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What if unemployment was as forecast?

Some folks have asked for an update to a post we did last year on the paths of unemployment – considering we now have eights months more data to work with, it’s worth taking another squiz at.

One of the often unappreciated issues with the Australian economy, or any economy for that matter, is time – particularly the time it takes for labour markets to recover from any arbitrarily large jump in unemployment. Did you know, for instance, that it took over 8 years for unemployment to get back to around where it started from with  the 80’s recession and over 10 years for it to fully recover from the 90’s recession?

To demonstrate it, we can track the change in unemployment through those recessions (and add in the recent GFC period as well) by taking the unemployment rate the month before it started growing through those three periods as a baseline. As the unemployment rate increased as time went on through those recessions, we can subtract the baseline unemployment rate from the unemployment rate that occurred during each subsequent month.

That shows us not only the size of the increase in the unemployment rate through those recessions, but it also shows us the shape of recovery – effectively demonstrating the paths of unemployment growth and recovery during and after economic downturns. For this, we’ll use the ABS Labour Force Survey data – the seasonally adjusted version – and use months as our time unit.

(click to expand)

unemppaths1

Saying that the higher the level of unemployment that a recession causes, the longer it takes to wash out of the system is sort of stating the obvious, but the time frames involved in the recovery – over a decade in the case of the 90’s recession – is something really worth keeping in mind.

One interesting thing to come out of the 80’s and 90’s recession was the similarity in the rate of unemployment recovery. If we run a straight regression line through the recovery period of each, the slope of the lines – the average monthly amount that unemployment decreased by- are very, very similar.

unemppaths2

Back in the 2009/10 budget, Treasury had forecast that unemployment in Australia would hit 8.25% around June 2010.

If we chart that forecast against what actually happened, and assume that the behaviour of the recovery in unemployment into the future will occur at the same rate as occurred during the previous two recoveries in the 80’s and 90’s (around a 0.044% reduction per month from the peak rate) – it makes for stark viewing, showing what would be two very different Australias:

unemppaths3

At the moment, our unemployment rate is 1.4% higher than what it was immediately before we entered the GFC. That puts Australia today somewhere in the vicinity of being 6 years ahead of economic schedule than what would have occurred if our unemployment rate reached Treasury forecasts and the recovery rate was the same as the last two recoveries. Under those assumptions, Australia wouldn’t have reached an unemployment rate 1.4% above what we entered the GFC with until sometime around June 2016. Yet, let’s say the assumptions are wrong and it was only 5 years, or 7 years or whatever – the point is that the magnitude of the difference is enormous – not measured in months, but measured in many years.

This is why time is such an important function of policy action – at least as far as managing unemployment is concerned. The smaller you can make unemployment peak, the quicker you can deploy resources towards it, the shorter is the time it takes to recover back to where you were. But it also says something else about our labour market – while shedding jobs is easy, getting them back is a very slow and grinding process where the time involved probably needs to be appreciated a little more.

27

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  • 1
    blue_green
    Posted May 14, 2010 at 12:41 pm | Permalink

    Thanks Poss, Excellent post. Is is possible to extrapolate the budget consequences of this (ie avoided dole payments vs taxable income received)?

    Will this avoided dole alone justify the stimulus package?

  • 2
    Andos
    Posted May 14, 2010 at 12:44 pm | Permalink

    So, what you’re saying is that now is not the time for a ‘belt-tightening’, ‘fiscal consolidation’, ‘return to surplus’ budget. With over 600k Australians still unemployed, Tuesday’s budget seems like a kick in the teeth from what’s supposed to be the party of the workers.

    I guess if we had the Liberals instead the unemployment path would look more like the red line above (probably worse).

  • 3
    Posted May 14, 2010 at 1:52 pm | Permalink

    Scary figures

    and with worstchoice in force the Fibs would have taken even tougher measures against the employee class

    We dodged a bullet BIG TIME

  • 4
    BigBob
    Posted May 14, 2010 at 1:55 pm | Permalink

    No, Andos, I’d say he’s saying that the stimulus worked and that ratcheting back government expenditure now is the correct thing to do as we are 6 years ahead of where we would have been.

    That extra 1.4% is not good for those that are a part of it, but with the jobs momentum going forward, they should soon be employed.

    If you continue the high rates of government expenditure, you risk really overheating everything, and ending up in a worse case than where we are headed currently.

  • 5
    thewetmale
    Posted May 14, 2010 at 1:59 pm | Permalink

    Really nice to see you going back and reprising this post Poss. I think that’s the kind of thing that should be done more often in the media in general. It seems to me that politicians and the like can get away with a fair bit by saying such and such will happen a year in the future or what have you, confident people a year or more on will have forgotten what had been committed to.

