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by David Sharp, Founding President of the Australian Adam Smith Club (Melbourne) and author of Economic Simplicities

Unemployment is likely to be the major economic topic of 2013. Early indications suggest that the jobless rate has begun to rise and that finding work has become harder. This is particularly the case amongst the young. The Australian jobless rate is predicted to rise from the present official 5.4% to 6%. Unemployment among the young is presently officially 16.8% and likely to remain at 3 times the general rate. The situation in many other countries, particularly in Europe, is far worse.

What is Unemployment?
The concept of unemployment has changed considerably over time. At various times in the past, for example, it has been considered inappropriate to regard women, children or the elderly as unemployed. Questions still arise today as to just who are to be regarded as such. Does it include those who are working part-time but would prefer full-time? Is, for example, a brain surgeon only able to find work as a labourer, a seasonal worker between jobs, or a young person opting to continue at school due to the unavailability of paid work, unemployed?

Whilst official unemployment rates are regularly compiled and widely published, we should be constantly aware, particularly when they are being used for international and intertemporal comparisons, of the definitions and statistical methods used to compile them. These are subject to frequent change and hence the resulting figures can only be of limited value. We can nonetheless employ a broad economic definition of unemployment, which can provide an indication of the loss and damage being suffered. Those persons ready, desirous and capable of working in a particular capacity to a desired extent, but who are unable to obtain paid employment in such capacity to the desired extent, are unemployed.

Unemployment is a social scourge. It is wasteful and impoverishing and generates discontent, frustration and resentment. Ultimately, if not checked and reversed, it can lead to the disintegration or destruction of the society itself.

Unemployment in Australia has historically tended to occur in phases. The colonies suffered significantly from the depression of the 1890s, with high unemployment and much poverty. In the first decade of its existence as a country unemployment spiked to 9.5%.. Then, from 1910 to the onset of the Great Depression the rate hovered around 4.9%. During the period 1929 to 1941 it spiked to nearly 20%. Thereafter, for the next three decades, it remained steady at around 2%. This was a golden age of Australian employment. It used to be said at this time that if unemployment rose above 2% the government would fall. However, from the 1970s, the unemployment rate rose steeply to over 8% in the late 1990s.. It then fell steadily to about 4.2% in 2008. Since then it has risen.

One significant feature of Australian employment history was the so-called Sunshine Harvester case of 1907. Justice H B Higgins, sitting as President of the Court of Conciliation & Arbitration, decreed that the Sunshine Harvester company was obliged to pay its workers a civilized minimum wage, sufficient to maintain a wife and 3 children, regardless of its capacity to pay. The ruling was widely noted both nationally and internationally. On appeal the High Court overturned it as unconstitutional. It did not matter. Higgins ignored the High Court and continued to make similar orders. In this he had widespread popular support, particularly from the unions. It was the origin of the basic wage, a concept that dominated the Australian economy for much of the C20th. During this time, Higgins and his ruling were viewed in an extremely favourable light. On the centenary of the ruling a symposium celebrating the ruling was held at which the present PM delivered the opening address. Only a small minority continue to maintain that the ruling was unfortunate; a major blight and detriment to the Australian economy.

The proximate causes of unemployment can be many and varied; natural phenomena, such as droughts and floods can destroy sources of employment, as can technological innovation, such as caused the demise of linotype, or changes in fashion, which devastated the millinery trade. Cheaper or more efficient competitors can destroy an entire industry, as occurred with Indian producers and Lancashire cotton. Such unemployment is only temporary. In the absence of government intervention the operation of the market will resolve the issue. Widespread, protracted unemployment is the result in effect of a dispute between politics and economics. Whilst politics prevail, chronic and growing unemployment will occur.

Whenever governments intervene into the labour market to raise by force of law the marginal cost of labour above the marginal return of such labour, it creates unemployment. It does not matter whether it is an increase in the base wage, shorter hours, additional benefits or more regulation, marginal workers who are thereby rendered unprofitable, will become unemployed and/or will not be hired. Governments can also increase the numbers of unemployed by increasing the welfare paid to them in order to sustain them whilst unemployed but which has the perverse effect of making unemployment marginally more attractive. Last but not least governments by their conduct of their country’s affairs, particularly economic affairs, can raise or lower the perception therein of so-called sovereign risk. Employers are unlikely to expand employment when and where there is a high perception of sovereign risk.

What should be done to cure unemployment? There exist at least 2 alternatives approaches, which we can refer to as the political and the economic approaches. Presently the political approach is the one favoured by most experts such as Ben Bernanke, Chairman of the US Federal Reserve and Paul Krugman, a Nobel Prize winning Keynesian economist, which approach is largely being implemented by the world’s governments. Proponents of the political approach are likely to suggest that economics is not a science and that labour is not a commodity. Welfare must be funded and if necessary expanded with governments borrowing more if required to ensure that there is no fall-off in the level of consumer spending. Over time the system will stabilize, confidence will be restored, the economy will consolidate and prosperity will return. The nature of the employment, to be funded by government, does not matter. Digging ditches and filling them up will do if necessary.

Advocates of the economic approach reject the political approach completely. Economic activity created by increased government spending is illusionary and will evaporate when such spending ceases, as eventually it must. Rather government intervention in the labour market must be significantly reduced, including welfare, taxes, and regulations. This will undoubtedly cause short term pain. But the marginal cost to employers and entrepreneurs will be reduced which will encourage them to create productive enterprises and jobs that actually create wealth, not consume it. The secret of a successful economy is one that creates increased wealth, not one that consumes its existing wealth.

Given the nature of things, it is unlikely that the economic approach will be freely chosen any time soon. It is likely that those who fear being accused of responsibility for unemployment will be looking for scapegoats. The usual suspects will need to be wary. Already there are signs of this occurring It has been pointed out that 200,000 foreigners are working in jobs that could be performed by native born Australians. There is also the possibility that a third alternative approach, one that has shown some success in the past, will be adopted. A major war could be expected to reduce the number of unemployed significantly.