Why Unemployment Came to Town...

Author: John B. Lonergan

“Involuntary unemployment was once effectively eliminated in Australia using a buffer-stock of jobs, meaning that anybody who wanted work could find a job. Today, inflation and wage costs are managed through a buffer-stock of the unemployed. This shift is as profound an impact as any in our political history.” Warwick Smith

Over the last 50 years, the most notable employment shifts have been away from agriculture and manufacturing. The most noticeable increase in jobs has been within the developing Service industries such as Hospitality, Health, and Education.

In the 1970s and 1980s, tariffs and trade restrictions were dismantled leaving previously protected industries such as automotive production, shipbuilding and a vast number of other manufacturing sectors exposed to international trade sporting the advantage of cheap labour. The trends continue today however now, also driven by technology.

The Great Depression

Unemployment during the period of The Great Depression rose to a national average of 20% (higher in some parts of Australia). The domestic economy was very weak, taxation receipts (taxation collected) was falling quickly and in response, the government cut back on spending further. Whilst this was a traditional fiscal response of Classic Economic practices of the day, it is now obvious that it simply further exacerbated the economic decline by reducing further public demand. Intern, taxation receipts fell further still and unemployment reached its height of 20%.

World War II

World War Two came close on the heels of the recovery from The Great Depression. By 1943, two-thirds of the workforce were employed directly or indirectly by the armed services. This created a significant shortfall of labour for the balance of private enterprise. Rationing and price controls were implemented to maintain economic stability within the market place however, the most significant factor at this time was the introduction of women to the workforce to supplement labour demand.

This never before achieved efficiency of full employment would inspire future employment policy for the following decades. It was evident that the capacity of government expenditure to eliminate unemployment was a tool that could be used during peacetime also.

The two greatest extremes of historical employment/unemployment can be seen in the graph above. The Great Depression and the “post-war boom”. These two extremes illustrate the impact of public policy, external shocks, and domestic economic conditions on levels of employment.

Australia’s unemployment rate, 1901-2001. From the Australian Government Treasury, 2001.

The Post War Boom – The Dream is Born

This was the period from 1945 to the mid-1970s. During the 1950s, price controls and rationing were extinguished. This was a period of prosperity, consistently low unemployment, stable inflation, high wage growth, high productivity (a rapid return from national deficit being 25% of GDP) and importantly for the community, reduced inequality. Jobs were in high supply and the simple act of turning up on site would secure employment.

Involuntary unemployment was effectively eliminated during the post-war boom through the maintenance of a buffer-stock of jobs. The government shifted from Labour to Liberal however policy commitment to full employment did not alter as an expectation in the electorate. In fact, Menzies nearly lost the 1960s election due to a brief rise in unemployment to almost 3%.

Enter Keynesian Economics of the mid 1970s

The experience of the Great Depression lead to the development of what is now known as Keynesian Economics (after John Maynard Keynes economist for the UK). Keynesian economics asserts that the natural ups and downs of the business cycle could be substantially manipulated if government spending was counter-cyclical; spending during economic declines and reduce spending during economic boom.

In Australia, dominant and bipartisan belief was that government should use its fiscal capacity to maintain full employment to reduce the destructive outcomes of economic downturns and avoid the experiences of the Great Depression.

The Relationship with Inflation

Is there a relationship between Inflation and Unemployment? As you will observe from the graph below, by the nid-70s There was reason to believed so. Unfortunately, for the Unemployed and nearly 50 years on, it appears our government still believes so.

A century of inflation. From (The Australian Government Department of Treasury, 2001).

Now to cut a long story short the attitude of government changed almost overnight. Back in 1945 the then Labor Party lead by John Curtin presented a White Paper titled ‘Full Employment in Australia’, inspired by that Keynesian Principles from the UK. This document committed the government to maintain full employment having the obligation to step in when private demand falls in order to prevent the kind of self-reinforcing downward spiral that led to the Great Depression.

Note: At the same time that Australian policy-makers were focused on full employment, the United Nations Charter enshrined employment as a basic human right.

It is prudent at this point to mention Protectionist policies. These policies were generally maintained during the post war boom period and were responsible for the expansion of a vast range of manufacturing industries such as clothing and automotive production.

The Rise of Neoliberalism – Death to the Dream

The 1970s saw a dramatic rise in inflation within Australia. The culprit being the oil shock price push of 1974 causing a rapid increase in unemployment. Until now, the strong bargaining power of labour, wages were pushed up to keep up with prices. With prices and wages rising faster than productivity, unemployment began to rise sharply. The accepted 2% rose to 6% and higher (11%).

Government policy changed. Full employment was abandoned. The shift of government responsibility to maintain demand for full employment moved to that of individual employability. The Great Australian Dream was being killed-off and new government policy would ensure so.

Unemployment was now painted as a problem, a problem of welfare dependence rather than the reality of deficiency of jobs for all. The emphasis shifted from a government responsibility to maintain sufficient demand for full employment to a focus on individual responsibility and employability.

Global governance has the ideology these days that Inflation is a tax upon capital and a deterrent to the Free Market concept; especially the Free Market concept of the ‘holders of capital’.

Enter NAIRU – wtf is that?

As though the world needs yet another acronym however, this one has had a profound effect upon you. This acronym stands for ‘Non-Accelerating Inflation Rate of Unemployment’ and it means the level of Unemployment below which employees gain sufficient power to push wage growth beyond productivity growth. The theory goes … the result of wages rising faster than productivity is inflation as demand for goods and services outstrips supply.

Again, the theory of NAIRU is that the larger the pool of unemployed workers, the greater the risk faced by employees demanding higher wages because they are readily replaced and will find it difficult to obtain alternative work. This is the Neoliberalism practiced by Australian government today.

This policy practice of government has extraordinary effect when one considers the sum of Unemployment – those with no job (>5%), Underemployment – those unable to obtain the minimum necessary working hours to stay above the poverty-line (>14%) and Underutilised employment – those who have given-up searching for a job all together (>8%).

Add these numbers together (nearly 30% of the employable workforce) and the real story of how NAIRU in the era of Neoliberalism effects the community becomes alarming. Whilst hind-sight has 20:20 vision, the 1975 term of ‘Dole Bludger’ bleated as the cause of fiscal social bleeding and coinciding with the welcoming-in of Neoliberalism, takes on a more sinister form of propaganda.

The share of Australian national income going to profits vs. wages

As it can be seen by the graph above, since 1984 profits have grown substantial however wages have frozen or in fact degraded. The gap of inequity has increased and the Neoliberalist policies have transferred the bargaining power to capital at the significant cost to the power of labour.

Increasing productivity allows production to keep pace with wage rises. Maintaining low unemployment and relatively high labour power enables labour to take a greater share of economic output, thus reducing inequality and lifting the material standard of living for most Australians.

So, accepting a high NAIRU of 5% or more, is likely to be stifling productivity growth, freezing and reducing wages over a long term unnecessarily and reducing Australia’s economic growth.

Unemployment arises because there is a lack of ‘collective will’. It does not arise because real wages are too high or aggregate demand too low. These are only proximate causes, if causes at all. The lack of ‘collective will’ has been the principal casualty of the influence of rationalism.”

Professor William Mitchell (Mitchell 1998)