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Oh what a marvellous mirage!

Australian Finacial Review 16 December 1999


Unemployment is down to 6.7 per cent and some say there is a jobs "boom". Marvellous news! Clearly, Australia doesn't need more labour market reform - with the reforms already in place unemployment will continue to fall as the economy grows.

But hang on a second. Before closing off the reform option, consider whether the labour market legislation of recent years has really produced any underlying improvement.

First, looking behind the reduction in unemployment, something of a mirage is revealed. This is apparent from the startling graph in Minister Newman's Discussion Paper on The Challenge of Welfare Dependency in the 21st Century showing the "Proportion of population of workforce age receiving income support payments". That graph exposes a key fact, viz between 1992 and 1998 the unemployment rate fell from 10.5 to 7.8 per cent but there was also an increase from 17.5 to 18.4 per cent in the proportion of the working age population relying on income support payments.

Thus, although unemployed fell over this period by around 250,000, this was more than offset by increases in other benefit recipients, most notably by an increase of about 300,000 in disability pension recipients. In short, labour market deregulation to date has apparently contributed little to the lowering of unemployment. Instead, weaknesses in the social welfare system have effectively shuffled large numbers of unemployed on to disability pensions -and at a higher cost to taxpayers. This has also happened in some overseas countries claiming to have lowered structural unemployment.

Second, while the employment side of the labour market appears to have improved, that is also questionable. Although between 1992-93 and 1998-99 the proportion of the working age population employed increased by around 2 percentage points, 1992-93 was the bottom of the cycle in the labour market and this improvement may mostly be cyclical.

Indeed, an examination of the employment rate at previous peak years for the (regulated) labour market suggests no improvement. In 1989-90, for example, some 59.6 per cent were employed and in the early 1970s the proportion went over 60 per cent, in both cases above the 1998-99 rate of 58.3 per cent. The most that can be said is that the employment rate is slightly higher now than it was in the mid 1960s when Menzies retired.

The performance of our labour market also compares badly with that of less regulated markets in the US, the UK and New Zealand. (For comparative purpose, we take 15-64 year olds as the working age population because that allows use of comparable data compiled by the OECD).

Each of those countries also had peaks in employment rates in the late 1980s or early 1990s, followed by dips and recoveries since. But by 1998 each had a considerably higher proportion employed - nearly 74 per cent in the US, about 71 per cent in the UK and nearly 70 per cent for New Zealand, compared with 67 per cent for Australia. Yet Australia's employment rate ought to be higher because, on average, we have a more literate/numerate labour force than any of these three.

But, as Labour won the New Zealand election on a platform that included re-regulation, doesn't this suggest that de-regulation should be off the Australian agenda? In fact, the performance of New Zealand's labour market since the reduced regulation of the early 1990s argues for maintaining that agenda. Even with its mini recession of 1998, New Zealand has achieved a consistently higher employment rate than Australia since reducing regulation and it was only the recession that pushed its unemployment rate slightly higher. If New Zealand growth now picks up to around 4 per cent as projected (and provided in office the new Government backs off major re-regulation), unemployment could soon return to pre-recession levels of 6-6.5 per cent.

What of the outlook? Subject to the economy remaining strong, unemployment is projected to edge down further and Minister Newman's social welfare review is focussing on ways of improving the incentive to work. But, if that review succeeds, this will increase the supply of labour and reduce the scope for shuffling the unemployed on to other welfare benefits. Without further deregulation unemployment could increase as some now outside the work force are encouraged back into it - only to find that the "system" is still deterring employers from offering additional jobs.

Politically, the Government will also likely need to respond to a commitment by Labor to reduce unemployment to 5 per cent or even less through interventionist measures. It will be more difficult to challenge the credibility of any such commitment starting from a lower unemployment base.

All this suggests that further deregulation must remain firmly on the policy agenda. Apart from the politics, there is a desperate need to reap the economic and social benefits of the higher employment and lower unemployment that would flow.