Chalmers should give the RBA an employment target

My trouble is I’m too nice. I’m too reluctant to tell people when I think they’re not trying hard enough. If I had time over again, I’d be tougher on nice young Treasurer Jim Chalmers and his white paper on employment.

The Albanese government wants to revitalise our resolve to achieve full employment, but didn’t have the courage to put a number where its mouth is and nominate a numerical target for employment.

I’ve been convinced of this by my former colleague, friend and most worrying competitor, Peter Martin, now of the universities’ The Conversation website.

Chalmers says the white paper is “ambitious”, but Martin isn’t convinced. “A clearly ambitious statement would have specified a target for unemployment, ideally one that was a bit of a stretch,” Martin says.

He notes that the Keating government’s Working Nation statement did that in 1994. Released at a time when unemployment was almost 10 per cent, it specified a target unemployment rate of 5 per cent – an ambition that served as a beacon for decades.

With all the progress we’ve made in recent times, getting unemployment down to about 3.5 per cent for more than a year, Martin proposes setting a stretch target of 3 per cent, or even 4 per cent, as an aspiration.

Essentially, his argument for setting a target is that “what gets measured gets done”. And he’s dead right. This is not about economic theory, it’s about the practicalities of not just having ambitions, but making sure you have your best shot at achieving them.

In an ideal world, it would be enough to merely state your ambitions. But in a world of human fallibility, we need to impose on ourselves rules and targets to help us stick to our guns.

The target we’ve had for the rate of inflation – of 2 to 3 per cent, achieved on average over time – which we’ve had since 1996, has been no magic answer, but has been highly effective in leaving everyone in no doubt about whether we were on track or off track, and by how much.

But, as is widely agreed, in the day-to-day management of the economy, we have two objectives, not one: price stability (as measured by the inflation target) and full employment (as not measured by any target).

This lopsidedness leaves us constantly tempted to err on the side of low inflation at the expense of low unemployment. That’s the unspoken message the lack of a numerical target is sending the economic managers, particularly the Reserve Bank. As I’ve written before, this omission may secretly suit the interests of business.

So if the Albanese government’s professed determination to get full employment back up on its pedestal alongside price stability is to be meaningful, it must involve setting two targets, not one.

Last week, one of the nation’s leading labour market economists, Professor Jeff Borland of Melbourne University, joined this debate. He doesn’t agree that the white paper was the right place for the government to nominate a specific numerical target.

But he does believe the managers of the macroeconomy require a numerical target. To achieve what the white paper calls the “maximum sustainable level of employment”, he says, “you need to know what it is”.

Borland accepts the white paper’s criticism of the present way of estimating full employment, the NAIRU, or non-accelerating-inflation rate of unemployment, which “evolves over time, is difficult to measure, and does not capture the full potential of the workforce” – a reference to underemployment and “potential workers”, who want to work but aren’t actively seeking a job, and so aren’t counted in the labour force.

Borland adds another criticism, that “estimation of the NAIRU has become a ‘black box’, making it almost impossible to understand why it is at a particular level at any time.”

So Borland accepts the government’s argument that, rather than relying solely on estimates of the NAIRU, “policymakers need a broad suite of measures to gauge the extent of current underutilisation [of labour]” and whether the labour market is close to the current maximum sustainable level of employment.

This means Borland rejects Martin’s argument that unemployment can stay the measure of full employment because it moves in line with underemployment (having a part-time job, but not as many hours as you want).

“The rate of unemployment is no longer sufficiently informative about labour underutilisation – and labour underutilisation is what we should care about for policymaking,” Borland says.

However, he dismisses the claims of other critics that the new full-employment objective is bad news for keeping inflation under control.

He quotes what the white paper says on the matter. The objective is to “keep employment as close as possible to the current maximum sustainable level of employment that is consistent with low and stable inflation”.

The plain truth is that there has always been much potential for conflict between the goal of price stability and the goal of full employment. Life is full of such conflicts.

And a key teaching of economics is that when you encounter two conflicting but highly desirable objectives, the answer is never to fly to one extreme or the other, as humans are so often tempted to do.

No, economics teaches that what you should do is seek out the best available “trade-off” (combination) between the two, so you end up with as much of each as the circumstances allow.

The point is that making sure we have explicit targets for both is the best way to motivate the economic managers to find the best trade-off available. Both the white paper and the recent independent review of the Reserve Bank’s performance imply that, in recent years, we haven’t been finding the best trade-off between the two.

But there’s still time for Chalmers to nominate a numerical employment target. Although the Reserve’s act requires it to achieve full employment, the review recommended that, in the setting of interest rates, the full-employment objective be raised to the same status as the inflation target.

The place for this to happen is in the imminent “statement on the conduct of monetary policy”, the agreement between the treasurer of the day and the governor that the treasurer has newly appointed.

It was in the first of these agreements, in 1996, between Peter Costello and Ian Macfarlane, that the Howard government accepted the inflation target the Reserve had formulated as the government’s target.

In the upcoming agreement between Chalmers and new governor Michele Bullock, he could ask the Reserve to go away and come up with its own employment target.

But if he wants to be seen by the public as doing his job with diligence and the courage of his convictions, he will ask the new governor to accept an employment target the government has determined as the embodiment of the fine ambitions expressed in its white paper.

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How full employment can coexist with low inflation

Who could be opposed to full employment? No one. Not openly, anyway. But Treasurer Jim Chalmers’ white paper on employment has been badly received by the Business Council and other business lobby groups. And, of course, business’s media cheer squad.

At least since Karl Marx, the left has charged that business likes unemployment to stay high so there’s less upward pressure on wages and workers are more biddable. We know that when, during recessions or lockdowns, bosses announce they’re skipping the annual pay rise, the unions never dare to disagree. Forget the pay rise and keep my job secure.

So you don’t have to swallow all the Marxist claptrap to suspect there may be some truth to the idea that, though businesses hate recessions, they don’t mind a bit of healthy unemployment.

If so, don’t expect them to be greatly enamoured of Labor’s latest resolve to pay more than lip service to the goal of full employment. But, by the same token, don’t be surprised if business happens to find in the full-employment package something they can profess to be terribly worried about.

Talk about speed reading. As is the practice in lobbyist-ridden Canberra, within minutes of the release of the white paper last Monday, the Business Council – like a lot of other business lobby groups – issued a full-page press release singing its agreement with the government’s move. It was all wonderful, and, in fact, just what the council had been calling for in its own recent voluminous report.

Until, suddenly, in the third-last paragraph, we discover the government had got it a bit wrong. Unfortunately, “we believe the federal government’s workplace relations reforms will undermine the objectives set out in the white paper.

“They will return the workplace relations system to an outdated model, unable to meet the expectations of both employees and businesses in the ways they seek to work today. It will risk fossilising industry structures and work practices when we know technology is going to change and people and workplaces need to adapt quickly,” the council says.

“If the government is to achieve the task it has set itself in this white paper, we encourage it to halt the current workplace relations changes and work constructively with business to identify challenges and find solutions that will deliver sustainable real wage increases for Australians.”

Ah, yes. Now we have it. And I’m sure all that would make perfect sense to every chief executive.

No, part of the opposition to the employment white paper comes from paper’s qualification to the definition of full employment as no one being jobless for long: “These should be decent jobs that are secure and fairly paid.”

But another part of the opposition has involved flying to the defence of the NAIRU – the “non-accelerating-inflation rate of unemployment” – which Chalmers now calls the “technical assumption” used by the Reserve Bank and Treasury in their forecasting, as opposed to the broader definition of full employment set out in the white paper.

The Australian Chamber of Commerce and Industry, the biggest employer group, said in its response to the white paper that the government “needs to make it clear that, contrary to trade union understandings, there will be zero impact on the Reserve Bank’s interest rate setting framework, and zero expectation that [it] will be more doveish on inflation”.

Well, not sure about that. Those who take the government’s recommitment to the goal of full employment to be a return to the post-World War II days when full employment was the only goal in the management of the macroeconomy are doomed to disappointment.

But those who happily imagine it will make zero difference are also kidding themselves. As the white paper makes clear, achieving sustained full employment involves “minimising volatility in economic cycles and keeping employment as close as possible to the current maximum level consistent with low and stable inflation”.

It doesn’t mean that, having fallen to about 3.5 per cent, the rate of unemployment must never be allowed to go any higher. No one has abolished the business cycle, nor the need for macro management to smooth the ups and downs in demand as the economy moves through that cycle.

So, the likelihood that, having greatly increased interest rates despite the fall in real wages, we’ll see some rise in unemployment in coming months, won’t prove the white paper was all hot air.

It’s also true, as more sensible business economists have realised, that the improvements in education and training that the white paper envisages could reduce “structural” unemployment, and thus the level of estimates of the NAIRU.

