Unemployment & underemployment

 When I started in economics and investments, the unemployment rate was a reliable economic indicator.  The percentage of the labour force who worked part-time was small.  Most ppl had full-time jobs.  The definition of employment is one hour of work per week.  When most ppl worked full-time that was a workable (though odd) definition.  But that's all changed.  A person might work only an hour a week but would like to work 10 hours or 20.  And those ppl are called 'underemployed'.  

The Parliamentary website has a clear explanation.

The Australian Bureau of Statistics (ABS) identifies two distinct groups as underemployed:

• part-time workers who wanted to work more hours and could start additional hours either in the reference week or in the subsequent four weeks; and
• full-time workers who worked part-time hours in the reference week for economic reasons (such as being stood down or insufficient work being available). It is assumed these people wanted to work full-time and would have done so, had the work been available.

The underemployment rate has been steadily increasing over time, as the gig economy increases the size of the precariat.  Note that all these charts end before the covid crash.

The underutilisation rate is the sum of the unemployed and the underemployed, expressed as a proportion of the labour force.  It's scarcely surprising that with so many in the labour force 'underutilised' that wage increases are negligible.

This chart from Greg Jericho in The Guardian shows the inverse relationship between the underemployment rate and wage inflation.  The data in this chart end in 2018.

Given that the share of GDP going to profits is at a record high, and the share going to wages at a record low, it's obvious that we need to run the economy 'hotter', and it's equally obvious that monetary policy is not achieving this.  Monetarism is a central plank of neo-liberalism.  Time to dump this failed policy prescription.

Post-GFC growth slump

The chart below shows real GDP for the OECD group of nations, which includes most of the developed world, but doesn't include India, China, Russia or Brazil.  From 1980 to the peak of the cycle in 2007, the long-term growth trend was just under 3% per annum.  Since then it's been nearly one third lower, at 2.1% p.a.. In fact, that's a generous calculation.  That 2.1% is taken from the cyclical low point in 2009, not the cyclical peak in 2007.  From the 2007 peak, the growth rate has nearly halved, to 1.7% per annum.




The covid crash will reduce world GDP  by as much as the GFC did.  And the question is:  will the trend growth rate over the next 10 years fall again?  The GFC was the result of excessive credit growth by poorly regulated banks.   Yet what were the reasons for the slump in the long-term growth trend?  Rising inequality; an obsession with balancing budgets in Europe, come what may; an aging population; loss of confidence in stable growth by people; austerity; falling tax revenues because of cuts to company and high-income personal tax rates?

I fear that when "normal" returns, the pernicious gods of neo-liberalism will again be worshipped.  Governments will try to balance budgets by cutting spending, by slashing welfare, by raising indirect taxes.  They will continue to believe that how much leverage there is in the economy is best left to the "markets", that banks can be trusted to manage their affairs, despite the evidence.  They will continue to put their faith in monetary policy instead of Keynesian  fiscal policy, despite the fact that interest rates are now zero almost everywhere in the OECD, and bond yields are absurdly low or negative in all developed countries.  Interest rates have trended lower with each cycle for 30 years.  How will they cut interest rates below zero?  And how will Central Banks stop the consequent asset price speculation and subsequent ever deeper busts?

It's obvious that neo-liberalism has failed.  But, alas, even though governments have embraced socialism, for now, (how ironic is that?) I suspect the lure of orthodoxy as the world economy recovers will be irresistible.  Which will mean that our trend growth rate will fall again, and it will take another crisis to force a rethink.  After all, it was the Great Depression which led to Keynes's famous work, The General Theory of Employment, Interest and Money, and his prescription that when interest rates are extremely low, the only way to generate growth is for governments to undertake deficit spending.  The US unemployment rate is likely to rise to heights not seen since the Great Depression.  Low unemployment only returned with the deficit spending occasioned by the war.  What will reduce the unemployment rate this time?

I don't know which way things will turn.  Are our politicians, financiers and economists perceptive enough to rethink the dogmas of neo-liberalism?  Or are they too hidebound to change course?   Will the public put up with more austerity stretching out over the next decades?  Or will they start voting for extremist right-wing populist parties which distract them from uncomfortable economic realities by manufacturing "enemies of the people"?

One thing is for sure:  without a change in direction, trend growth will fall again, making all these political shifts all the more stark.