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Frank Stilwell
Judith Bessant

    Unemployment :
    The Economic Myths

    Associate Professor of Economics, University of Sydney

    an essential summary
    edited by The Jobs Letter

  • The Labour Federal government's 'Working Nation' policy statement was issued ostensibly to tackle the roots of the unemployment problem but in practice largely confined itself to the management of the long-term unemployed. After a decade of 'economic rationalist' policies which had become part of the problem, 'Working Nation' was evidently 'too little, too late'.

    The new Liberal-National Coalition government is currently developing policies which can be expected to make the unemployment situation worse. Their policies -- including further labour market deregulation, more privatisations and major cuts in government spending -- are based on a mythology about the market economy.

    It will be damaging in two respects. First because of their immediate impact on levels of unemployment, and second because of their long-term damage to social values, social cohesion and the institutions which are needed to solve the problem.

  • The 5% unemployment target set in 'Working Nation' seems modest but unattainable. Unemployment hasn't been below 5% of the workforce for over 20 years now. It has been over 10% in each of the recessions of the early 80s and 90s. It currently seems stuck around 8% and would be higher were it not for the dramatic rise in the school retention ratio over the last decade. Unemployment is evidently no longer a primarily cyclic phenomenon -- it is a deep-seated long-term structural problem embedded in our system.

  • According to 'Work for All', the book by John Langmore and John Quiggin, Australian unemployment in 1992 was adding about $12 billion to direct government outlays and reducing tax revenues by a further $8-12 billion annually -- a total of over $20 billion per year. This is a massive fiscal deficiency.

  • From an economists perspective, the greatest cost of unemployment -- and the source of its fundamental irrationality -- is its 'opportunity cost'. This is the cost to society of foregoing the goods and services the unemployed could have produced were they gainfully employed. This includes more schools and smaller class sizes, better hospitals, community services, public transport, improved housing ... all the things that might have been created. Any rational economic system would mobilise its unemployed resources to produce the goods and services needed to satisfy social needs.

  • It is important to expose the mythology that passes for economic analysis at this time. Six myths come immediately to mind and are worth examining, as they lie at the heart of the current problem.

    1. Wage reductions create more jobs.

    Indeed, more young people would be offered jobs if the 'youth wage' were set at $4.50 per hour, as the Liberals have previously suggested, but it would most likely be at the expense of the jobs of other more highly paid workers. How low can we go with wages anyway? And at what social cost? Do we want to emulate the USA where labour market 'flexibility' and wage-cutting has produced a massive class of the 'working poor', only a step above an extensive 'underclass' which threatens social cohesion and personal security? Would this wage-cutting strategy simply shift the burden from employers to the state?

    2. Balanced budgets are necessary to deal with the nation's economic difficulties.

    Balanced budgets have the aura of good housekeeping. But, as Keynes argued, fiscal policies can have a more creative role in eliminating economic cycles, generating employment and building the infrastructure needed for economic success. To relinquish such a creative role is to substitute a narrow accountants viewpoint for an economists viewpoint.

    3. Government expenditure cuts create employment.

    Obviously when the government cuts spending, public servants lose their jobs -- the Liberal's plan for government cuts will see an estimated 9,000 direct job losses. The negative impacts of that flow onto the private sector, because of the lower spending on goods and services by those who have lost jobs. Furthermore, the evidence suggests that government spending, on infrastructure for example, actually creates the preconditions necessary for private sector investment, and private sector jobs.

    4. Increased savings are the key to improved economic outcomes.

    It is investment by businesses in new capital goods, not savings by households, that drives output income and employment. On this reasoning, the task is to get investment up, then savings will follow. In Australia, productive investment has remained disappointingly low. A push to raise savings by itself can do more harm than good to employment levels. We need to ensure that savings are more effectively mobilised to finance investment in Australian industry.

    5. Tariff cuts will help create jobs.

    The shared belief is that exposing Australian industry to international competition will enhance economic efficiency, as resources 'shaken out' from uncompetitive firms are more usefully deployed elsewhere. So the theory runs. In practice we've had all the downside -- with major job losses in industries manufacturing textiles, clothing, footwear and cars, and more to come -- but very little of the upside.

    Resources evidently do not flow freely to new productive industries as the textbook theories assume. Building new industries requires more interventionist policies, involving co-operation between business, unions, financial institutions and government. Such industries don't emerge spontaneously on a 'level playing field'. A more appropriate metaphor for the present situation would seem to be 'scorched earth policy'.

    6. Increased economic inequality creates incentives for improved economic performance.

    The pursuit of 'economic rationalist' policies has gone hand-in-hand with increased inequality -- a polarisation of rich and poor. What has kept the tendency to growing inequality in check historically has been trade unions and the redistributive role of government. As these institutions are pared back, the inegalitarian character of the economy is given free rein. In practice, countries with a more egalitarian distribution of income, like Japan, have fared better. Their people have certainly fared better.

    We are asked to accept as necessary, if not desirable, a growing gulf between executive salaries and the wealth of corporate high fliers on the one hand, and the incomes of the bulk of the people on the other. This assumes different motivational postulates for the rich and the poor -- that the rich will work harder when their incomes are raised and the poor will work harder when their incomes are lowered!

    We in Australia are ideally placed to show that a balance between economic, social and environmental goals is possible. After all, this is what international visitors to this country commonly comment on: it is the basis for a genuine comparative advantage.

  • 'Nurturing', 'Building', and 'Sharing' can be unifying theme in a programme for positive alternatives.

    Nurturing means giving priority to the creation and development of our human resources -- our most vital asset.

    Building means fostering new industries, through laying down the necessary infrastructure, providing public services, and actively intervening to promote industries that serve social goals, and take seriously the challenge of ecologically sustainable development.

    Sharing means developing the economic case for a more egalitarian distribution of incomes as a means of fostering social cohesion and productivity. A guaranteed minimum income scheme could help ease the transition...

  • And there is also an increasingly strong case for more directly sharing the work that is available -- taking advantage of technological progress in terms of increased leisure as well as material consumption. That is not happening, of course. Instead, many people are working longer hours -- and getting sick -- while others are excluded from work altogether -- and getting sick. A shorter working week and more job-sharing has to be on the agenda in these circumstances.

    see also

    Department of Sociology, Social Welfare and Administration, Australian Catholic University, Victoria, Australia.

    For further contact : John Tomlinson, Organising Committee, National Conference on Unemployment, Queensland University of Technology, GPO Box 2434, Brisbane, Queensland 4001
    email contact --

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