate. The figures are now clear, each month is seeing a smaller rise in employment. We can see confirmation of this in the number of job vacancies, which fell from 172,600 to 169,400. It might not seem much, but that is the worst fall since 2013. It means that fewer new job opportunities are arising.

So far this is not causing a huge crisis. This is because the participation rate is falling and decreased by 0.1 points to 64.8% last month. A lower participation rate has resulted in fewer job seekers per vacancy than there would have been. The number of unemployed people today per vacancy stands at 4.2, but if the participation rate had stayed at its November level that would now be 4.5 people per vacancy.

 

The moral of this story? The headline figures can look okay, but looking deeper allows us to see that the outlook is not as good as it was and there may yet be an unemployment problem for Australia around the corner.

The full ABS figures for May are here

The figures on Australian unemployment are of direct relevance to VCE students. However the relationship highlighted in this article between the participation rate, vacancy rate and unemployment rate is relevant for IB and VCE students. It shows how there are always more questions to ask about data.

A problem of supply side reform

France has an unemployment rate of 10.5%, far higher than other EU countries of similar standing (but not as high as the basket cases of Spain, Portugal, Italy and Greece). That France's unemployment has been consistently higher than the UK's and Germany's really should concern the French.

The charts below show the French and UK unemployment rates. They show that UK unemployment has been consistently lower than Frances and that the UK has recovered from the Global Financial Crisis while France has not. Yet these two countries are neighbours, with broadly similar populations and similar industrial/service based economies.

One explanation offered for this is France's inflexible labour market. The maximum working week is set at 35 hours, there are strict laws about when people can work, generous minimum paid holiday (30 days a year compared to Germany's 20) and employment protection which makes it very difficult for firms to let workers go.

The French government wish to relax labour laws so that while those in work might be a little worse off there will be more jobs overall. 

This is a supply-side policy and copies the process begun in their neighbour, the UK, as early as 1981. This type of supply-side policy is called deregulation. The hope is that the reforms will give firms greater flexibility, so they become more responsive to customers and profitable, and encourage them to take on more employees because there is less risk they become 'stuck' with staff they don't need.

This is being strongly opposed by French Trade Unions who are engaging in nationwide strikes.

The article below explains the policy changes and also suggests that this is a battle between those currently in work and those who would like to be, but can't get jobs in the current climate.

The data certainly suggests that there is something stopping the French labour market from working efficiently and that this will cost France economic growth and give the French generally a lower standard of living.

The BBC article is here

This article is more directly applicable to IB students, but VCE students also need to understand the nature of Supply-side policies and their effects and also the difficulties that can be encountered in implementing them. There is no doubt that creating a more flexible labour market is one aim of supply-side policy and it will result in lower wage rate, but higher employment in the short-run, while allowing higher long-run growth.

The 'Prepare - trial - hire' initiative aims to reduce youth unemployment

An important measure in the Australian Federal Budget is the so called PaTH initiative. It replaces 'Work for the dole' for young people (although that is available after a year of unemployment).

The PaTH initiative (it stands for Prepare, Trial and Hire) is a supply-side policy initiative to try to tackle the problem of structural unemployment among young workers.

Structural unemployment arises because of a mismatch between the skills workers have and the skills needed to fill job vacancies. Young workers have the disadvantages of no experience and no in-work skills. Training workers is expensive and is therefore a cost of employment. If the cost of employing workers can be reduced somehow then firms will hire more of them.

The chart clearly shows unemployment among young workers is higher than over 25's

The ultimate goal of this policy is to shift the Aggregate Supply curve to the right. The policy does this by increasing the supply of skilled workers. It does not assume that all young unemployed workers have no skills, but does assume that the lack of current skills means that some unemployed are not really employable and so not truly part of the workforce (or labourforce/labour supply) available to the economy.

The scheme works by paying the young unemployed  $100 a week extra on their benefits to take part in the early stages of the scheme. This is important because they need an incentive. If there was no additional payment the disadvantages of travel to work costs and getting up early each day etc. would mean many would prefer to stay out of work.

After the first two stages of the scheme employers receive help for six months to pay the wages of the young workers they hire - anothVCEer incentive. This is in addition to $1000 paid to firms at the early stage of the scheme. This payment, of between $6,500 and $10,000 helps offset the training costs of the new workers. With hope after six months of employment the new worker is adding more than the value of their wages to the firms revenue and will keep their job.

Will this work? We don't know until we try it. The incentives on both sides of the market have to be enough to fill the 30,000 places a year. It is clear not all 30,000 will go on to full time permanent jobs, but some should. Overall this measure should help to contribute to Australia's economic growth and lower unemployment. However it will do so only slowly.

The Age explains the scheme in detail here

This article relates to an important measure in the Australian Federal Budget 2016. VCE students need to know the details (plenty in The Age article). IB students can use it as an example of supply-side policy and should be able to analyse the effects in the AD/AS model.

Unemployment and Monetary Policy

The Australian unemployment rate has fallen to 5.7%. This is the lowest rate for two and a half years and so people are generally pleased.

5% remains the 'full employment' target rate, but at least things are going in the right direction. The end of the mining investment boom meant many economists feared 7% unemployment would become a reality, a level not seen in Australia for a considerable period.

Why has Australia done so well? There are a few factors we can identify.

1. Accommodating monetary policy
2. A lower exchange rate
3. A Federal Budget deficit.

The Reserve Bank of Australia (RBA) has reduced interest rates to 2%, the lowest ever, and this has helped boost consumer and investment spending, both components of Aggregate Demand, by making it cheaper to borrow while also reducing the interest on existing loans.