The truth is, economists make lots of calculations and the NAIRU is just one of them. While their calculations can tell them the NAIRU is now higher or lower than it was a few years ago, economists have never been able to tell you just why it’s changed.

The best they’ve ever been able to do is “ex-post” (after the fact) rationalisation. If the NAIRU has fallen, think of something that’s improved. If it’s risen, think of something that’s got worse.

The way the critics have rushed to the defence of the NAIRU, you’d think its magic number was written by God on tablets of stone. It’s just an estimate. And, like all estimates, it can be more reliable or less reliable.

No, what the government’s recommitment to full employment does is put full employment back up there as an economic objective equal in importance to low inflation. There’s always been scope for tension between the two objectives, and this increases that tension.

It says: if you’ve been erring on the side of low inflation, don’t. Try harder to find a better trade-off between the two.

It means the Reserve Bank and Treasury will now be less mindless and more mindful in the way they use the NAIRU to influence forecasts and judgements. But, unlike the critics, I think the Reserve and Treasury have already got that message.

As generator of magic numbers, the NAIRU has two glaring weaknesses. It was designed in an era when most jobs were full-time, so entirely ignores the spare capacity hidden in underemployment.

And, as the Reserve itself has acknowledged, it assumes all price rises are caused by excess demand, when we know that, in recent times, many price rises have come from disruptions to supply. And we know there’ll be more supply-driven pressure on prices from the transition to renewables and other things.

Have you noticed that whenever the Reserve and Treasury tell us their latest estimates of the magic number, they never tell us how much “judgment” they applied to the number that popped out of the model before they announced it?

But if that doesn’t convince you, try this one: the judgements the Reserve Bank makes will be better in future because, for the first time in a quarter of a century, Chalmers has appointed to its board someone who really knows how wages are set in the real world.

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Albanese wants to put full employment back on its throne

Something really important to the management of the economy happened this week: the Albanese government released its white paper on employment. If the government achieves the vision it has laid out, it could be a turning point in how our economy works, one that begins a lasting reduction in the rates of unemployment and underemployment.

This is Labor’s decision to put “full employment” back on its throne as a central objective of macroeconomic policy. Or, as the paper puts it, “placing full employment at the heart of our institutions and policy frameworks”.

For the first 30 years after World War II, the achievement of full employment was the overriding objective for the managers of the economy. This era began in 1945, with the Curtin Labor government issuing a white paper on full employment in Australia. Notice a pattern?

It worked well for 30 years, but fell apart with the arrival of high inflation in the mid-1970s. Since then, the primary concern of macroeconomic management has been to keep inflation low, with the goal of achieving full employment usually given not much more than lip service.

What’s changed has been the way the ups and downs of the pandemic have suddenly returned us to the lowest rate of unemployment in almost 50 years, about 3.5 per cent. But also the lowest rate of underemployment – part-timers who can’t get as many hours of work as they want – in several decades.

At present, we have about the highest proportion of the working-age population participating in the labour market – by having a job or actively seeking one.

This unexpected return to something close to full employment has prompted many people to think we should be trying at lot harder than we have been to keep employment high and unemployment low.

And that’s why the Albanese government has decided to put the goal of full employment back on its throne in the halls of macroeconomic management.

“Macro” means focusing on the economy as a whole. “Micro” means looking at particular bits of the economy, or at particular mechanisms within the economy.

Since World War II, governments have sought to use “fiscal policy” (the budget) and “monetary policy” (interest rates) to “manage” the macroeconomy by smoothing out the ups and downs in demand for (spending on) goods and services – and thus employers’ demand for workers.

If the goal of full employment is now back on centre stage, what does full employment actually mean?

The white paper defines it as where “everyone who wants a job is able to find one without having to search for too long”. But it adds a qualification: the jobs we create should be “decent jobs that are secure and fairly paid”, a requirement many employers won’t like the sound of.

The paper says it wants “sustained” full employment, which means “minimising volatility in economic cycles and keeping employment as close as possible to current maximum level consistent with low and stable inflation”.

So restoring the priority of full employment doesn’t mean ceasing to care about inflation, but does mean that getting serious about full employment will affect the day-to-day management of the macroeconomy.

The paper also says full employment must be “inclusive”: broadening the opportunities for people to take up paid work and lowering the barriers to work created by various forms of discrimination.

But how will the government go about achieving this more inclusive view full employment? Well, one way to answer this is to take the economists’ standard list of the types or causes of unemployment.

“Frictional” unemployment occurs because, at any time, there’ll always be some people moving between jobs or seeking their first job. So frictional employment is inevitable and nothing to worry about.

It occurs because it takes time for someone wanting a job to find someone wanting to give them one. You’d think that with so much advertising of job vacancies, and so much looking for jobs, occurring online, frictional unemployment ought to be lower than it used to be.

“Cyclical” unemployment is caused by downturns in the economy, which reduce employers’ demand for workers with little reduction in the people seeking work. As the paper says, it can be lessened through “effective macroeconomic policy settings”.

That is, to get the economy moving quickly out of a recession and, better, managing to stop it getting into recession in the first place. It’s when people lose their jobs during a prolonged recession – and education-leavers take months to find their first job – that you get a build-up in “long-term” unemployment.

These are the people who needed special, personalised help from the government because the longer they go unemployed, the less an employer wants to take them on. This role used to be played (not particularly well) by the Commonwealth Employment Service, which was replaced by what’s now called Workforce Australia, using often for-profit providers of “employment services” to people with problems.

If you’ve heard anything about robo-debt, it won’t surprise you that it’s become a travesty of what it was supposed to be, with providers gaming the system and gaining the impression the government wants them to punish people rather than help them.

The Albanese government has instituted an inquiry into the present system of government-funded employment services. How seriously it reforms this shemozzle will be a key test of how committed the government is to achieving sustained full employment.

The final type of unemployment is “structural”, caused by a mismatch between the skills a worker possesses and the skills employers are seeking. Sometimes the mismatch is geographic; often it’s caused by the ever-changing structure of industry, as some industries decline and others expand.

This is the hardest cause of unemployment to reduce. But it involves reforming every level of education and committing to retraining and lifelong learning. Again, this will be a key test of whether the government is committed to achieving sustained full employment, not just dreaming about it.

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Good news: why our low unemployment rate will last

Nobody’s noticed, but something really good has come out of the upheaval of the pandemic: more than 100,000 people who’d spent ages searching for a job without success, finally found one. The benefit to them – and the economy – will last a long time.

When I say nobody noticed, I mean no economist or econocrat. The person first to notice was a former economics writer for this august organ, now economics editor for The Conversation website, Peter Martin.

Because no one had experienced a pandemic, and because it was feared initially that the disruption to the economy would be much greater than it proved, both the Reserve Bank, with its cuts to interest rates, and the government, with its spending and tax cuts, responded to the need for lockdowns by giving a huge boost to demand.

The authorities responded as though the lockdowns were an ordinary recession, not something much more short-term and limited to particular parts of the economy. The economy bounced back strongly after each of the two lockdowns.

So, the surge in demand for goods and services led to a surge in demand for workers to produce them. Adding to the demand for workers were the high levels of absenteeism caused by the virus.

Normally, much of this increased demand for workers would have been satisfied by bringing in workers from abroad. This time, however, our borders were closed. Worse, we’d sent home many overseas students and backpackers.

So what happened? If they wanted more staff, employers were obliged to be less choosy about the workers they hired.

Some people in the pool of unemployment get to find a job and escape the pool after only a few weeks. Others take a lot longer. And the harsh truth is that the longer it takes you to find a job, the less likely an employer is to want you.

Employers think, “if no other employers have wanted you, why should I risk it?” It’s as though the longer you stay in the pool, the further down you sink until eventually, you get stuck in the mud at the bottom.

The Bureau of Statistics defines “long-term” unemployment as having been jobless for a year or more. The number of long-term unemployed always rises greatly in the years following a normal recession.

That’s because the normal pattern is for unemployment to shoot up at the start of the recession, but then take six or seven years to come back down.

Among the greatest victims of recessions are students who have the misfortune to be leaving education at the time. Economists say such unfortunates get “scarred” by the long delay in finding an appropriate job. Research shows it can take them up to 10 years to get their careers going properly.

But though Treasury economists feared the pandemic would leave many young people scarred, it didn’t happen because the “coronacession” proved so short and sharp.

Martin is the first person to shout that, over the year to June, the number of long-term unemployed fell from 218,200 to 130,100. And then to join the dots.

Over the 14 months to June, the fall’s even bigger: 125,000 – almost 1 per cent of the labour force.

This week, we learnt that the unemployment rate has fallen to 3.4 per cent, its lowest in almost 50 years. For the sceptics who think this a fudge, at 6 per cent the rate of underemployment is its lowest in more than 30 years.

