Modern Australian

we'll never cut unemployment to 0%, but less than 4% should be our goal

  • Written by Richard Holden, Professor of Economics, UNSW

One of the most concerning things that happens in any recession is the spike in unemployment. The COVID-19-induced recession in Australia and around the world is no exception – other than perhaps the magnitudes involved.

Being out of work is distressing, even in advanced economies with a social safety net (like Australia). Welfare payments rarely, if ever, replace the full loss of income from employment.

In many countries, such as the US, unemployment benefits expire after a certain period of time. This puts the unemployed at risk of being destitute. In Australia (and other countries) receiving unemployment benefits requires proving you are actively looking for work. These obligations can be quite onerous, even if well-intentioned.

Worse still, being unemployed can tilt the scales against an employer offering you a job.

As MIT and Harvard economists Robert Gibbons and Lawrence Katz noted in a landmark 1991 paper, if employers have some discretion over whom to lay off – as is often the case – the labour market will rationally infer that laid-off workers are less desirable employees.

High unemployment also leads to what economists call “labour-market scarring”. This means all those starting work in a bad labour market can suffer long-term economic effects. Either because they don’t get on the job ladder as early as they would have, or because they start off in a job that doesn’t build their skills as well as would have been the case in a strong economy.

Rarely has Australia’s unemployment rate fallen below 5%

we'll never cut unemployment to 0%, but less than 4% should be our goal Seasonally adjusted. ABS Labour Force

These effects can be significant and are of particular concern during this pandemic, as University of Michigan economist Betsey Stevenson has pointed out in an excellent paper on how to mitigate those effects.

Finally, a job also has non-financial benefits. As US presidential candidate Joe Biden has rightly reminded us, a job is about more than a paycheque:

It’s about dignity. It’s about respect. It’s about being able to look your kid in the eye and say everything will be okay.

All of this points to why policy makers need to make low unemployment one of their core missions.

This involves central banks using monetary policy to reduce unemployment and smooth out the business cycle, and governments using fiscal policy to boost demand when it is flagging.

Searching for jobs

That said, there are two important imperfections in labour markets that make some amount of unemployment inevitable. The first is that employers and employees need to be matched together. This involves workers searching for the right job – a process that takes time.

As Peter Diamond, awarded the 2010 Nobel prize in economics for his pioneering work on “search theory”, has observed:

We have all visited several stores to check prices and/or to find the right item or the right size. Similarly, it can take time and effort for a worker to find a suitable job with suitable pay, and for employers to receive and evaluate applications for job openings.

Indeed, searching for better matches between employers and employees is an important contributor to labour market efficiency. As Diamond noted, in the US on average 2.6% of employed workers have a different employer a month later. Some people spending some time unemployed is part of a healthy labour market.

A second important friction was pointed out by another Nobel laureate, Joseph Stiglitz (joint winner of the economics prize in 2001 for his work on asymmetric information).

Efficiency wages

That is, employers might not want to pay their workers the bare minimum they can get away with. Paying above market – what is called an “efficiency wage” – can induce workers to work harder and more efficiently, because the prospect of losing their job is even more painful.

Another way to think about this was offered by George Akerlof (co-winner of the 2001 Nobel economics prize with Stiglitz and A. Michael Spence).

Akerlof brought insights from sociology into economics by viewing the contract between employers and employees as, at least in part, about “gift exchange”. As he put it:

According to this view, some firms willingly pay workers in excess of the market-clearing wage; in return they expect workers to supply more effort than they would if equivalent jobs could be readily obtained (as is the case if wages are just at market clearing).

What is ‘full employment’?

These frictions in the labour market mean full employment, practically speaking, is not zero. It’s almost surely not 1% or 2%, either. The level depends, in part, on how brutal we are willing to make being unemployed. It also depends on the level of the minimum wage.

I, for one, am glad Australia does not cut off unemployment benefits after 16 weeks (as in the US state of Arkansas) and consign the jobless to abject poverty. I’m also glad Australia’s national minimum hourly wage is A$19.84 (about US$14) – double the US federal minimum of US$7.25.

Does that make unemployment higher here than in countries that take a harsher approach? It does. But it also makes us a more compassionate and empathetic society that takes human dignity seriously.

So when federal Treasurer Josh Frydenberg said a few weeks ago that once Australia’s unemployment rate is “comfortably below 6%” the task of “budget repair” should begin, I gasped.

