Editor’s note: Following the publication of this article, new data on February employment conditions was released from the Australian Bureau of Statistics indicating a change in national unemployment from 5.0 per cent to 4.9 per cent. Watch our interview with ABS chief economist Bruce Hockman in the video above.
You probably already know that unemployment can have a devastating effect when it happens to you.
Studies show when you lose your job it can lead to poor mental health, poor physical health, lower life satisfaction and less marital or family satisfaction.
But did you know that other people’s unemployment is also bad for you – especially if that unemployment happens quickly, locally or for a prolonged period of time.
We asked two leading economists why other people’s unemployment isn’t just damaging to the economy but likely to affect you personally.
How is unemployment measured?
The most commonly used measure of unemployment is the unemployment rate.
“Basically, the unemployment rate is the proportion of the working age population who aren’t working,” says CBA senior economist Gareth Aird.
“If there’s an increase in the number of people not working who’d like to, the unemployment rate goes up. If there’s a decrease, it goes down.”
Right now, unemployment is low. January 2019 figures showed it at 5.0 per cent nationally, seasonally adjusted, according to the ABS.
“When the economy starts contracting, the government starts receiving less revenue from tax but has to spend more on welfare”
New South Wales and Victoria are particularly strong, with unemployment rates at record lows of just 3.9 per cent and 4.5 per cent respectively.
On the face of it, that means most people looking for work in Australia can find it. But if that doesn’t gel with your experience, there may be a reason why.
“Employment is defined and measured by the ABS as working in a job for at least one hour in the month,” explains AMP senior economist Diana Mousina.
“So the measure would clearly include a lot of individuals who want to work more hours or those who are underemployed.”
What happens when the unemployment rate rises?
When the unemployment rate goes up it means there has been an increase in the number of people who couldn’t find work at all over the past month.
And when that happens, the flow-on effects follow pretty quickly, Aird says.
“If people don’t have a job they’ll generally have less money to spend. If they’re not spending, the economy starts contracting.”
Aird also points out that while this begins by impacting local businesses who no longer receive as much revenue, it can sometimes begin to spread through the entire economy and eventually start affecting the nation’s finances.
“When the economy starts contracting, the government starts receiving less revenue from tax but has to spend more on welfare. The result is that it has to start borrowing to fund its payments so the budget deficit grows too.”
In fact, if the unemployment rate were to rise to, say, eight per cent, a whole chain of events would occur, says Mousina.
“Australia hasn’t had an unemployment rate around eight per cent since 1998. An unemployment rate of around eight per cent in Australia in the current state of the economy would occur if there was a severe and long recession.”
“In this environment, business and consumer confidence would be weak, retail sales growth would be low and the RBA would need to step in and cut interest rates.”
Why (almost) nobody wins in a recession
If that interest rate cut sounds like the light at the end of the tunnel, don’t fool yourself.
Both Aird and Mousina point out there are very few winners in an environment of high unemployment.
With less people spending, businesses will tend to have fewer sales orders to fill.
That’s especially true for any involved in selling, manufacturing or distributing “non-essential” items. So they begin to reduce bonuses, freeze wages and eventually start laying off staff.
“We expect to see the leading indicators to weaken over the next few months”
Lower profits tend to mean they’ll also start paying lower dividends and that will cause share prices to fall too – so investors take a hit.
At the same time, the housing market begins to slow as buyers have less money to put towards their home. Tenants also have less money in their pockets, so rents tend to fall too.
“Perhaps you might be better off if you manage to keep your job and you want to buy a house because you end up paying less and interest rates will probably be lower,” says Aird.
“But that is offset by other factors. At the end of the day, rising unemployment is rarely good for households.”
Similarly, businesses thinking a wages cut could be a blessing should think again, says Mousina.
“Generally, in times of high unemployment, business profits will suffer by more than the drop in the wages bill,” she says.
What’s happening now?
With unemployment at record lows in parts of the country – and with GDP growth slowing across much of the country – it’s likely that we’ll see unemployment start to rise soon, or at least for jobs growth to slow.
“We expect to see the leading indicators to weaken over the next few months,” Mousina says.
In particular, she sees a lack of jobs growth in housing construction and infrastructure-related employment weighing on the figures.
However, Mousina says AMP doesn’t see a rapid climb in unemployment on the cards, of the kind that would cause most people’s income, investments and finances to suffer in a prolonged and devastating way.
“The probability of this type of severe fall in growth is small, at around five per cent,” says Mousina.
“This type of extreme situation would probably occur if there was a domestic shock, like a severe collapse in home prices,” she explains.
“Or if there was a deterioration in global growth, such as a large fall in Chinese growth and demand for commodities, as Australia has a large reliance on Chinese demand for commodities and other goods like agriculture, tourism and education.”
Aird agrees, saying that while economic data has softened somewhat over the past two-to-three months, his forecast is that unemployment is likely to stay close to where it is for the remainder of 2019.
“The data says we should see jobs growth of around 20,000 a month for the next little while which is enough to keep the unemployment rate around where it is,” says Aird.
And that’s good news for Australian households, businesses and investors.