This isn’t surprising since 98 per cent of all the extra jobs created since March 2020 have been full-time – suggesting the labour shortage has prompted employers to turn many part-time jobs into full-time.

Since March 2020, the rate of youth unemployment (people aged 15 to 24) has fallen from 11.6 per cent to 7 per cent. And you’d expect the labour shortage to have increased the labour-force participation of older workers, as employers encouraged them keep working or switch to part-time rather than retire.

All this is more than just good news for the people who’ve finally been able to find jobs, move from part-time to full-time, or keep working despite getting older.

It has important implications for the economy’s prospects, and for its ability to achieve lower rates of unemployment before this causes wage inflation to take off. By changing so many people’s category from unemployable to actually employed, it’s increased the effective supply of homegrown labour.

By getting 125,000 long-term unemployed back into the working world, it’s lowered the floor under the unemployment rate by about 1 percentage point. So even if the economy turns down in coming months or years, the unemployment peak, however high, is likely to be about 1 percentage point lower than it otherwise would have been.

It gets us closer to a level of full employment that makes more sense to an ordinary person who thinks full employment surely must mean unemployment close to zero.

It means a rare conjunction of circumstances – strong demand while the economy was closed to imported labour - has brought about a structural change in our labour market that makes nonsense of economists’ conventional estimates of our NAIRU - the “non-accelerating-inflation” rate of unemployment.

When the Morrison government decided to spend big in the 2021 budget to improve its political chances, the econocrats decided to make a virtue of necessity by moving to what I call Plan B: keep stimulating demand to get unemployment so low that employers would have to bid wages up to get all the workers they needed.

This week’s news that wage growth over the year to June has soared to the frightening rate of 2.6 per cent suggests that Plan B hasn’t been a roaring success, and certainly isn’t a reason to worry that labour shortages will lead to wage growth that threatens our return to low inflation.

But the econocrats could claim credit for an unintended consequence of Plan B: it’s helped bring about a long-term reduction in the rate of unemployment.

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It's not jobs we're short of, it's jobs that pay decent wages

When it comes to knowing what’s going on in the jobs market, there’s a bit more to it than being able to remember the present rate of unemployment. It helps to know why the unemployment rate is at the level it is, and what that implies for the family’s future finances.

In case you’ve gone deaf – or just stopped listening – Scott Morrison wants you to know the rate of unemployment has been falling rapidly over the past six months, and is now a fraction under 4 per cent.

That’s the lowest it’s been in about 50 years.

But wait, there’s more. Morrison said last week his priorities are “jobs, jobs, jobs, jobs and jobs”. To which effect he’s promising to create a further 1.3 million over the next five years. This will be on top of the 1.9 million jobs already created since the Coalition returned to power in 2013.

The growth in employment and the fall in unemployment since the economy’s massive contraction during the “coronacession” in the June quarter of 2020 is a truly remarkable achievement, for which the Morrison government deserves much credit. Don’t let any carping Labor critic convince you otherwise.

Don’t let anyone tell you the government has changed the definition of unemployment. It isn’t true. What is true is that the problem of underemployment – people who have jobs, but aren’t able to find as many hours as they’d like – is a bigger problem today than it was 50 years ago.

But the rate of underemployment has fallen to 6.3 per cent, down from 8.8 per cent two years ago, and the lowest it’s been since 2008.

In any case, almost all the 395,000 net extra jobs created since the start of the pandemic two years ago are full-time.

Next, get this. The proportion of the working-age population holding a job now stands at 63.8 per cent – the highest it has ever been.

And the biggest winners in this have been young people. Their rate of employment is 4.6 percentage points higher than it was two years ago. The rate for people aged 25 to 64 is up 1.9 percentage points, while the rate for those aged 65 and over is up 0.4 points.

But all the growth in employment hasn’t been sufficient to meet the demand from employers. The number of job vacancies is at a record level of 423,500. That is, getting on for a half a million job openings are going begging.

Now, let me ask you a question: does it sound to you as though our big problem at present is an acute shortage of jobs, jobs, jobs?

If you’ve heard of generals fighting the last war rather than coming to grips with the present one, now you know that prime ministers are prone to the same mistake.

So, why is Morrison claiming to have made getting us a lot more jobs his priority, when there must surely be more pressing problems he should be focused on? Two reasons.

One is that Australia’s had a problem with insufficient jobs – aka high rates of unemployment – since the late 1970s. This was the case for so long – did I mention 50 years? – the notion that a shortage of jobs is an eternal feature of economic life is now lodged deeply in many people’s minds.

And, as is the practice of modern politicians, Morrison finds it easier to pander to our misconceptions than to straighten them out.

“You think we can never have enough jobs? OK, I promise to create another 1.3 million of ’em.”

But how on earth do we finally seem to have got on top of a 50-year problem? Mainly because our first recession in almost 30 years turned out to be more benign than any we’ve had.

In particular, the government spent unprecedented multi-billions on the JobKeeper wage subsidy scheme, which was designed to preserve the link between employers and their workers, even when they had no work for their workers to do. It worked brilliantly.

The billions federal and state governments spent on this and many other programs to protect the incomes of businesses and workers have given an enormous boost to the demand for workers.

But remember, this surge in demand came at a time when our borders were closed to our usual supply of imported labour: overseas students, backpackers and skilled workers on temporary visas.

Now that our borders have reopened, the demand for workers will increase, but so will their supply. If employment does grow by 1.3 million in the next five years, it will be mainly because of population growth, coming mainly from immigration.

The other reason Morrison wants to talk about jobs, jobs, jobs is to direct our attention towards his economic successes and away from his economic failure: since a year or two before the Coalition’s election in 2013, wages have struggled to keep up with the rising cost of living.

If Anthony Albanese was a sharper politician, he’d be telling us his priorities were wages, wages, wages.

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Economy's rebound goes well, but now for the hard part

Does the economy’s strong growth last quarter mean the recession is over? Only to those silly enough to believe in "technical" recessions. Since few economists are that silly, it’s probably more accurate to call it a "journalists’ recession". Makes for great headlines; doesn’t make sense.

It’s probably true – though not guaranteed - we’ll suffer no more quarters where the economy gets smaller rather than bigger. But people fear recessions not because they deliver growth rates with a minus sign in front of them, but because they destroy businesses and jobs.

You’ll know from walking down the main street that some businesses have closed and not been replaced. You’ll probably also know of family or friends who’ve lost their jobs or now aren’t getting as much casual work as they need and were used to.

By any sensible measure, this recession won’t be over until the rates of unemployment and underemployment are at least back down to where they were at the end of last year, before the virus struck. And Reserve Bank governor Dr Philip Lowe said this week that wasn’t likely for more than two years.

On a brighter note, the increase of 3.3 per cent in real gross domestic product during the September quarter, revealed by the Australian Bureau of Statistics in this week’s "national accounts", does mean the recovery from recession is off to a good start.

So far, however, what we’ve had is not so much a recovery as a rebound. Remember, this unique recession was caused not by an economic threat, as normal, but by a health threat.

The contraction in GDP of a record 7 per cent in the June quarter was caused primarily by a sudden collapse in consumer spending of 12.5 per cent. Why? Because, to halt the spread of the virus, governments ordered many retail businesses and venues to close, employees to work from home if possible, and everyone to stay in their homes and leave them as little as possible.

As a result, people who’d kept their jobs had plenty of money to spend, but greatly reduced opportunity to spend it. Even people who’d lost their jobs had their income protected by the JobKeeper wage subsidy scheme and the temporary supplement to the JobSeeker unemployment benefit.

Turns out that, despite the loss of jobs, those two big support measures actually caused a jump in the disposable incomes of the nation’s households in the June quarter. But, since it was impossible to keep spending, the proportion of households’ income that was saved rather than spent leapt from 7.6 per cent to 22.1 per cent.

The worst-hit parts of the economy were hotels, cafes and restaurants, recreation and culture, and transport (public transport, motoring, domestic and overseas air travel).

But this initial lockdown lasted only about six weeks before it was gradually lifted in all states bar Victoria. In consequence, consumer spending jumped by 7.9 per cent in the September quarter, more than enough to account for the 3.3 per cent jump in overall GDP.

Guess what? The strongest categories of increased spending were hotels, cafes and restaurants, recreation and culture, and transport services. Spending on healthcare rebounded as deferred elective surgery and visits to GPs resumed.

The quarter saw the rate of household saving fall only to 18.9 per cent – meaning people still have plenty of money to spend in coming quarters, even if pay rises will be very thin on the ground. And, since Victoria makes up a quarter of the national economy, its delayed removal of the lockdown ensures the rebound will continue in the present, December quarter.