Read more: No snapback: the budget sets us up for an unreasonably slow recovery. Here's how

If “comfortably below” means something like 4%, then fine.

Because of the labour market frictions mentioned above, and our approach to unemployment benefits, it’s going to be hard to get unemployment much below that in Australia.

But the idea we should tolerate unemployment of, say, 5.5% in normal times is, frankly, intolerable. Monetary and fiscal authorities should use all the firepower at their disposal to avoid that outcome.

Authors: Richard Holden, Professor of Economics, UNSW

Read more https://theconversation.com/vital-signs-well-never-cut-unemployment-to-0-but-less-than-4-should-be-our-goal-149070

NEWS

New research suggests immunity to COVID is better than we first thought

Early in the pandemic, many researchers feared people who contracted COVID could be reinfected very quickly. This was because several earlystudies showed antibodies seemed to wane after the first few...

who is Antony Blinken, Biden's pick for secretary of state?

US Secretary of State-designate Antony Blinken promises both awkwardness and opportunity for Australia’s Morrison government.Blinken could hardly represent a more striking contrast with his soon-to-be predecessor Mike Pompeo in his...

Think taxing electric vehicle use is a backward step? Here's why it's an important policy advance

The South Australian and Victorian governments have announced, and New South Wales is considering, road user charges on electric vehicles. This policy has drawn scorn from environmental advocates and...

what’s the best way to conduct Australia’s Great Koala Count?

ShutterstockFederal environment minister Sussan Ley this week announced A$2 million for a national audit of Australia’s koalas, as part of an A$18 million package to protect the vulnerable species.The funding...

Data from 45 countries show containing COVID vs saving the economy is a false dichotomy

ShutterstockThere is no doubt the COVID-19 crisis has incurred widespread economic costs. There is understandable concern that stronger measures against the virus, from social distancing to full lockdowns, worsen...

Mining companies are required to return quarried sites to their 'natural character'. But is that enough?

New Zealand has more than 1,100 registered quarries. Some of these mined sites are small, rural operations, but a significant number are large and complex, and within a city’s urban...

the fraught history of women and swearing in Australia

Kath and Kim (aka Jane Turner and Gina Riley): the suburban hornbags used swearing in clever ways in their 2002-2007 TV series.Riley Turner ProductionsWomen have had a fraught historical relationship...

From here on our recovery will need more than fiscal policy, it'll need redistribution

From the 1980s right through to the global financial crisis, the standard response in Australia and elsewhere to too weak or too strong an economy has been monetary policy —...

Forensic linguists can make or break a court case. So who are they and what do they do?

shutterstockIf you’re an avid viewer of crime shows, you’ve probably come across cases in which an expert, often a psychologist, is called in to help solve a crime using their...

Officials' engagement with China especially important in tense times: Morrison

Scott Morrison has encouraged federal public servants to engage with their Chinese counterparts, saying these are important connections particularly given the tensions in the bilateral relationship.Answering a question during a...

two views on increasing the super contribution

The increase in the compulsory superannuation contribution, legislated to rise next July from 9.5% to 10%, is being fiercely debated following the release of the retirement income report.In this podcast...

Victoria is boosting disability support in schools by A$1.6 billion. Here are 4 ways to make the most of it

ShutterstockThe Victorian government has announced an investment of nearly A$1.6 billion for public schools to ensure students with disability are supported in the classroom. The money will double the number...



News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion













Popular articles from Modern Australian

Your New Home Needs A Great GardenHow To Identify Signs Of Stress In Your ChildInstalling Shade Sails On your Garden10 Tips for Clearing a Blocked DrainCarpet Cleaning: Where Is It Headed In The Future?Common Repairs to Shipping ContainersThe lifestyle Choices of the Australian Millennials5 Tips For Creating a Kid-Friendly BackyardWhat Happens When You Choose a Wrong Cosmetic Dentist Sydney?Garlic In Your Life: The Health Benefits and How To Grow Your Own GarlicPost-Coronavirus Camping - 5 Tips To Help You Have A Safe And Happy Camping TripEasy Ways to Stop Your Mechanic from Ripping You Off12 Helpful Tips to Increase Your Savings This SummerHow to Organize Your Kid’s Nursery On A Budget