If unemployment turns sour, who should we blame?

Suspect 4: The failure of the Rudd Government to support WorkChoices

If unemployment rises to 5 per cent plus over the next 12 months and remains stubbornly high even when economic conditions improve, many economists will see the retreat from WorkChoices as a significant culprit.

In many ways this will be an academic debate, given the resounding rejection of WorkChoices by the electorate in November and more recently by Opposition Leader Nelson. Still, the issue is important for the future direction of labour market policy.

I believe that the Gillard reforms will prove unfriendly to trade unions. This is the view of most analysts, including the right wing Institute of Public Affairs. It is also the view of the unions themselves. Note this comment from Dean Mighell, Victorian Secretary of the Electrical Trades Union: “There are all these great fears about wages breakouts. I would like to know how it’s going to happen when Howard’s laws, which are now Rudd and Gillard’s laws, still apply and give workers no bargaining rights in this country” (cited in The Australian May 10, 2008).

We will have to wait and see.

Suspect 5: Swan’s excessive fiscal zeal

This is the line the Treasury Opposition spokesperson, Malcolm Turnbull, was running a week or so ago (although he is now taking a bet each way).

Swan’s budget is certainly deflationary in that it sharply slows down the rate of growth in government spending (from 2.9 to 1.1 per cent per annum) and increases the cash surplus. To do this when the RBA and Treasury are forecasting a big slow down in consumption and housing is “brave”.

But, as with Costello’s over-expansionary fiscal stance in 2006 and 2007, the risks that Swan’s stance will do much damage to the employment market are small. First, Swan is withdrawing about ¼ to ½ a percentage point from domestic demand- not a big deal. Second, he has put his surpluses in easily accessible Funds which could be drawn on quickly if economic circumstances change. The Rudd Government could also quickly implement some active labour market programs to better match job vacancies and job seekers (regionally and occupationally). So the fiscal strategy can be quickly reversed if the unemployment figures turned ugly (started to rise towards 5.5 or 6 per cent).

Some economists are saying Swan should have been tougher (surprise, surprise) so the arguments will run both ways.

Summing up

If there is a rise in unemployment above 5 per cent over the next two years - and there is a good chance this may not happen - some of the blame will be attributed to the above factors but in my view the RBA’s over-reaction in 2008 will have to take the lion’s share of responsibility.