Sadie Brownlee and Charlie Cutter
A prevalent topic in the news during the pandemic has been skyrocketing unemployment across the world and numerous governmental tactics to combat it. The threats of high unemployment on the employed and the searching are twofold: fewer jobs available mean people are less likely to find a job, and that employed people are at more risk of losing their jobs (Blanchard). Thus, governments should keep their unemployment rate low and maintain employment to avoid great economic shocks that have the potential to spiral. For reference, the Great Recession saw a peak close to 10% unemployment, with the percent unemployed finding a job dropping from 28% to around 17%.
Fig. 1 - The Unemployment Rate and the Proportion of Unemployed Finding Jobs, 1996-2014
Source: Blanchard 142
Fig. 2 - The Unemployment Rate and the Monthly Separation Rate from Unemployment, 1996-2014
Source: Blanchard 143
Government stimulus directed towards the unemployed reduces the decline in real wages. Higher unemployment leads to lower real wages as workers have a weaker bargaining position (Blanchard). Unemployment insurance makes unemployment less painful and reduces the drop in real wages by allowing the worker some or more of their prior wage, in the case of added stimulus. By providing some of the worker’s previous wages, the drop in consumer demand is dampened, decreasing unemployment’s adverse effects on the economy. The Great Depression was the catalyst for the establishment of unemployment insurance in the US, where estimates place unemployment higher than 20 percent (Pells).
Fig. 3 - Unemployment Rate, Seasonally Adjusted
Source: Australian Bureau of Statistics
Fig 4. - Changes in payroll jobs, mid‑March to end‑May 2020 (indexed)
Source: Australian Government
Similar to graphs we have seen from the United States, the Unemployment Rate of Australia skyrocketed during the pandemic with a peak of 7.5% in July of 2020. The pre-pandemic rate in February of 2020 was 5.1%. JobKeeper is a wage subsidy program implemented by the Australian government designed to give businesses the ability to maintain their employees’ wages without laying off many, if any (Australian Government). It is one of many ways governments are attempting to curb rising unemployment. As Fig. 4 demonstrates, unemployment plateaued after the introduction of JobKeeper. After a year and over $68 billion spent, the Australian government is terminating the program, inciting alarm from some and relief from others (Heath). Some Aussies believe the program has been successful and does not need to continue (Heath). Throughout 2020, 875,000 new jobs were created, with only one month where jobs were lost (Heath). This month of contraction, September, coincided with the Australian state of Victoria’s second wave of COVID-19 (Heath). Economists suggest this overall growth will absorb any loss the country will incur upon the end of the subsidy (Heath). However, not everyone is so convinced. According to Diana Mousina, senior economist at AMP Capital Investors Ltd, 1.3% of the workforce is underemployed, indicating that the economy has much more room for growth under the protection of JobKeeper (Heath). Without it, this portion of the workforce is at a high risk of unemployment (Heath). Some economists land in the middle, stating that broad wage subsidies should end, but more targeted stimulus should continue (Duke). But will targeted stimulus provide as much relief as people hope?
A study conducted by Ursula Jaenichen and Gesine Stephan suggested targeted wage subsidies for “hard-to-place” workers, such as those who have been unemployed for extended amounts of time or disabled people, can stimulate employment but can also be associated with some deadweight loss (Jaenichen). They found the share of “hard-to-place” workers that took on a subsidized job, as opposed to remaining unemployed, was 25-42% greater than their unsubsidized counterparts (Jaenichen). In other words, 25-42% of those employed in a new job after being introduced to the workforce through subsidized employment would not have been employed without this opportunity (Jaenichen). However, compared to those that went straight into unsubsidized employment, rather than beginning with a subsidized job and transitioning out, the latter was not better off than the former and incurred a deadweight loss (Jaenichen). Therefore, their study found that being employed through a subsidized program is much better than being unemployed but not any better than having an unsubsidized job (Jaenichen). For Australia, this study supports maintaining wage subsidies, i.e., the JobKeeper program, for people who would not otherwise be able to find employment. For those that can easily find a job, wage subsidies are unproductive.
Additionally, the effects of targeted labor stimulus are challenging to isolate and quantify due to numerous measurement factors, such as defining labor markets and whether they should overlap. Manning and Petrongolo conclude that an increase in job vacancies in one area, as well as a decrease in the cost of the distance between a job and home (calculated separately and independently in their study), both radiate far beyond the targeted locale for these programs (Manning). They found that localized efforts to meet labor demand prompt people in other areas to redirect their job searches, therefore expanding the affected region, as fig. 5 illustrates for the London suburb Stratford (Manning). Manning and Petrongolo highlight that not allowing for overlapping labor markets or improperly measuring the affected zone’s size can skew results toward overestimating or underestimating the stimulus’s impact (Manning). This means that focusing aid to specific parts of Australia that need more support than others may not be as potent as necessary to prompt a strong recovery, or the data reported may not accurately reflect its impact.
Fig. 5 - The Effect of a Doubling in the Number of Vacancies in Stratford, England, on the Unemployment Outflow (Percentage change)
Source: Manning
Fig. 6 - The Effect of Halving the Cost of Distance Between Heathrow and Stratford on the Unemployment Outflow (Percentage Change)
Source: Manning
Context: Stratford is a high-unemployment area in East London, while Heathrow is a low-unemployment area 30.7 km away or 1 hour and 20 minutes drive.
Works Cited
Blanchard, Olivier. Macroeconomics. 7th ed., Pearson Education Inc., 2017.
Manning, Alan, and Barbara Petrongolo. “How Local Are Labor Markets? Evidence from a Spatial Job Search Model.” American Economic Review, vol. 107, no. 10, Oct. 2017, pp. 2877–2907. EBSCOhost, doi:http://www.aeaweb.org/aer/.
Heath, Michael. “End of Australia’s $68 Billion Job-Saving Stimulus Tests Economy.” Bloomberg.com, Bloomberg, 28 Mar. 2021, www.bloomberg.com/news/articles/2021-03-28/australia-pulls-job-stimulus-worth-5-of-gdp-in-test-for-economy.
Australian Government, The Treasury. The JobKeeper Payment: Three Month Review, 21 Jul. 2020.
Jaenichen, Ursula, and Gesine Stephan. “The Effectiveness of Targeted Wage Subsidies for Hard-to-Place Workers.” Applied Economics, vol. 43, no. 10–12, Apr. 2011, pp. 1209–1225. EBSCOhost, doi:http://www.tandfonline-com.ezproxy.plu.edu/loi/raec20.
Duke, Jennifer. “‘Better Ways to Provide Stimulus’: Five Top Economists Support End of JobKeeper.” The Sydney Morning Herald [Canberra], 29 Mar. 2021, www.smh.com.au/politics/federal/better-ways-to-provide-stimulus-five-top-economists-support-end-of-jobkeeper-20210329-p57evk.html.
“Labour Force, Australia, February 2021.” Australian Bureau of Statistics, 18 Mar. 2021, www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release#unemployment.
Pells, R. H. and Romer, . Christina D. "Great Depression." Encyclopedia Britannica,
September 10, 2020. https://www.britannica.com/event/Great-Depression.
No comments:
Post a Comment