    It would also be worthwhile to check back on predictions made by people as well – and not obvious stuff like who will win elections, but how they’ll do it and what effect policies and decisions will have.

    One thing political commentary could take from sports commentary – i’ve seen on NBA coverage (i think on the TNT network – whatever ONEHD has) they get their special comments guy to name at the start what will be crucial and then actually go back towards the end of the fourth quarter and see how each team went in those areas.

    In short, I think Bernard Keane is spot on when he writes about the collective memory of the media.

  • 6
    Socrates
    Posted May 14, 2010 at 2:23 pm | Permalink

    We can have a go at answering Blue-green’s question for the dole payments at least.

    If unemployment reached 8.25% instead of the curretn 5.4% that would be another 325,000 unemployed. (8.25% – 5.4%) x 11.6 million labor force.

    From Poss’s graph those people would stay unemployed for on average another 66 months.

    Cost = dole/month x 66 months x 325,000 people

    Taking Newstart allowance of $456/fortnight = $912/month

    Total cost of extra unemployment = $912/month x 66 months x 325,000 = $19.5 billion!!

    That doesn’t include the lost taxes, or additional personal losses such as people who may lose their homes. That is just the direct cost to government.

    As Andos says, it really does make those arguing we need to get back into surplus even sooner look quite stupid.

  • 7
    shepherdmarilyn
    Posted May 14, 2010 at 2:45 pm | Permalink

    Interesting charts. I remember the recessions of the 80′s and 90′s and have to say that Rudd and co. handled this one better than Howard and Keating handled the last two – it was acknowledged by many that their handling of things was spot on

    I am tired of the so called pollsters asking the wrong frigging questions though.

    Why on earth we pander to the mortgage belt when they are a small minority of the country and ignore those who rely in interest rates on income to survive is beyond me and why the morons think taxing multi-billion dollar mining internationals more is beyond me.

    People can talk all they like about Rudd’s inability to communicate but we have a media that tells lie after lie and goes unchallenged.

  • 8
    Socrates
    Posted May 14, 2010 at 2:50 pm | Permalink

    We can have a further go at estimating the cost of the extra unemployment in terms of lost income tax. Let us asume that they (the 325,000) made the average wage ($1200/week) and paid average tax (just under 20%) on that income.

    Income tax lost = 325, 000 x $4800/month x 19.6% tax = $30.6 billion!!!

    So the combined saving from the $40 billion stimulus package was $19 billion in unemployment benefits and $31 billion in income tax – a total of $50 billion. Even this figure is probably low, because the employers of those workers woudl have paid payroll tax and company profits on the output from those workers, which would also have been lost if the recession had bit harder.

  • 9
    Socrates
    Posted May 14, 2010 at 2:53 pm | Permalink

    Sorry correction to 9 – that should be $20.1 billion in income tax, for a total of $40 billion saved.

  • 10
    blue_green
    Posted May 14, 2010 at 2:56 pm | Permalink

    Thanks Soc,

    Given no-one smarter than me has taken on the taxes foregone question I will follow Soc’s logic.

    Assume average wage of those prevented from being unemployed=$35,000pa

    From ATO calculator their income tax = $4,368.00pa (or $364 per month)

    Foregone tax to govt = tax not payed by unemployed indiv x 66 months x 325,000 people = $7.8 Billion.

    You could also add foregone GST, etc, etc.

    I am sure Poss could work out a more elegant way than this, but all in all the stimulus was a neccessary investment especially if the building programs offset or delay future infrastructure spending requirements.

  • 11
    blue_green
    Posted May 14, 2010 at 2:57 pm | Permalink

    SOc, thanks for the income tax answer. Simultaneous posting.

  • 12
    Socrates
    Posted May 14, 2010 at 3:02 pm | Permalink

    Snap Blue Green!

    My assumptions could be a little out but I think it is clear from both our answers that total savings in tax income and unemployment benefits expediture runs into the tens of millions. Compared to doing nothing the stimulus was almost cost neutral.

  • 13
    blue_green
    Posted May 14, 2010 at 3:02 pm | Permalink

    Soc you used the non-resident tax rate.

  • 14
    Socrates
    Posted May 14, 2010 at 3:03 pm | Permalink

    Doh – I got my millions and billions mis-typed. Call me Barnaby ;)

  • 15
    blue_green
    Posted May 14, 2010 at 3:04 pm | Permalink

    I reckon if you added up all the tax foregone and the cost of running unemployment programs it wold be cost neutral.

    But that doesnt take into account that we got stuff out of it. We should not have to build another school hall out of it and there was stacks of public housing maintenance etc.

  • 16
    Socrates
    Posted May 14, 2010 at 3:06 pm | Permalink

    Blue Green

    Actually I worked out the equivalent tax rate for someone on the average wage.

