Sent: 09-11-2010 10:56:04
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US Unemployment: Lessons from Australia
The US Federal Reserve may benefit from a study of Australia's unemployment history in coming to terms with its own predicament.
The latest report from the US Bureau of Labor Statistics puts the unemployment rate at 9.6%. Since 1948, US unemployment has been higher during only one period, namely, 1982-83 in the aftermath of the second oil price shock and the anti inflationary moves made by the Paul Volker led Fed.
Prior to the onset of the most recent recession, the US unemployment rate had been as low as 4.4%. The subsequent rise to a peak of 10.1% with few signs of a meaningful decline has created anxiety, anger and frustration. One manifestation was the Congressional election result last week in which incumbents faced heavy losses.
President Obama, congressional leaders, talk show hosts, business commentators and grassroots political activists believe they are entitled to something better.
The charts at http://www.thebigpicture.com.au/atc/us_unemploy.pdf put the US employment outcomes into some historical perspective.
The first chart shows US employment growth rates since 1940. Three things are clear.
- The volatility in employment growth rates has diminished over time.
- The duration of cycles has appeared to lengthen.
- The strength of the recovery phase in the employment cycle has been weakening. Since the early 1980s, the peak rate of employment growth as the economy recovers from recession has been getting lower.
The medium term deceleration in employment growth might have something to do with the changing structure of the US economy. Less dependence on export oriented manufacturing industries means less opportunity to spur employment growth in a recovery.
The correspondingly greater dependence on service industries tends to mean a heavier reliance on a recovery in household incomes to spur growth. Since rising household incomes also depend on higher employment, initiating a reduction in unemployment becomes progressively more difficult.
In the current cycle, the US economy has also been hamstrung by a depression in real estate prices and the restructuring faced by the banking industry. Australians are in a position to understand this predicament better than most.
Australia's 1989/90 recession was severe by any standards. High interest rates battered household finances and some of Australia's largest financial institutions came perilously close to failure. Some of its lesser financial institutions did fail. Even many months after the recession was officially over economists and others were discussing how the recovery was being constrained by the unwillingness of the banks to resume lending.
Australia's unemployment rate which reached a low point in December 1989 of 5.6% had risen to 10.8% by July 1992. In March 1994, the unemployment rate was still above 10% although it had begun to decline.
The US is now in a similar position to Australia two decades ago. Australia had long understood that it was a subsidiary economy not fully in command of its own destiny. While the US economy is the world's largest, many others are now growing more strongly. The US has seemingly lost its industrial pre-eminence and capacity for independent recovery.
This is a novel perspective for US policymakers and many are fighting to deny the new reality they are confronting.
The second chart brings together Australia's late 1980s unemployment experience with the current US situation. The two series have been aligned so that the low point in Australia's unemployment in November 1989 coincides on the chart with the low point in US unemployment in May 2007. For each series, the chart also shows the previous 24 months of unemployment history.
The track of the two lines is remarkably similar. In Australia's case, 36 months passed before unemployment eventually peaked. For the US, the peak occurred 29 months after the trough in unemployment was passed.
So far, the US unemployment rate has been moving lower at a slightly faster pace than the experience in Australia. However, the Australian experience also suggests another seven or eight months could pass without any substantial change in the unemployment rate as the economy regains enough strength to make a difference in the labour market.
Unfortunately, Americans will take no notice of the Australian experience. Perhaps all we can hope for is that Australian commentators take notice of the Australian experience in drawing inferences about the state of the US economy and, by extension, market conditions there and here.
The Australian experience suggests progress at the top of the unemployment cycle is slow but that the US economy is moving along the path to recovery. It suggests the US economy is in better shape than many think.
The Australian experience also suggests that some time in the next several months we could begin to see a more rapid drop in US unemployment. Realisation of this possibility might catch many by surprise and provide an unanticipated fillip to US and global markets.
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