The exchange rate has fallen significantly since 2013, making the non-mining sector more competitive overseas, and so boosting exports.

The government, despite the desire to return the Budget to surplus, has maintained a substantial deficit, so helping maintain Aggregate Demand.

As the article below points out the lower unemployment rate and slower growth in house prices, along with low inflation, means the RBA could cut interest further to encourage a depreciation in the AU$ which has strengthened recently and threatened Australia's export competitiveness.

The Sydney Morning Herald covers the story here

Australian unemployment falls to 5.8%

Unemployment in Australia, which had seemed to be heading well above the full employment level has shown encouraging signs over the last few months. It has now fallen from a peak of 6.4% last year to 5.8%.

The rise in unemployment was expected due to the ending of the mining investment boom, and the recovery is attributed to the expansionary monetary policy and the depreciation of the dollar.

VCE students need to know how all of the key economic indicators have moved over the previous four years (from 2013 for the current Year 12's). In particular VCE students should know the demand and supply side factors which have influenced each variable and the policy responses (budgetary, monetary and supply-side) these have prompted.

Below is an article from The Guardian which analyses recent trends. It also examines what full employment might mean and whether it is worth pursuing as an economic policy goal.

The Guardian article is here

While this post focuses on Australian Unemployment and the needs of tackling VCE it is also useful for IB students. Consider the impact of different factors of unemployment and how economies are interdependent.

Penalty rates. A story to watch.

The Productivity Commission in Australia are looking at a variety of work practise's and this includes whether penalty rates are set appropriately.

Penalty rates are generally called 'overtime rates' in the rest of the English speaking world. It refers to the 'bonus' paid to workers who work extra hours over their usual working week or work at anti-social times, such as weekends. In Australia these rates continue to be set on a national level and for particular industry's.

Some argue that the rates set are too high. In some industry's the rates can be 200% of normal wages. The graph below shows the rates for the hospitality industry.

The traditional argument on penalty rates is that they lead to lower employment. The higher the wage rate then the lower the demand for labour. The same argument can be applied to the minimum wage. The graph below shows the effect of a penalty rate, PR, set above the market wage rate W. The effect is to lower employment by N - Nd hours when penalty rates apply. Notice that Ns - Nd hours of work are offered by workers, but are not taken up (involuntary unemployment).

Another way of looking at this is that penalty rates will cause firms costs to be higher. This leads to market prices being pushed up and so output, and so employment, in an affected industry is lower. The diagram below shows this with the industry or firm supply curve SPR reflecting the higher costs of penalty rates compared to no penalty rates, SNR.

There is some doubt about this analysis. When firms have a great deal of power relative to their employees, as they do in retail and hospitality, they might be able to force wage rates below market rates (W). This means that penalty rates protect workers from profit maximising employers. 

There is also not much evidence to suggest firms close down, or don't operate, when penalty rates apply. 

Below are some articles that look at this issue. The Productivity Commission will give its final report around July, it is worth being ready for it.

The ABC looks at Commission proposals here

Q&A fact check claims on penalty rates here

This is good analytical practice for IB and VCE economists. It might be a fruitful area for IA's or EE's for IB students.

RBA less optimisitc on economy

The Quarterly Statement of the RBA has painted a gloomy picture of the economy. Unemployment is forecast to stay high for two years and the rate of growth will be just below trend. Inflation is forecast to be just 2% rather than the 2.75% previously predicted, mainly due to the repeal of the Carbon Tax.

Note that the repeal of the carbon tax does not reduce core (underlying) inflation, only headline inflation as it won't be repeated and will drop out of the index after a year.

The overall implication is that interest rates won't be rising any time soon and this might help bring the exchange rate down. Such a downward movement will be welcomes to exporters.

The Guardian article outlines the main points and contains essential figures to remember!

The Guardian article is here

The RBA Quarterly Statement on Monetary Policy is here

Work for the dole. Will it work?

The government wish to introduce a 'Work for the dole' scheme that will see all unemployed people under 60 being required to do community based work at some point. Details can be found in news reports.

The policy is a supply-side measure. There are several arguments for it.

* There is an increased incentive to the unemployed people to take a job, any job, as they no longer get as much leisure time while out of work.
* The unemployed maintain a 'working routine' and therefore their skills and habits don't decline as quickly making them more attractive to employers despite their period of inactivity.
* The cost to the state of unemployment is not as great as something of value is recovered in return for benefits.

The argument really revolves around the idea that the unemployed are voluntarily unemployed to some extent. Some don't want jobs and others are waiting for the 'right job'. By making unemployment more costly (this includes falls in the value of benefits announced in the budget) by demanding more effort then those out of work are more likely to accept a job offered to them. This effectively shortens the period of unemployment and helps match people to vacancies more willingly.

The problem is that the economic research on this issue says that it does not work. The Saturday Paper reviews this topic below.

The Saturday Paper article is here

Unemployment up, but not all bad news

Unemployment rose last month, and has now reached 6%. This might seem a bad thing, but there were actually more full time jobs last month and the rise in employment exceeded expectations.

The reason for the rise in unemployment is due to a higher participation rate. This is encouraging because it means more people are seeking work and that indicates a degree of confidence in the economy.

The ABC article says it all. In particular look at the State unemployment data at the bottom of the article.

The ABC report the data here