Unemployment v Fiscal Instability: Which is the greater threat?

Unemployment v Fiscal Instability: Which is the greater threat?

In the immediate aftermath of the Global Financial Crisis in 2008-09, the main concern for most policy makers was ensuring people were employed. The unemployment rate rose from as low as 4% to almost 6% quite rapidly. After both the government and the RBA took various stimulus measures, this panic subsided and unemployment gave way to debt and deficit as the primary concern of government officials. Australia was supposedly on the brink of a collapse of another kind, that, if not dealt with, could lead us on a path similar to that of the periphery nations of the Eurozone, where fiscal credibility was destroyed.

This crisis of course was unfounded and, over five years on, the debt and deficit levels have failed to prove as catastrophic as once thought. But this still hasn’t stopped it from still remaining as the focal point of Australian economic policy, and as a result, the recent rises in the unemployment rate have gone relatively unnoticed.

Perhaps it’s a good time to take a look at the state of unemployment in this country to see if it is a viable candidate to take the mantle of primary economic concern.

Firstly, it is astounding that almost seven years on from one of the greatest economic catastrophes in recent history, unemployment is actually higher than it was at the peak of the crisis. Even at the peak of the GFC, the unemployment rate never reached 6%, yet in 2015 it currently sits at 6.3% and has been gradually rising for quite a few years now. Some at first glance may think that this rise has been caused by an increase in the participation rate, but this is not the case. The participation rate has trended downward in recent years.

There is also the case of the continually neglected issue of underemployment. One could easily make the case that Australia’s recovery from the GFC was somewhat overstated as the relatively low increase in unemployment was primarily due to worker hours being reduced as people moved from full-time employment to part-time. People were employed, but they wanted to work the hours they were working before the crisis, and they were denied this due to a lack of aggregate demand. The fact that this was barely noted is mainly due to the feebleness of our definition of employment, which includes anybody who works more than one hour a week.

To calm nerves, some may point to the fact that full employment is considered to be around 5% and thus a rate of 6.3% is not all that bad. This is true, and is one of the reasons why panic is not justified. But at the same time, our unemployment rate has been rising for some time now, not falling like it should be in an economy emerging from crisis.

What gave Australia so much prestige in the post-GFC world was the fact that we were one of the very few developed countries that emerged from it intact. We took much pride, and rightly so, in indulging in the fact that we were one of the few nations in the developed world, along with others like South Korea, Poland and Slovakia that avoided a technical recession.

It is therefore quite troubling that when one puts the current unemployment rate into an international context, Australia doesn’t hold up all that well anymore. The United States, the nation in which the crisis originated and where the unemployment rate reached double digits in 2009, now has an unemployment rate of 5.7%, 0.6% lower than ours. This should be a point of severe concern considering our unemployment rate had around a 5% headstart post-GFC.

Youth unemployment is another area of continuing concern. While we can look alarmingly at our European counterparts with youth unemployment rates at ridiculous levels (51% in Spain), our youth unemployment rates are not showing any sign of falling. It has now reached 14%, and again, while this may seem negligible, consider the fact that prior to the GFC, the rate was below 8%, and at the peak of the crisis hovered around 12%.  A particular point of interest is the fact that the evidence suggests that youth is not necessarily giving up on working, as rates of youth searching for work has actually increased. This suggests the rise in the rate of youth unemployment is down to a low level of demand for younger workers, a definite cause of concern.

Now let’s compare this with the state of the debt and deficit.

The debt to GDP ratio is at 28.6% at the moment, and although this has been increasing over the last few years, it is still worth putting in perspective. Once again lets refer to the US, where the debt levels are somewhat of a concern, yet considered manageable. Their debt to GDP ratio currently sits at 101%. As recently as 2013, when the Liberals came into power on the back of accusations accusing the Labour party of fiscal irresponsibility, Australia was ranked 112th in the world in regards to the debt to GDP ratio, sitting behind a number of notoriously reckless fiscal brats, like Sweden.

It’s a similar story with the deficit. Ours currently sits at just over 3% of GDP, which is roughly where it has been over the last few years. Somewhere along the way, Australians seemed to pick up the idea that a budget deficit is always a problem. Much like how a business recording a loss each year is a sign of a weak company doomed for failure, many Australians seem to regard regular budget deficits as a sign of a doomed economy. This does not hold up to any kind of reasonable economic analysis. Unlike a company’s profit statement, where the profit is the ends, the Australian budget is the means to achieve certain economic goals, one of which being full employment. Therefore, it seems entirely rational to seek full employment before we seek budget surpluses.

Despite all this, it would be foolish to take extreme measures like drastic cuts in the cash rate or massive stimulus programs to deal with the issue of unemployment. It is a situation that needs to be managed rather than attacked. However, if we are to avoid the problem getting out of hand, it seems entirely necessary to shift the national conversation away from the debt and deficit and finally give unemployment, and underemployment, its place on top of the podium.