See the point I’m making? When the greatest part of the collapse in economic activity was caused by a government-ordered lockdown, it’s not surprising most of that activity quickly returns as the lockdown is unwound.

But this is just a rebound to something not quite normal, not a conventional recovery as the usual drivers of economic growth recover and resume their upward impetus.

Thanks to the massive support from JobKeeper and JobSeeker, the rebound is the easy, almost automatic bit. But even the rebound is far from complete. The lockdown will leave plenty of lasting damage to businesses and careers – and the psychological and physical recovery is much harder matter to get moving.

Treasurer Josh Frydenberg boasts that, of the 1.3 million Australians who either lost their jobs or saw their working hours reduced to zero at the start of the pandemic, 80 per cent are now back at work.

Which is great news. But 80 per cent is still a long way short of 100 per cent. And even when 100 per cent is finally attained, that only gets us back to square one. It doesn’t provide additional jobs for those young people who’ll be needing employment in coming years.

Note, too, that most of the rebound in employment has been in part-time jobs. So far, less than 40 per cent of the 360,000 full-time jobs lost between March and June this year have returned.

In March, the rate of unemployment was 5.2 per cent; now it’s 7 per cent. The rate of underemployment was 8.8 per cent; now it’s 10.4 per cent.

And, returning to this week’s figures for GDP in the September quarter, once you look past the rebound in consumer spending, you don’t see much strength in the rest of the economy. Output in mining fell by 1.7 per cent, while production in agriculture was down 0.6 per cent.

One bright spot was home building, which ended a run of eight quarters of decline to grow by 0.6 per cent. Many new building approvals say this growth will continue.

But non-mining business investment in new equipment, buildings and structures incurred its sixth consecutive quarterly fall, with subdued investment intentions suggesting the government’s investment incentives will have limited success.

Little wonder the Reserve’s Lowe has warned the recovery will be "uneven, bumpy and drawn out". Don’t pop the champagne just yet.

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The young will carry the worst scars from this recession

When Scott Morrison spoke to the first day of the National Youth Commission's virtual "youth futures summit" on Monday, he sought to assure the young people that, difficult as the pandemic and the economy are at the moment, there is another side to it, "where Australia emerges once again, where we actually do go back to the life that we loved".

I'm sure that's true. But if past recessions are any guide, most of us will have recovered from the coronacession and be back enjoying the life we love long before most of the present crop of youngsters leaving education have found themselves a decent job.

If the past is any guide, the government won't do nearly as much as it should to help those youngsters who, "through no fault of their own", as Morrison would say, had the immense misfortune to be born in the wrong year or three.

And, quite apart from the pain so many young people will suffer, the money the taxpayer saves from that neglect is likely to be exceeded by all the subsequent cost to the budget in healthcare, unemployment benefits and workers whose reduced incomes mean they don't pay as much tax as they might have.

The greatest burden of recessions always falls on the young for the simple reason that employers' automatic response to a recession is to cancel their annual intake of school and university leavers. The deeper the recession, and the slower the recovery from it, the more years that entry-level hiring is postponed.

This was the case for many years after the global financial crisis of 2008 even though, for the rest of us, a recession was avoided.

You've heard that, unusually in this recession, the greatest burden has fallen on women rather than men. But this can be true while it remains true that the young are the greatest losers. That's because a disproportionate share of the women is young.

As summarised for the summit by the independent economist Saul Eslake, recent research by Treasury has found that people who enter the jobs market for the first time during a recession are less likely to change jobs – which means they're more likely to miss out on one of the main ways by which people get pay rises during their first 10 years in the workforce (that is, by changing jobs).

This matters because almost 80 per cent of lifetime wage rises occur during the first 10 years of someone's working life. So the "scarring" effect of leaving education in a bad year lasts for 10 years.

Treasury finds that the scarring effect has been bigger since 2000 than it was in earlier recessions, so that the most recent generations of young people have been affected more than previous generations. And it's worse for women than for men.

All this is consistent with the interim findings of a nationwide inquiry into youths' transition from education to employment, which the National Youth Commission published on Monday. It finds that unemployment for 15- to 24-year-olds is consistently higher than for 25- to 64-year-olds. And that traditional pathways to employment for young people have eroded over the past couple of decades.

One thing that's changed over the years is the growth of underemployment. To the present unemployment rate of 7.5 per cent and rising must be added the underemployment rate of 11.2 per cent, representing those who have some paid work but want more.

Just remember it's the young who dominate the underemployed. Many of them have multiple jobs, but still can't make ends meet. Many are in the "gig economy", whom governments have allowed to be defined as "independent contractors", thus permitting those wonderful innovative outfits that run app-based fast-food delivery and all the rest to sidestep the legal obligations of an employer.

Remember, too, that the seeming epidemic of "wage theft" – which, by their neglect, governments have done too much to allow and too little stamp out – would be perpetrated particularly on the young.

Unsurprisingly, the inquiry found the (pre-pandemic) levels of the youth allowance and unemployment benefits – which successive governments have frozen in real terms for 25 years – are inadequate. It's the young who suffer most from this parsimony.

Morrison and his ministers have repeatedly defended the $40 a day by saying people are on the dole only temporarily before they find a job. That was certainly the reasonable expectation in the past. Now, however, it's one of the respects in which the inquiry found the system no longer fit for purpose.

Another respect is, it's no longer true that most jobs for young people are full-time. Only in the past month has the government temporarily changed the means test to encourage the unemployed to look for part-time jobs. Pity so few of them are on offer at the minute.

The youth commission has proposed a detailed "youth futures guarantee" laying out reforms and measures that would better support our young people in meeting the challenges they face. Challenged to respond to the proposal, Morrison was masterfully noncommittal.

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Complacent government cutting back support far too early

Sorry, but this is the economic statement of a government that’s complacent about controlling the coronavirus and about getting a million unemployed people back to work. It sees its job as largely done. Now it’s time to quickly wind back its spending on supporting the economy and call for the bill.

You can tell Prime Minister Scott Morrison and Treasurer Josh Frydenberg decided this before the extent of the setbacks in Victoria and NSW became fully apparent. They have assumed that after the six-week lockdown in Melbourne, everything will be fine again.

That’s quite an assumption, especially because those two states account for more than half the national economy.

A less complacent assumption would have been that, in the many months likely to pass before a vaccine is widely available, several further major setbacks could occur and delay the return to confidence by consumers and businesses that normal economic times had resumed and it was time to get on with spending and investing.

If so, the government might have a lot more spending to do to keep the economy above water until the pandemic’s “once-in-a-century shock” to the economy has passed.

Were you shocked by the news of the highest budget deficits since World War II, leading to net public debt already up to $488 billion and expected to hit $677 billion by next June?

Such shock seems to have been the main goal of Thursday’s budget update. The government’s spin doctors announced the fate of both the JobKeeper wage subsidy scheme and the temporary doubling of the JobSeeker unemployment benefit two days earlier so as to now heighten public concern about all that money being spent, and get us to accept the government’s decision that spending should be wound back pronto.

And that’s what Morrison announced on Tuesday – though you could be forgiven for not noticing it through all the spin. The government had gone for weeks threatening to end both schemes in September.

So when Morrison announced that they would be continued for another six months, in modified form, there was a sigh of relief. Few people noticed that the threatened “fiscal cliff” would now be just a precipitous incline.

It’s estimated that two-thirds of companies – and their employees – will be off JobKeeper by early next year. Which will be fine provided the economy bounces back as strongly as the government seems to believe it will.

But Treasury’s forecast that the economy will grow by 2.5 per cent in 2021 seems optimistic to me – and in any case, wouldn’t be sufficient to do much to turn around the 870,000 jobs lost between March and May this year and the million workers who saw their hours cut.

What seems clear is that the government is anxious to rein in the growth in its spending so as to limit the growth in its debt. What’s much harder is to find economists who agree that, with the economy’s prospects still so worrying, now is the time to be cautious and pull back.

A poll of 50 leading economists, conducted by the Economic Society of Australia, found that 44 of them agreed the government should use its budget to boost demand during the economic crisis and recovery, “even if it means a substantial increase in public debt”.

And if Reserve Bank Governor Philip Lowe shares the government’s worries about debt and deficit, he’s got a strange way of showing it.

Only on Tuesday he said that “debt across all levels of government in Australia, relative to the size of the economy, is much lower than in many other countries and it is likely to remain so. The Australian government can borrow at the lowest interest rates since Federation.”

So it is “well placed to smooth out the shock to private incomes and support the economy through the pandemic”.

It all translates to economists telling the government it’s the “eye-watering” levels of unemployment it should be most worried about.