    $1200/week = $62400/year;
    Tax = $4650 + (62400 – 37000) x 0.3 = $12270
    Tax of $12270 = 19.6% of $62400 average income.

  • 17
    Socrates
    Posted May 14, 2010 at 3:07 pm | Permalink

    Agree again Blue Green. I am biased because I work as an engineer in transport planning. But a lot of the expenditure on public transport infrastructure was chronicaly overdue. It is not a waste.

  • 18
    blue_green
    Posted May 14, 2010 at 3:12 pm | Permalink

    The funniest news of the day is that Malcolm Turnbull is now back as preferred leader of the libs.

    http://www.roymorgan.com/news/polls/2010/4498/

    Looks like the public has forgiven him over utgate and his rating is back to same levels as the early leadership.

    I will lobby for Morgan to start polling Turnbull v Rudd for Preferred PM. It would be hillarious.

  • 19
    Andos
    Posted May 14, 2010 at 3:19 pm | Permalink

    Oh my god! It all makes sense now.

    Tone defeats Malcolm by one vote (or whatever), Malcolm polishes his image a little on the backbench, undergoes a death/rebirth ceremony (actually, I’m not going to retire!), and now he’s preferred…

    All he needs now is the dramatic coup late in the election cycle; takes down the Mad Monk to the cries of delight from his followers and storms home over a media-bloodied Kevin Rudd to steal the election.

    No?

  • 20
    rosa
    Posted May 14, 2010 at 3:48 pm | Permalink

    For all those who haven’t heard it yet, this is a link to Tony Abbott’s disastrous interview with Neil Mitchell on 3AW.

    Listen, and weep for our democracy. Funniest of all his his stupid cracked laugh when he gets caught out (you know the one).

    http://www.3aw.com.au/blogs/3aw-generic-blog/tony-abbotts-budget-reply/20100513-v08d.html

  • 21
    Country Kid
    Posted May 14, 2010 at 4:58 pm | Permalink

    Socrates et.al.

    Good stuff.

    I think there would be a fairly hefty health cost (quite a bit of mental health) associated with long term unemployment.

  • 22
    Stephen Lloyd
    Posted May 14, 2010 at 7:24 pm | Permalink

    http://www.roymorgan.com.au/

    Libs ahead in new Morgan

  • 23
    chinda63
    Posted May 15, 2010 at 4:29 am | Permalink

    Hehehehehe. Hockey is neck and neck with Abbott as the second most preferred leader.

  • 24
    morewest
    Posted May 17, 2010 at 8:31 am | Permalink

    All he needs now is the dramatic coup late in the election cycle; takes down the Mad Monk to the cries of delight from his followers and storms home over a media-bloodied Kevin Rudd to steal the election.

    No?

    Turnbull’s political dagger slipping between Abbott’s ribs just as the Rudd comcar passes through the Yarralumla gates is indeed the stuff of nightmares. The only comfort is that while Hawke got the timing right, I doubt the Libs will.

  • 25
    JP
    Posted May 17, 2010 at 9:33 pm | Permalink

    CK @ 22: Agreed.

    There’s also lots of other welfare impact besides the dole. Once your income falls from an average wage to dole levels, you become eligible for rent assistance, you get Family Tax Benefit at the maximum rates instead of whatever you got before.

    And as others have pointed out, an average wage earner will pay a hell of lot more GST than an unemployed person.

    So…. given that paying someone an average wage to go do nation-building work – whether that school halls or other infrastructure or whatever – actually returns more than it costs, shouldn’t nation building job creation projects be a routine response to high (or rising) unemployment?

  • 26
    Socrates
    Posted May 24, 2010 at 12:16 pm | Permalink

    One more point on this issue – there is considerable evidence from elsewhere that it takes economies at least as long to recover from recessions as Poss suggested. This paper looks at various recessions around the OECD in the past two decades and how long it took each economy to recover to pre-recession levels. The time varies with unemployment and house prices teh slowest to get back to pre-recession levels. Average recovery time was 1.9 years for GDP, 3.4 years for equity prices, 4.8 years for unemployment, and 6 years for house prices!
    http://www.economics.harvard.edu/files/faculty/51_Aftermath.pdf

  • 27
    David Richards
    Posted May 24, 2010 at 4:29 pm | Permalink

    JP – they certainly should be the stock response to tackling unemployment, rather than the punitive regimes trotted out in recent times.

    Also, more needs to be done on tackling the employer side of the equation. Putting more of the onus on employers to actually employ and reverse the downsizing trend.

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  1. ...] This post was mentioned on Twitter by Possum Comitatus. Possum Comitatus said: What if unemployment was as forecast? http://is.gd/c8c8f Two very different Australias [...

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