THE INCREASE in the unemployment rate to 10 per cent in June from 9.8 per cent in the previous month served as a reminder that unemployment reflects changes in the willingness of people to work as well as changes in those actually employed. Thus, while employment rose by 19,000 in June, those actively looking for work increased by nearly 45,000 -- supply increased by more than demand.
The Employment Minister, Simon Crean, treated both the increase in demand and the increase in supply as good news even though the net effect was to push the unemployment rate back to a double-digit figure. From one perspective he was right. It is important to have an economy that provides both increased employment and encourages more people to join the workforce. In the past year or so the Australian economy has been performing quite well in that regard. In the recent June quarter, employment was three per cent higher and the labor force two per cent higher than in the June quarter of last year, resulting in a fall in unemployment from 10.9 per cent to 9.9 per cent.
However, if this fall in unemployment is to be sustained then the demand for labor has to continue to increase faster than the supply over an extended period. The Government's stated objective is an unemployment rate of about five per cent by the turn of the century and it claims that this can be reached through a growth rate in the economy of between 4.5 and five per cent per annum. Such a sustained period of high growth has, however, only been attained in the '50s and '60s and few believe that it can be achieved in the '90s. It would certainly require the sustained maintenance of at least the three per cent employment growth in the past 12 months, which is indeed the growth rate forecast in the next 12 months in the recent Budget.
Unfortunately, there are already signs of a slowing in the demand for labor. In the June quarter itself employment increased by only 0.5 per cent, following increases in the previous two quarters of 0.7 per cent and 1.1 per cent respectively. If the June quarter trend were to continue, the increase in employment during 1994-95 would be closer to two and three per cent and, around this time next year, we could well find the rate of unemployment stuck at about present levels or even higher.
The causes of this recent slowing are unclear and it is possibly only a temporary phenomenon. However, we may already be starting to see some effects from the sluggish recovery in business investment. Thus, while businesses have been taking on extra employees and using excess productive capacity, that process can only go a certain distance without additional investment being undertaken. Yet businesses continue to be reluctant to expand investment and last week's ABS survey of business expectations suggested a very much smaller increase (only 2.8 per cent) over the year to the June quarter of 1995 than the Budget forecast of more than 20 per cent.
Without knowledge of that ABS survey, I pointed out last week that, contrary to the picture being portrayed by the Prime Minister, business profitability may not yet be high enough to provide sufficient incentive for the investment needed to generate the jobs growth that will reduce unemployment on a sustained basis. Increasing investment is so important to the prospects for employment that, in view of the ABS survey, I am highlighting in the graph on this page that profitability is still below levels which in the past brought forward strong investment growth.
One way of improving profitability (and hence investment) would be to give businesses greater freedom to determine wages and other conditions of employment. Unless this happens, Mr Crean could find that the demand for labor continues to be insufficient to absorb the growing supply. The cost of employing labor is being held at too high a level as a result of government-enforced regulations and, most notably, the system of wage awards governing the conditions under which some 80 per cent of the workforce is employed.
Indeed, it is remarkable that even though unemployment was as high as 10.5-11 per cent in 1991-92 and 1992-93, average real wages increased by more than two per cent in each of those years. A more flexible labor market would have allowed real wages to fall, encouraging businesses to "invest" in more employees and more equipment. There is also an important issue of equity here, and that is how can we as a society continue to justify regulations which deprive the opportunity of employment, not only to those officially classified as unemployed, but to the additional large number of people who would take a job if offered one but who do not meet the exact criteria necessary to be classified as unemployed?
ADVERTISEMENT
No comments:
Post a Comment