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Treasury: no depression, but no big bounce-back either

Although the virus has delayed the budget until October, Treasurer Josh Frydenberg will deliver an update on the budget and – more importantly – the economy, within the next fortnight. But last week the secretary to the Treasury dropped some big hints on what to expect.

In evidence to the Senate committee inquiring into the response to the virus, Dr Steven Kennedy started with the outlook for the labour market. The latest figures from the Australian Bureau of Statistics are for the four weeks up to mid-April.

In round figures, they show that 900,000 people lost their jobs during the period (although 300,000 gained jobs), 1 million people worked fewer hours and three-quarters of a million kept their jobs but worked no hours (most of them protected by the JobKeeper wage subsidy scheme).

So that’s a total of 2.7 million workers – about one worker in five - adversely affected by the snap recession. Total employment fell by 4.6 per cent, but total hours worked fell by twice that – 9.2 per cent, telling us much of the pain was borne by part-time workers. The rate of under-employment (mainly part-timers working fewer hours than they want to) leapt by almost 5 percentage points to 13.7 per cent.

The “good” news is, Kennedy thinks that’s most of the collapse in employment we’re likely to see. We may get a bit more in the figures for May, and maybe even a fraction more in June. But that should be it.

The trick, however, is that though the underlying position won’t be getting much worse, we’ll see the rate of unemployment shooting up. It had risen by “only” 1 percentage point to 6.2 per cent by mid-April, but Kennedy expects it to be closer to 10 per cent by mid-June. (And it would have gone a lot higher but for the JobKeeper scheme.)

Such a strange outcome – it’s not actually getting much worse, but the unemployment rate is rocketing – is explained by the strange nature of this coronacession: a recession caused by the government, acting under doctors’ orders.

In an ordinary recession, almost all the people who lost their jobs in April would have immediately started looking for a new one, and so met the bureau’s tight definition of being unemployed. This time, most people didn’t start looking because many potential employers had been ordered to cease trading and, in any case, you and I had been ordered to stay in our homes and rarely come out.

As the lockdown is eased, however, people will start actively looking for work, and the bureau will change their status from “not in the labour force” to unemployed, making the figures look a lot worse.

On Wednesday, the bureau will publish the “national accounts”, showing what happened to real gross domestic product – the change in the economy’s production of goods and services – during the March quarter.

Kennedy is expecting real GDP to have fallen a bit, mainly because of the bushfires and the ban on entry to Australia by foreign tourists and overseas students. He’s expecting the big fall to come in the June quarter, and for the combined fall since December to be as much as 10 per cent.

If it’s anything like that big it will be humongous. The total contraction in the last recession, in the early 1990s, was just 1.5 per cent. But, as with the job figures, Kennedy is expecting the contraction in GDP to end with the June quarter.

The big question is, what happens after that? With most of the economy reopened – but, of course, our borders still closed to international travel – will most of us be back at work and producing and spending almost as normal? That is, will the period of the economy dropping like a stone be followed by it bouncing back like a rubber ball, producing a graph that looks like a big V?

No. Kennedy told the Senate committee “I’m not predicting a V-shaped recovery in any sense, but the way we entered this [downturn], and the nature of this shock, give me some hope that if governments respond well, particularly through their fiscal levers [that is, their budgets], we needn’t have what’s called the L-shaped recovery”.

That is, economic activity drops a long way, but stays there without growing. Kennedy says the L-shape is probably what people would think of as more like a depression.

Kennedy noted that, according to separate figures from the bureau, the number of jobs in the accommodation and food sector fell by more than 25 per cent in just the three weeks to April 4, while jobs in the arts and recreation services sector fell by almost 19 per cent.

He drew some hope from the fact that the sectors worst affected by the lockdown are “quite dynamic”. “They’re sectors that have high turnover in businesses coming and going, quite high turnover in employees and a lot of casuals,” he said.

So, in the right conditions, they had the potential to re-establish quickly. In contrast, it was hard to re-establish a manufacturing plant quickly. In this strange recession, manufacturing, construction and mining had been allowed to continue without much disruption.

If you rule out V-shaped and L-shaped recoveries, what’s left is a U-shape. You go down fast, but bounce along the bottom before going back up. But our success in suppressing the virus means we’ve been able to start dismantling the lockdown earlier than the six months initially expected.

“So in some ways we’re actually a little more optimistic [than we were] – maybe we just squeeze the U together a bit,” he said.

That’s looking at our domestic economy. Looking at the prospects for the global economy, it’s possibly worse than he first thought. But even here Kennedy finds some source of hope. It so happens that our major trading partners – China, South Korea and Japan – are among the countries that have done better at beating the virus and getting back to work.

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Treasury: the budget won't ruin us, but will help save us

Something we should be thankful for is that Scott Morrison saw fit to return the leadership of Treasury to another highly respected macro-economist in the months before the arrival of a virus obliged Morrison to hit the economy for six.

The key to our success in suppressing the virus was his willingness to follow his medicrats’ Treasury-like advice to “go early, go hard”. Unfortunately, going hard meant governments closing our borders and ordering a large slab of private enterprise to cease supplying goods and services to their customers.

We’re left with a sudden, unexpected, government-ordered, supply-side “disease-led” shock to the economy that’s without precedent. By mid-April, this had caused 2.7 million Australians to have either lost their jobs or had their hours reduced.

It would have been several million souls worse than that, but for the quick thinking that saw we needed a new measure – the JobKeeper wage subsidy – to preserve the attachment between businesses and their workers, even though there was much less work to be done.

Treasury and the Australian Tax Office had to design and implement this completely unfamiliar program within a few weeks. It thus shouldn’t be too surprising that their initial estimate of its size and cost proved badly astray. Especially when you remember how far their staffing levels have been run down in the name of smaller (and thus less capable) government.

The JobKeeper program is now expected to involve 3.5 million rather than 6.5 million workers, and cost $70 billion over six months rather than $130 million. According to Treasurer Josh Frydenberg, this $60 billion reduction is “good news for the Australian taxpayer” - which suggests he’s yet to learn that the economy matters more than the budget.

Make a note, Josh: the budget serves the economy (and society), the economy doesn’t serve the budget. Taxpayers gain their livelihoods from the economy, which brings them many benefits (starting with three meals a day) along with taxes to pay. In my experience, someone who loses their job gets little comfort from the knowledge that they’ll be paying less tax.

In truth, the $60 billion stuff-up is good news for the economy and the people whose livelihoods it supports. It suggests that fewer businesses than expected have had their revenues cut by 30 per cent (or 50 per cent for big businesses), so that fewer workers than expected have had their livelihoods threatened.

In any case, Treasury secretary Dr Steven Kennedy’s remarks to the Senate committee examining our response to the virus, made the day before the stuff-up was announced, suggest there’ll be plenty of other important uses to which the $60 billion could be put.

Kennedy stressed the central role that the budget (“fiscal policy”) would have to play in getting the economy back to full employment “in the months and years ahead”, especially because the other instrument for managing demand, “monetary policy”, is “not able to provide the usual impact that it would”.

That is, interest rates are already as low as they can go, whereas in the global financial crisis they were cut by 4.25 percentage points to help stimulate demand.

As we move away from the supply shock and cautiously reopen industry, “it will become more about managing demand and more about confidence. The focus will be very much on fiscal policy – how it’s contributing to growth and how the composition of those policies contributes to growth and how they encourage re-employment”.

It was obviously a matter for the government but, in the run-up to the budget in October, Treasury would be advising the government on “macro-policy and the composition of existing fiscal stimulus and whether any more is required”.

“I realise people are very excited about lots of reform, but I would encourage us not to get too far ahead of ourselves; we need to keep the economy afloat as it is now and to also get it open,” Kennedy said.

When they think of the huge budget deficits coming up, readers ask me where all the money will be coming from. Short answer: it will be borrowed. And Kennedy advised the committee there was no shortage of institutions keen to buy the government’s bonds (including, no doubt, your super fund, but also foreign institutions).

Countries such as Australia and New Zealand had been “incredibly well placed” to borrow more because “we did start with relatively low levels of debt”. This meant our deficit spending in response to the economic shock could be managed without much debate, he said.

And with the cost of borrowing so low (10-year government bonds cost the government an interest rate of 1 per cent), once the economy was back to growing strongly and the budget balance improving – which wouldn’t be for some time – “debt will bring itself down over time”.

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Women, part-timers and the young hardest hit by jobs crisis

At a time like this, measuring the rise in joblessness is very important. But it’s a trickier job than many realise. You have to draw boundaries somewhere, and where they should go can always be debated.

But some who don’t like comparing shades of grey think the problem can be reduced to good guys and bad guys. Why do the figures look strange? Because some prime minister a few years back changed the definition of unemployment to make it look smaller. Would you believe that someone who’s worked as little as one hour in a week is counted as employed?

