Full employment offers a leg up to those at the bottom. Let’s lock it in

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Full employment offers a leg up to those at the bottom. let’s lock it in
Full employment helps disadvantaged workers the most, writes the Grattan Institute. Photo: Getty

At 4 per cent, Australia’s unemployment rate is the lowest it has been since November 1974.

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But over the 30 years before then, the unemployment rate averaged half that, just 2 per cent.

At the heart of Australia’s post-war golden era was full employment – simply put, this is when everyone who wants a job can find a job.

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So, what have we been missing out on all this time?

A new Grattan Institute report shows that no one gets left behind in a full employment economy.

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Everyone is better off, but the most disadvantaged workers stand to gain the most from a strong labour market.

Full employment boosts living standards

A weak labour market is costly – for individuals, households, businesses and the nation.

A period without paid work deprives most households of their main income source, but the effects can linger well after finding a new job.

We find that workers with otherwise good work histories will still have an 11 per cent lower labour income five years after a three-month spell of unemployment (see Graph 1). The cumulative effect is equivalent to nearly a year of lost pay – a huge blow to household finances.

Full employment offers a leg up to those at the bottom. let’s lock it in

The psychological and social costs of unemployment are also significant: The loss of a job is not only the loss of income, but for many workers it can mean the loss of status, purpose or identity.

Unemployment damages mental health and reduces life satisfaction. It is also associated with physical ill health and suicide, and has been shown to have spillover effects on family members.

But the burden of a weak labour market is not just carried by the unemployed.

Underemployment imposes a similar, albeit smaller, burden on workers and was a growing problem for Australian workers before the pandemic.

All workers, even those with sufficient hours, suffer through lower wages growth.

High unemployment in the years leading into the pandemic accounts for at least one-third of the slowdown in wages growth in Australia since 2013.

The effects of a weak economy compound over time, reducing the quality of life of all Australians.

Disadvantaged Australians benefit the most

A full-employment economy lifts up all workers, but those at the bottom rise most.

Some groups of workers have permanently higher rates of unemployment, including younger and less-educated Australians and those earning lower wages.

Working in a manual job is not only physically demanding but is also associated with spending more time out of work.

Some of these differences may be structural, rather than being driven by a weak labour market. But when we looked at how outcomes vary with the business cycle, the same groups stood out.

Workers who are young, less educated, have lower wages or wealth, or who are in manual jobs, are much more exposed to changes in unemployment over the business cycle. The data paints a striking picture (see Chart 2).

Full employment offers a leg up to those at the bottom. let’s lock it in

But it is low-wealth and low-wage workers who face the largest losses. They are more than twice as likely to lose their jobs when unemployment rises.

These workers bear the burden of recessions but also reap the benefits of a strong economy.

We find that the unemployment rate of the poorest 20 per cent of workers falls by a full percentage point in response to a 1 percentage-point increase in real GDP growth – about three times higher than the average.

The poorest 20 per cent also get a larger rise in weekly hours of work, and their real labour income rises 2.5 to 3 times more than the average (see Chart 3).

Full employment offers a leg up to those at the bottom. let’s lock it in

A strong economy provides a huge boost in livelihoods for these workers, all 2.5 million of them.

Good macroeconomic policy aimed at full employment could help reverse the course of rising income and wealth inequality in Australia in recent years.

Let’s put full employment back in the spotlight

Australia’s economic recovery from the pandemic has been better than anyone had dreamt.

But now, as the crisis fades, inflation is on the march for the first time in decades.

In the short term, the Reserve Bank will need to try to tame inflation, and the federal government should avoid adding further fiscal fuel to the fire while inflation is high.

But we shouldn’t lose sight of the prize of full employment.

Australia chose to push unemployment back down quickly, and it worked. Some of our most vulnerable stand to benefit most.

It’s a lesson we should learn for the future.

Alex Ballantyne is Senior Associate and Brendan Coates is Economic Policy Program Director at Grattan Institute

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