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Long-term joblessness to persist long after economic recovers

By Garry Shilson-Josling, AAP Economist
16 Apr 2009 5:27 PM

SYDNEY, April 16 AAP - Long after the recession has ended, consumers have resumed spending and businesses are investing once again, one group will be left behind - the long-term unemployed.

It has long been known that demand for labour waxes and wanes in response to changes levels of production of goods and services.

The typical delay - or lag - is generally thought to be around six months but can extend to a year or so, especially during periods of strong economic growth and labour shortages.

But during recessions the lag seems to shorten to about one or two quarters.

The current slump fits that pattern.

The peak rate of employment growth, 29,900 per month on a trend basis according to Australian Bureau of Statistics (ABS) data, was in December 2007.

That was a full year after economic growth, measured by the quarter-to-quarter trend in non-farm gross domestic product, peaked in the final quarter of 2006.

The subsequent slowdown brought economic growth below its long-term average growth rate of 3.2 per cent in the first quarter of 2008.

Employment growth fell below its par - annualised growth of two per cent - very soon after that, in April last year.

And, just as employment follows economic growth with a lag, so long-term unemployment follows short-term unemployment with a lag of around a year.

No complicated explanation of this is necessary.

To be counted among the long-term unemployed, conventionally defined as unemployed for a year or more, you first have to be unemployed for a year.

And sometimes the number becoming long-term jobless is greater than the number exiting that category, either by finding jobs or giving up looking.

In the early-1990s, short-term unemployment peaked at 639,400 or 7.5 per cent of the labour force in April 1991.

It was not until May 1993, nearly two years later, that long-term unemployment peaked at 329,800 or 3.8 per cent of the labour force.

We have only seen the beginning of this process in the current downturn in economic activity.

The number unemployed has risen by 199,900 in the past 12 months, with all but 13,600 of that rise accounted for by people unemployed for less than a year.

By March, total unemployment was 650,900, with the long-term component at 83,400, ABS data released on Thursday showed.

With the economy currently stagnating, there is virtually no doubt that unemployment will rise further.

And, unless the economy begins to recover very strongly and very soon, there is equally little doubt that the number of long-term jobless will soon start to rise markedly.

Economic growth is generally not expected to recover to an annual growth rate of around three per cent, what is needed to stop unemployment from rising, until late 2010.

That implies total unemployment will probably not stop rising until early 2011.

And that, in turn, means the number of long-term jobless might not peak until 2012.

If unemployment, currently 5.8 per cent of the labour force, peaked at 7.5 per cent with around 850,000 unemployed, most policymakers would probably be pleased that the worse outcomes had been avoided.

But even under that scenario, the number of long-term jobless would most likely continue to climb before eventually topping out in the 250,000-200,000 range.