Sorry, this fiddling is an urban myth. The truth isn’t nearly so exciting. But before I deflate the balloon, let me show you the circumstantial evidence.

The most recent figures, for April, show America’s rate of unemployment leaping more than 10 percentage points to 14.7 per cent – in just a month. Canada’s unemployment jumped 5 points to 13 per cent.

What happened to our rate? It crept up from 5.2 per cent to 6.2 per cent. Really? Are you kidding? What’s that if it’s not a fiddle?

Or, consider this. Our figures show that about 900,000 people lost their jobs in the four weeks to mid-April. But they also show that unemployment increased during the period by only about 100,000. How’s that possible? What’s that if it’s not a fiddle?

Actually, it’s support for one of my favourite sayings: the world is a complicated place. There are puzzles everywhere. If you want everything to be black or white – all good or all bad - you should never have left the security of primary school.

So, it may look like a conspiracy, but it ain’t. A sign that we’re dealing with a myth is that the identity of the PM who did the dirty deed changes with the political sympathies of the person who tells you they remember him doing it.

The figures we get each month for how many people are employed, unemployed or neither (“not in the labour force”) come from a huge monthly survey of households conducted by the Australian Bureau of Statistics, which brooks no interference from politicians.

The bureau follows international conventions set by the United Nations' International Labour Organisation, in Geneva. Its definitions haven’t changed in many decades. (I once ran into a union-movement economist who was an Australian representative on the ILO committee reviewing the definitions. To my surprise, he staunchly defended the decision to leave them unchanged, including the bit about one hour’s work meaning you were employed.)

As the bureau explains in its release, the main reason the North Americans’ unemployment rates are so much higher than ours has to do with workers who’ve been “stood down” for some weeks because the boss has no work for them, but hopes to bring them back when things improve.

We class such people a still employed, whereas the North Americans class them as unemployed. The bureau estimates that, if we did it the American way, our unemployment rate would be not 6.2 per cent, but 11.7 per cent.

Although about 900,000 Australians ceased to be employed during the four weeks to mid-April, it may amaze you that, in the same period, about 300,000 people went from not having a job to having one. This surprises people because they don’t realise how much coming and going there is in the labour force, even during recessions.

The bureau estimates that, even in a month where total employment seems hardly to have changed, on average about 300,000 people leave employment and about the same number move into employment.

It’s the net fall in employment of about 600,000 that matters. Why then did unemployment rise by only about 100,000? Because part of the definition of being unemployed is that you must be actively looking for job. Since we were in lockdown, 500,000 of these people didn’t start looking for another job, and so were classed as “not in the labour force”. As soon as they do start looking, they’ll be unemployed.

People make too much of the rule that an hour’s work means you’re not unemployed. Only 2.5 per cent of all those employed in March worked for only one to five hours a week. It’s true, however, that the international definition of unemployment is too narrow, especially in a world where one-third of our jobs are part-time.

This is why the bureau always calculates the rate of under-employment – people who have (mainly) part-time jobs, but would prefer to be working more hours than they’re able to, maybe even full-time hours.

The coronacession has meant many workers are having their hours cut. The number of underemployed people jumped by 100,000 to 800,000, taking the underemployed proportion of the labour force from 8.8 per cent to 13.7 per cent.

Delving into the figures, about 55 per cent of the 600,000 jobs lost in April were held by women, even though women accounted for only 47 per cent of the workforce. Almost two-thirds of the jobs lost were part-time.

Employment of people aged 15 to 24 fell by about 11 per cent, compared with a fall of 3 per cent for prime-aged workers (aged 25 to 54). Unemployment is a much bigger problem for the young, as is underemployment.

While your head’s still spinning, one last puzzle. Being counted as unemployed by the bureau is not the same thing as being eligible to receive unemployment benefits - the “JobSeeker” payment - from Centrelink.

Some people counted as unemployed aren’t eligible for the dole (often because their spouse’s income is too high), whereas some people eligible for the dole aren’t counted as unemployed (because they’re allowed to work a few hours a week before the dole cuts out).

Right now, however (and partly thanks to a temporary increase in how much your spouse may earn), there are 800,000 people counted as unemployed, but twice as many – 1.6 million – getting the JobSeeker payment.

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Our new economic worry: Reserve Bank running out of bullets

Scott Morrison got the government re-elected on the back of a budget built on an illusion: that the economy was growing strongly and would go on doing so for a decade. The illusion allowed Morrison to boast about getting the budget back into surplus and keeping it there, despite promising the most expensive tax cuts we’ve seen.

The illusion began falling apart even while the election campaign progressed. The Reserve Bank board responded to the deterioration in the economic outlook at its meeting 11 days before the election.

It’s now clear to me that it decided to bolster the economy by lowering interest rates, but not to start cutting until its next meeting, which would be after the election – next Tuesday.

If that wasn’t bad enough for Morrison, with all his skiting about returning the budget to surplus he may have painted himself – and the economy – into a corner.

In a speech last week, Reserve Bank governor Dr Philip Lowe made it clear that cutting interest rates might not be enough to keep the economy growing. He asked for his economic lever, “monetary policy” (interest rates), to be assisted by the government’s economic lever, “fiscal policy” (the budget).

He specifically mentioned the need to increase government spending on infrastructure projects, but he could have added a “cash splash” similar to those Kevin Rudd used to fend off recession after the global financial crisis in 2008.

See the problem? Any major slowdown in the economy would reduce tax collections and increase government spending on unemployment benefits, either stopping the budget returning to surplus or soon putting it back into deficit.

That happens automatically, whether the government likes it or not. That’s before any explicit government decisions to increase infrastructure spending, or splash cash or cut taxes, also worsened the budget balance.

And consider this. The Reserve’s official interest rate is already at a record low of 1.5 per cent. Its practice is to cut the official rate in steps of 0.25 percentage points. That means it’s got only six shots left in its locker before it hits what pompous economists call the “zero lower bound”.

What happens if all the shots have been fired, but they’re not enough to keep the economy growing? The budget – increased government spending or tax cuts – is all that’s left.

The economics of this is simple, clear and conventional behaviour in a downturn. All that’s different is that rates are so close to zero. For Morrison, however, the politics would involve a huge climb-down and about-face.

My colleague Latika Bourke has reported Liberal Party federal director Andrew Hirst saying that, according to the party’s private polling, the Coalition experienced a critical “reset” with April’s budget. The government’s commitment to get the budget back to surplus cut through with voters and provided a sustained bounce in the Coalition’s primary vote.

The promised budget surplus also sent a message to voters that the Coalition could manage the economy, Bourke reported.

Oh dear. Bit early to be counting your chickens.

The first blow during the election campaign to the government’s confident budget forecasts of continuing strong growth came with news that the overall cost of the basket of goods and services measured by the consumer price index did not change during the March quarter, cutting the annual inflation rate to 1.3 per cent, even further below the Reserve’s target of 2 to 3 per cent on average.

Such weak growth in prices is a sign of weak demand in the economy.

The second blow was that, rather than increasing as the budget forecast it would, the annual rise in the wage price index remained stuck at 2.3 per cent for the third quarter in a row. The budget has wages rising by 2.75 per cent by next June, by 3.25 per cent a year later and 3.5 per cent a year after that.

As Lowe never tires of explaining, it’s the weak growth in wages that does most to explain the weakening growth in consumer spending and, hence, the economy overall. Labor had plans to increase wages; Morrison’s plan is “be patient”.

The third blow to the budget’s overoptimism was that, after being stuck at 5 per cent for six months, in April the rate of unemployment worsened to 5.2 per cent. The rate of under-employment jumped to 8.5 per cent.

Why didn’t Labor make more of these signs of weakening economic growth during the campaign? It had no desire to cast doubt on the veracity of the government’s budget forecasts because, just as they provided the basis for the government’s big tax cuts, they were also the basis for Labor’s tax and spending plans.

Labor was intent on proving that its budget surpluses over the next four years would be bigger than the government’s – $17 billion bigger, to be precise.

Think of it: an election campaign fought over which side was better at getting the budget back to surplus, just as a slowing economy and the limits to interest-rate cutting mean that, at best, any return to surplus is likely to be temporary.

Morrison’s $1080 tax refund cheques in a few months will help bolster consumer spending, but they’re a poor substitute for decent annual pay rises.

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We've had plenty of new jobs - for the young, not so much

You can be sure Scott Morrison and Josh Frydenberg will be boasting about this week’s job figures, which show the jobs market remaining unusually strong. But their critics know not to believe the numbers.

The Australian Bureau of Statistics’ figures for January show the seasonally adjusted rate of unemployment steady at 5 per cent – the lowest it has been since the start of the decade. The more reliable “trend” (smoothed) estimate is little different at 5.1 per cent.

