Our economy is still weak despite unemployment at 5%

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Australia's unemployment rate is low but this figure is deceptive (Image by Dan Jensen)

Australia's low unemployment statistics are not an indication of the true state of our labour market or economy, writes Abul Rizvi.

WHEN UNEMPLOYMENT INCREASED to over 11% in 1992-93, we worried but we were not surprised given the state of the economy. After all, our unemployment rate was over 10% just ten years earlier after the 1982-83 recession and we experienced similar levels of unemployment in the 1974-75 recession.

So when unemployment fell to less than 5% in 2006-2008, Australians enjoyed boom times with real wages rising rapidly and a strongly growing economy. It was a time we worried about high interest rates. Former Prime Minister John Howard promised us interest rates would always be lower under a Coalition government — a boast he may no longer wish to be repeated.

It was also a time net overseas migration was rising rapidly compared to each of the three recessions mentioned above. Net overseas migration fell sharply during each of our three major recessions of the past 50 years to levels around 50,000 and lower. Net overseas migration also fell after the global financial crisis (GFC), when Australia did not fall into recession, but not nearly as far as it fell during the three major recessions. (See data.gov.au for historical migration statistics.)

With the unemployment rate falling to 5.1% in December 2019, a trend participation rate just below our record level of 66.1% and net overseas migration still at relatively high levels, why isn’t our economy booming again?

This question has been the subject of much debate including the fact that a 5% unemployment rate today is not really the same as a 5% unemployment rate 20 or even ten years ago.

But how can that be? Hasn’t the definition of unemployment remained the same?

The unemployment rate measures the portion of people participating in the labour force who do not have a job. Of course, people in employment are defined as anyone with a job even if it is only for one hour a week. If the portion of people with a job that employs them for only a few hours per week is significantly higher today than was the case ten or 20 years ago, the unemployment rate would no longer be comparing like with like.

That would certainly be the case if more people are working as casuals or part-time or indeed in the gig economy. The Australian Bureau of Statistics (ABS) seeks to measure this effect by adding underemployment to unemployment to measure what it calls the underutilisation rate. It defines underemployment as ‘people employed part-time who wanted to work more hours and were available to start work with more hours’.

But this remains a subjective measure of what people would like to have.

A better, more objective measure of the state of the labour market would be the average number of hours actually worked per month per adult.

Apart from being an objective measure, it also incorporates the impact of unemployment, participation, underemployment and population ageing.

In that sense, it is a measure that is more readily comparable over time than the unemployment rate.

Chart 1 below tracks this measure for the last 40 years. It clearly highlights the impact of the 1982-83 recession when average hours worked per month per adult fell to 95.4 and the 1992-93 recession when it fell to 98.9.

(Source: ABS Cat: 6202 and 3101)

After peaking at 108.1 in June 2008, it fell sharply after the GFC to 103.6, recovering only briefly in 2010 and 2011 — largely due to the Government’s fiscal stimulus.

It has been in slow and steady decline ever since. By June 2019, it had reached 99.7, the first time in 40 years it has been below 100 outside a recession.

(Source: ABS Population Projections, Cat: 3222, Series B)

How should we interpret that decline?

It clearly confirms the fact our current economy and labour market are weak. The Morrison Government’s crowing about the number of jobs created is largely a reflection of the level of net overseas migration — which, by the way, is now falling and well below the 2019 Budget forecast.

But does it also reflect the fact Australia’s working age-to-population ratio peaked around 2008-09 and has been declining ever since? (See Chart 2.)

If it is, amongst other factors, a reflection of the impact of population ageing, will this indicator continue to deteriorate? There will undoubtedly be periods in the future when the economy strengthens and the average number of hours worked per month per adult will rise.

The impact of ageing, however, will be relentless.

It is time we once again started to think about how we are going to manage our economy and our society with an ageing population.

We can take comfort in the fact our population will not age as rapidly as most other developed countries, particularly countries in Europe as well as in East Asia (such as Japan, China and Korea).

Chart 3 compares our rate of ageing with that of Japan:

(Source: ABS cat 3222 and Statistics Bureau of Japan)

Australia will age more slowly, predominantly because of our immigration program.

However, as an economy heavily dependent on international trade, it would be a mistake to think we will be immune from the impact of population ageing.

Treasurer Josh Frydenberg has the opportunity in the next Intergenerational report due in May this year to lay out a plan for how Australia will manage the impact of ageing. He could squib the challenge by repeating the fantasies in his 2019 ten-year Budget plan. Or he could be honest with us and give us a genuine plan for our future. 

Abul Rizvi is a former Deputy Secretary of the Department of Immigration and is currently undertaking a PhD on Australia’s immigration policies. You can follow Abul on Twitter @RizviAbul.

Abul Rizvi is a former Deputy Secretary of the Department of Immigration and is currently undertaking a PhD on Australia’s immigration policies. You can follow Abul on Twitter @RizviAbul.

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