Slow road to jobs growth: the true picture of unemployment in Australia

Not so long ago, when economic commentators thought about unemployment and the Australian labour market, their main question was: How low can it go?

The global financial crisis was a setback to this improving outlook, but only temporary; and the rise in the unemployment rate in 2008-09 in Australia to 5% was much less than the US and UK where it reached 10%.

Yet only a short time later, the question about unemployment in Australia has become: how high will it go?

After declining from 6.3% to 4.9% following the GFC, in 2011 the rate of unemployment in Australia rebounded to 5.3%. This happened because employment growth in 2011 was substantially slower than in preceding years and not strong enough to keep up with population growth.

In the six years from November 2004 to 2010 (a period that covers the initial phase of the mining boom and the GFC), employment increased by an average of about 272,500 jobs per year. But in the year from November 2010 to 2011, employment grew by only 43,000 jobs.

What happens to employment is primarily a reflection of what is happening to demand conditions in the Australian economy. Presently, major influences on demand are the mining boom, consumer sentiment, and demographic change.

The two faces of Australia’s mining boom are apparent in employment outcomes in 2011. The boom continued to cause growth in mining employment, with 41,400 jobs being added. But the high exchange rate for the Australian dollar that the boom has caused, by making it cheaper to buy from importers and on-line sellers, harmed the manufacturing and retail sectors, which together lost a total of 72,000 jobs.

A more cautious attitude to spending by consumers is another factor behind the decrease in jobs in the retail sector, and is also likely to partly explain the slowdown in building and housing construction employment in 2011. Increased off-shoring of mining construction activity is another potential explanation for the reversal in what had previously been rapid growth in construction employment in Australia.

The other industry that was important in explaining the slowdown in employment growth in 2011 was agriculture, where employment had been static from 2004 to 2010, but declined by almost 30,000 jobs in 2011.

Growth in the size of the older population in Australia will have been an important influence on the ongoing increase in employment in the health care and social assistance sector, with 56,700 new jobs added in 2011. This rise was, however, offset by declines in employment in many other personal service industries, such as the education and training sector.

Notwithstanding recent discussion of a poor outlook in the finance sector, employment grew by 36,500 jobs in 2011, substantially more than the average growth of just 6,200 jobs per year between 2004 to 2010.

Some workers have been hit harder than others by the slowdown in employment growth in 2011. Professional workers, sales workers, and labourers were particularly affected. Reflecting declining employment in the retail and manufacturing sectors, total employment of sales workers and labourers decreased in 2011. Slower growth in professional employment was concentrated amongst education professionals and design and engineering professionals.

The slow growth in employment in 2011 was an Australia-wide phenomenon. So while there continued to be much talk of Australia as a patchwork economy, this was not evident in differences in employment outcomes between states. Similarly, for the most part males and females, and full-time and part-time employment, were equally affected by the weaker labour market conditions.

For the next year or so, employment and unemployment outcomes are likely to remain a concern in Australia. Forecasts of economic growth for 2012 are sufficiently strong to suggest that total employment will increase. But this is again likely to be at a slower rate than in the 2000s. And what happens to unemployment will depend importantly on how many people want to work.

In 2011, the effect of slower employment growth on unemployment was moderated by a decline in the labour force participation rate, the proportion of the population in work or wanting to work. Had this decline in the labour force participation rate not occurred, the rate of unemployment at the end of 2011 would have been 6% instead of 5.3%. Hence, should labour force participation steady or begin to increase in 2012, future rises in rate of unemployment may be much larger than has occurred so far.

Job losses or slow growth in employment are likely to continue in industries that were adversely affected in 2011. Most forecasts have the exchange rate for the Australian dollar remaining at a levels at which it is difficult to see a bounce-back in employment in the manufacturing or retail sectors. Reductions in government expenditure to meet commitments to achieve balanced budgets will also cause slower growth in public sector employment in industries such as education and training.

Suppose that the Australian labour market does enter a prolonged period of weaker growth that results in higher unemployment. How will this play out over time? Who will be affected? Our previous experience of labour market downturns gives us some guide to answering these questions.

Initially, the rise in unemployment that occurs in a downturn will be concentrated on workers and job seekers who have become newly unemployed. But as the duration of the downturn lengthens, those who have not been able to find work become long-term unemployed, and consequently the proportion of long-term unemployed will rise.

Then, policymakers are faced with difficult issue of undoing the adverse social and economic effects of this long-term unemployment.

Workers from industries experiencing the largest declines or slowest growth in employment are of course more likely to be adversely affected in any downturn. This is why we are currently seeing so many news stories about job losses for manufacturing industry workers in Australia.

In addition, it is a common pattern for younger and less skilled workers to fare worse in downturns than their older and more skilled counterparts. Younger workers will, for example, have had less time to acquire skills specific to the organisation at which they are working, and hence may be more likely to be laid off as they are seen as more easily replaced than older workers.

Jeff Borland has received funding from the ARC for work on labour markets.