Sticking with the trend figures, employment has increased by more than 295,000 people over the past year. That’s a rise of 2.4 per cent – a lot bigger than the average annual growth rate over the past 20 years of 2 per cent.

Almost three-quarters of those extra jobs were full-time. Full-time employment has been growing particularly strongly in the past few years.

Another good indicator of how well the economy is going at providing jobs for those who want to work is the employment ratio – the proportion of everyone in the population aged 15 and over who has a job. It’s steady at 62.4 per cent, the highest it’s been.

Just during January, employment increased by 24,900 to reach 12.7 million. That’s an increase of 0.2 per cent, above the monthly average growth rate over the past 20 years of 0.16 per cent.

But don’t get the idea this means all of us stayed in our jobs while another 24,900 joined us. That’s just the net increase. There was a lot more coming and going than that. Indeed, the bureau informs us that, each month, about 300,000 people leave employment and about 300,000 enter it.

Looking at that strong performance over the past couple of years, what’s not to like? With a federal election coming up, why shouldn’t Morrison and Frydenberg boast about the great job they’ve done on jobs?

Well, a lot of their critics would be happy to tell you. They know the official unemployment figures understate the true extent of joblessness.

Did you realise, for instance, that the bureau counts you as employed even if you’ve worked for as little as one hour a week?

This means that, as well as the 680,000 people counted as being unemployed, there are another 1.1 million people who are under-employed – those who have a part-time job, but want to work more hours a week than they are.

Those 1.1 million represent 8.3 per cent of the “labour force” (all those with jobs or looking for jobs). Add that 8.3 per cent to the official unemployment rate and you get a total “labour under-utilisation rate” of 13.3 per cent.

This is down from 14 per cent a year ago, with under-employment accounting for just 0.2 percentage points of the fall and unemployment accounting for the rest.

So the under-employment rate, which rose in the years after the global financial crisis, has fallen since its peak of 8.8 per cent in early 2017, but much more slowly than the fall in unemployment.

That’s the standard critique of the official story: the “true” extent of joblessness is far higher than the official unemployment rate tells us, and when you take account of widespread under-employment you see also that the rate of improvement has been a lot smaller.

What are we to make of this criticism? Well, it’s correct factually, but when you look deeper you see it goes to the other extreme of overstating the extent of the problem.

Take, for instance, the oft-repeated news that people are counted as unemployed if they work for as little as an hour a week. That’s true, but how many people do work as little as an hour?

Answer: almost no one. This week the bureau issued a special note about this matter. It says that only about 14,500 people do, out of total workforce of 12.7 million – that is, 0.1 per cent. (If you think 14,500 people is a lot, you don't realise how big our economy is.)

Make it people working up to three hours a week and you’re still only up to 100,400 people, or 0.8 per cent. In fact, about 97 per cent of workers usually work seven hours or more a week. That’s at least one full shift a week.

The point is that you have to draw the dividing line between unemployed and employed somewhere, and by adhering to the longstanding international convention of drawing it at an hour a week, we are not significantly overstating the position.

Many people assume the only good job is one that’s full-time. Wrong. Many students, parents and semi-retired people are perfectly happy working only part-time.

Further, many people assume that every part-time worker who says they’d like to work more hours is someone who’d rather have a full-time job if only they could find one. That’s wrong, too. Though many would indeed prefer a full-time job, many part-timers want to stay part-time, but wouldn’t mind working a few extra hours.

So when you take the unemployment rate (people with no job) and simply add the under-employment rate of 8.3 per cent on to it, you’re exaggerating the number of people working significantly fewer hours than they want to.

But let’s take a closer look at under-employment. As the bureau has explained, it is concentrated among the young. More than a third of the under-employed are aged 15 to 24. About 18 per cent of all workers in this age group are under-employed.

It seems clear that education-leavers have borne more than their fair share of the pain during the period of below-par growth since the global financial crisis in 2008. Many people leaving university have had to settle for a part-time job and, until quite recently, they’ve taken more months to make it into full-time employment.

The latest figures from the universities show their new graduates are now taking less time to find a decent job than they were.

But, in any case, caring about the troubles of young people is deeply unfashionable. It’s the well-off elderly we should be worrying about.

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Young people bearing the brunt of a weak economy

Without wanting to be branded a class traitor, I have to admit that we Baby Boomers have enjoyed a rails-run in the race of life.

Most of us had little trouble getting ourselves set up in the jobs market and then the housing market. I look at today’s bright and bushy-tailed youngsters, just starting out in both markets, and don’t envy them one bit (except, of course, their instinctive understanding of the right place to click on a webpage).

(Just to protect my back: those Baby Boomers who were conscripted, or ended up in Vietnam, didn’t have it easy. Nor should those who’ve come after us imagine all Baby Boomers are rolling in it, have never been unemployed, never paid uni fees nor suffered bad luck.)

In the decade since the global financial crisis and the recession we supposedly didn’t have, the supply of people wanting to work has been stronger than employers’ demand for work to be done.

That’s true even though the rate of unemployment never got very high and isn’t all that high today. But a study by Zoya Dhillon and Natasha Cassidy, of the Reserve Bank, confirms what I’ve long suspected: the reason the position overall hasn’t looked so bad is the brunt of the weakness in employers’ demand for labour has been borne by young people leaving school and university.

Whatever you’ve heard in the media, not a lot of workers have been laid off since the shock in September 2008. Employer behaviour has changed, the study confirms. Firms have been less inclined to get rid of people and more inclined to reduce the total amount of hours they’re paying for.

This has become easier for them to do because of their greater ability to employ people on a part-time or casual basis.

On balance, and from an economy-wide perspective, this change of behaviour is an improvement, a shift to a lesser evil. It’s a terrible blow to suddenly lose your job. Better to have some paid work than none.

But the price for this marginal improvement has been paid mainly by the young. Established workers have tended to keep their jobs, but employers haven’t recruited as many people at entry-level. And more of the jobs they’ve offered young people have been part-time.

A new twist on last in, first out.

The result is that education-leavers have had greater trouble – and suffered longer delays – in finding a full-time job suited to their education.

“Over the past decade,” the study says, “increases in the unemployment and underemployment rates for younger people have been twice as large as for the overall labour market. The share of 20 to 24 year-olds that have become disengaged from either study or work has also increased.”

“Younger people” means those aged 15 to 24, though remember that those aged 15 to 19 will mainly be still at school, while many of those aged 20 to 24 will be at university or TAFE.

Some younger people have part-time jobs while still at school, and most higher education students in full-time study also work part-time.

Nothing new or worrying about that. But “in recent years there has been a pronounced increase in the share of 20 to 24 year-olds working part-time who are not studying full-time”.

You’ve heard, no doubt, that while the official unemployment rate has been edging down, the rate of underemployment – people working part-time who want to work more hours – has been edging up (until lately, as we’ll see).

What’s less well known is that underemployment is dominated by younger workers, and it’s they who’ve done most to drive the rate up over recent years. A lot of this would be people finishing uni but having trouble finding a full-time job and taking a part-time job while they keep searching.

In the mid-1990s, about 80 per cent of all bachelor-degree graduates found a full-time job within four months of graduating. By last year, that had fallen to just over 70 per cent – about the same as it got down to during our last severe recession in the early 1990s.

Remember, it’s like a traffic jam. It takes a lot longer than it should, but you do get through eventually.

The most worrying thing is the “NEET rate” – the proportion of younger people who are “not in education, employment or training”. The NEET rate has fallen over the decades as we’ve done better at getting more of our young people into education and training.

But the rate for 20 to 24 year-olds has increased in recent years and is back to where it was in 2005.

The study says prolonged spells of disengagement from the labour market are known to have lasting ill-effects. “Poor labour market outcomes early on not only affect an individual’s future employability, but also have persistent negative effects on lifetime earnings.”

All this says the difficulties younger people are encountering in finding decent full-time jobs are better explained by the economy’s prolonged period of below-par growth since the financial crisis than by the sexier and more frightening explanation that it’s caused by the rise of the “gig economy”.

Which brings me to a little good news. The trend rate of underemployment for all ages has fallen a little to 8.4 per cent over the past year. And the rate of unemployment for younger people has fallen from 12.4 per cent to 11.6 per cent in just the past four months.

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Jobs growth goes from extraordinary to ordinary

How’s the job market going? Not nearly as well as the Turnbull government would like us to believe, but not as badly as its critics claim.

According to the money market economists, the figures we got this week from the Australian Bureau of Statistics for the labour force in June were “another strong jobs report”.

Total employment rose during the month by a “stronger than expected” 51,000 jobs. More than 80 per cent of the extra jobs were full-time, and the rate of unemployment fell to 5.4 per cent, its lowest in more than five years.

