Only deregulation can create jobs

The unemployment rate in August 2002 stood at 6.2%—a high figure considering continuing economic growth. According to the Australian Bureau of Statistics, there were 622,700 unemployed people, but only 100,800 job vacancies, in Australia that month. Simple math—622,700 divided by 100,800—shows that there were more than six job seekers for every available job.

Advocates of increased social security spending often argue that, with so many people chasing every job vacancy, it is unreasonable to tie welfare benefits to work obligation. They propose two broad ‘solutions’ instead: one is to increase the number of taxpayer-funded, public-sector jobs, and the other, to make unemployment benefits more generous.

This is, however, too simple an argument.

For a start, the ratio of job seekers to job vacancies has little to do with the unemployment rate. Historical ABS data indicate that these two indicators are not necessarily interdependent. Take 1978. In May that year, the unemployment rate (6.2%) was exactly the same as in August this year, but the job seeker to job vacancy ratio (12.4) was twice as large then. The relationship between unemployment and job vacancies is by no means straightforward.

Moreover, jobs are always being created. The number of job vacancies appears not to change dramatically from one period to another. This is because just as many jobs are being filled as are falling vacant. Between 1979 and 1998, the average time taken to fill a job vacancy was 15 days at most. This suggests that, over time, the number of job vacancies for which an unemployed job seeker can apply is much greater than appears from the job vacancy statistics at any one time. Professor Peter Dawkins has demonstrated that, even assuming eight unemployed and eight employed applicants per job vacancy, the average unemployed job seeker could find employment within six months.

The job seeker to job vacancy ratio of 6:1 is therefore not as grim as it appears. It also needs to be remembered that there is considerable movement in and out of unemployment.

Those classified as ‘unemployed’ each month are never the same group of people. Some of those unemployed this month will have found jobs next month. Between July and August 2002, 9.1% of those who had been unemployed gained full-time employment while 0.7% of those who had been in full-time employment left or lost their jobs. There is a considerable turnover in the Australian labour market.

Critics complain that some jobs offered in the labour market may be temporary. But short-term employment is far better than no employment. It provides labour market participants with, among other things, an opportunity to update their skills and some relief from the sense of isolation that often comes with unemployment. It also helps maintain work discipline; those who have been out of work for a long time often find it difficult to keep a job when they eventually get one.

The problem therefore does not have to do with temporary jobs but with the long-term unemployed. Around 40% of all unemployed Australians are reported to have been out of work for over six months; the average duration of unemployment sometimes exceeds 50 weeks.

To tackle long-term unemployment, it is necessary to look at not only the supply of, but also the demand for, labour.

The two broad ‘solutions’ proposed by the welfare lobby won’t help much. First, making unemployment benefits more generous would provide a strong disincentive to look for work and would further increase, rather than reduce, unemployment. Second, public-sector job creation programs would increase the tax burden on working Australians, discourage consumption, slow down the economy and eventually destroy jobs.

Jobs can be created, and unemployment can be reduced, without resorting to the public purse. This can be achieved by further deregulating the labour market.

There are many types of labour market regulations in Australia that destroy jobs. Unfair dismissal laws deter not only firing but also hiring. Awards, made at an industry or an occupational level, result in working conditions that are too expensive for some employers to comply. The award minimum wage, very high by international standards, may compel employers to reduce employment of low-wage labour in one way or another.

To boost job creation, these barriers need to be removed so that employers will be more willing to take on new workers.

Australia’s social security spending has increased five-fold since 1960. The unemployment rate had continued to rise until recently. The unemployment problem clearly calls for a different approach, and further labour market deregulation must be part of any future strategy.

 

To Top

About the Author:
Kayoko Tsumori is a Research Fellow at the Centre of Independent Studies with the Social Foundations social policy programme, and author of Poor Laws, a CIS Issue Analysis paper.