Impressed? Don’t be. What happened in just the past month tells us little about how the labour market is travelling, particularly as the money market economists insist on using the ropy seasonally adjusted figures because this makes their betting games more exciting.

That the increase was “stronger than expected” sounds nice, but it means nothing to anyone but them and anyone foolish enough to lay money based on their prediction. They make predictions every month, but they’re wrong more often than they’re right.

No, for a sensible view of what’s been happening to jobs we need to look over a run of months and focus on the bureau’s “trend” (smoothed) estimates.

Six weeks ago, when we learnt that real gross domestic product grew by a “stronger than expected” 3.1 per cent (seasonally adjusted) over the year to March, Treasurer Scott Morrison was keen to put this together with the fact that total employment grew by more than 400,000 in 2017 – the strongest growth ever for any calendar year, with more than 1000 jobs created on average every day.

It was proof that Australia had “climbed back to the top of the global leaderboard”. Tough times were over and, under his and Malcolm Turnbull’s masterful plan for Jobs and Growth, everything was on the up and up.

Now, all his claims about our extraordinary jobs performance last year were true. But last year was six months ago. How’ve we been travelling since then?

Ah, not quite so swimmingly. Whereas over the course of 2017 total employment grew, as we’ve seen, by more than 400,000, or 3.3 per cent, over the first six months of 2018 it’s grown by 124,000, which is growth of 1 per cent or, annualised, 2 per cent.

So, after its extraordinary performance last year, this year the job market’s been very ordinary. Indeed, 2 per cent is right on the average annual rate of growth over the past 20 years.

And note this: whereas last year 80 per cent of the extra jobs were full-time, over the past six months less than a third of ’em have been.

I don’t take this as a sign the economy is slowing, however. Rather, it’s an indication that a year-long period in which employment grew far faster than the economy’s unspectacular rate of growth would have led you to expect, has ended and things have returned to normal.

And while we’re cutting the hype back to size, note this. You could have expected that the extraordinary period of jobs growth would have produced a big fall in unemployment. It didn’t. The rate of unemployment fell just from 5.8 per cent to 5.5 per cent, which is good to see, but not outstanding.

Why was the improvement in unemployment relatively modest? Why didn’t the extraordinary growth in jobs cause an extraordinary fall in unemployment?

Because while employment was growing by 3.3 per cent, the number of people in the labour force (that is, those with jobs or actively seeking one) grew by an extraordinary 3 per cent.

Why did the labour force grow so strongly? Partly because the population of working age (everyone 15 and older) grew by a strong 1.7 per cent, but mainly because the rate at which those of working age chose to participate in the labour force (either by holding a job or by seeking one) rose by 0.8 percentage points to a (near record) 65.5 per cent.

Why is participation so high when the experts were expecting the ageing of the population (aka the retirement of the baby-boomer bulge) to bring it down? Mainly because so many baby boomers are continuing to work, even if only part-time. (Stop looking at me like that.)

But while we’re deflating the government’s triumphalism, its critics also need taking down a peg. They like to remind us that the official unemployment rate understates the true extent of worklessness. Specifically, it fails to take account of under-employment  – people with part-time jobs who’d like to work more hours.

All that’s true. But when you correct the unemployment rate (for May) of 5.4 per cent by adding the underemployment rate of 8.5 per cent to give a broader measure of labour “underutilisation” of 13.9 per cent (as, admittedly, the bureau encourages you to do), you’ve gone from understating the problem to overstating it.

Why? Because, by using this “head count” method of measurement, you’re adding apples to oranges. The underemployment rate counts every part-timer who’d like more hours (which is only about a quarter of them), whether they’re after a full-time job or just a few more hours a week.

(Similarly, many people don’t realise that, of the 720,000 people who account for the unemployment rate of 5.4 per cent, about 30 per cent of them are seeking only a part-time job. That is, the official unemployment rate also involves adding apples and oranges.)

Knowing this full well, the bureau also measures labour underutilisation (unemployment plus underemployment) on a consistent, “volume” (or hours-wanted) basis, which it buries deep on its website at catalogue no. 6291.0.55.003, table 23b.

On this other basis, the rate of unemployment falls from 5.4 per cent to 4.2 per cent, and the rate of underemployment from 8.5 per cent to 3.1 per cent, giving an overall rate of underutilisation of not 13.9 per cent, but 7.4 per cent.

This measure of the rate of underemployment hasn’t changed in three years, but the rate of unemployment has fallen slowly, meaning underutilisation has fallen from 7.9 per cent in May 2015. Slow progress.

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Seeking the truth about the extent of unemployment

So, the Australian Bureau of Statistics told us this week, the rate of unemployment fell a tick to 5.6 per cent in July. Trouble is, most people know the official unemployment rate understates the extent of the problem.

What many people don't know, however, is that when you take the rate of unemployment and add the rate of under-employment, which in May took us up to 14.5 per cent, you overstate the extent of the problem.

It's well known by now that the official definition of unemployment is a very narrow one because you only have to do one hour's work in a week to be classed as employed.

A lot of people also know – or think they know - that this amazing definition was introduced by the government some years ago to stop the figures looking so bad.

Labor voters know it was a Coalition government that fudged the figures; Liberal voters know the villain was a Labor government.

Sorry, this is an urban myth. It is just not true. The bureau would never allow any bunch of politicians to fiddle with the definitions it uses.

As it has explained many times, the bureau uses internationally agreed standards to define unemployment, which are set by the International Labour Organisation, part of the United Nations.

They had to draw the dividing line between unemployed and employed somewhere, and they chose one hour – a choice that was easier to make in the days when almost all the jobs were full-time.

Even today, there'd be very few people actually working just an hour or two a week. Most would work at least one shift of seven or eight hours.

Even so, there's no denying that such a narrow definition understates the extent of joblessness. This is why the bureau also publishes a measure of underemployment.

The underemployed consist of all those people who are working part-time – defined as less than 35 hours a week – but would prefer to be working more hours.

When you take the rate of underemployment and add it to the rate of unemployment (with both unemployment and underemployment expressed as proportions of the labour force) you get what the bureau calls the "labour underutilisation rate", which we can think of as a broader measure of unemployment.

If you look over the years, the rate of unemployment tends to go higher and lower in line with the downs and ups in the business cycle.

You can also see the business cycle reflected in the rate of underemployment, but it has a much clearer underlying upward trend. It was 2.6 per cent in 1978, but 8.3 per cent in November 2015 and 8.8 per cent this May.

Until early 2003, the unemployment rate was higher than the underemployment rate, but since then the underemployment rate has been higher, with a growing gap.

Between February 2015 and this May, the unemployment rate fell by 0.5 percentage points, whereas the underemployment rate rose by 0.3 points.

The underemployment rate is a lot higher for females, 11 per cent, than for males, 6.9 per cent.

It's also greatest among people in lower-skilled occupations and lowest among people in higher-skilled occupations. (Uni students please note.)

Now get this: although workers of all ages suffer underemployment, it's much more a problem for the young. More than a third of the underemployed are aged 15 to 24, and their rate is 18.5 per cent.

But why has the trend rate of underemployment been rising steadily since the late 1970s?

Since underemployment is an affliction of part-time workers, the steady rise in part-time employment over that time – so that it now accounts for about a third of all jobs – does much to explain why there's more part-timers who happen to be saying they'd prefer to be working more hours.

Professor Jeff Borland, of the University of Melbourne, adds that "younger workers appear to have experienced the largest increase in underemployment because they have had the largest growth in part-time employment".

He reminds us that more young people have part-time work because more of them are in full-time education and needing a part-time job.

But here's my punchline: although the official unemployment rate understates the size of the problem, just adding the underemployment rate goes to the other extreme of exaggerating it.

Why? Because it adds apples to oranges. We worry most about underemployment because we assume it involves people who need full-time jobs but have had to settle for part-time.

It does. But it also includes people who are happy to stay part-time but, even so, would prefer to work an extra shift or maybe just a few more hours.

It doesn't make sense to add people with such a small problem to people with the much bigger problem of needing a full-time job but not being able to find one, as though they were similar.

Remember, too, that almost a third of the people included in the official unemployment rate are looking only for part-time work.

This is why, if you search very deep on the bureau's website (clue: catalogue no. 6291.0.55.003, table 23b) you find that, as well as just counting heads, it also does a more accurate measure of underemployment that counts the hours people are looking for – meaning part-timers needing a full-time job count for a lot more than those just wanting a few more hours.

This "volume" measure shows that, in May, the underemployment rate was 3.2 per cent of all the potential hours the whole labour force could work, and the unemployment rate was 4.3 per cent, giving an hours-based measure of labour underutilisation of 7.5 per cent.

Which is closer to the truth of the matter.

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