The Unemployment Rate Test
Updated: Apr 29
COVID-19 and the necessary health measures taken to contain its spread could create the deepest recession in Australia since the depression of the 1930s. In terms of measured change in GDP, over a short period of say 6 months through the middle of 2020 there could be some similarity, but over the next year or two the current COVID-19 driven-downturn will be far less severe than the 1930s depression and in some aspects will not match the severity of Australia’s last recession in the early 1990s. The current recession is likely to be quirky. GDP will fall sharply in 2020, perhaps 6% or more, as indicated in the IMF’s latest forecasts, but the unemployment rate is unlikely to rise as far as in the early 1990s when it peaked at more than 11% let alone the peak rate of the 1930s at around 30%.
When the economy starts to head into recession, it is the rising unemployment rate reducing household income and spending and cutting ability to meet debt servicing commitments that compounds and extends the economic downturn. The current recession caused by sudden shutting down of parts of the economy has undoubtedly caused an unusually quick and sharp fall in GDP and potentially could have caused a very large lift in the unemployment rate well above 10%. Because of Government policy measures and the way the Australian Bureau of Statistics (ABS) will allow for these policy changes when measuring unemployment, it is now unlikely that the unemployment rate will rise above 10%.
The unemployment rate was still surprisingly low in the latest ABS data released for March, 5.2% (market consensus forecast 5.5%) from 5.1% in February. Employment rose by 5,900 in March against a market consensus forecast fall of 40,000. The much better than expected March result came down to forecasters not allowing for the timing of when the ABS conducted the labour force survey – the first two weeks of March before the declaration of the pandemic in Australia and the announcement of the more severe COVID-19 containment measures or the announcements of the changed JobSeeker arrangements or the new JobKeeker payment.
When the April Labour Force report is released in mid-May it will reflect the survey results from the first two weeks of April and will capture the early and pronounced impact of COVID-19 related business shutdowns. The survey will contain questions that factor in the new $1,500 per fortnight JobKeeper allowance as well as changes to eligibility for the JobSeeker payment (doubled during the covid-19 crisis from $550 to $1,100 a fortnight).
Those receiving the JobKeeper wage subsidy will be classified as employed regardless of hours worked and even if stood down. This is an entirely reasonable classification by the ABS as recipients of the JobKeeper allowance will be receiving regular income via their employer (with legal sanctions ensuring employers pass through the entire allowance to employees) and should transition back to their pre-covid-19 employment once the crisis has passed. The JobKeeper wage subsidy will be a major factor ensuring the unemployment rate rises much less than would otherwise be the case following a sharp fall in GDP.
The JobKeeper wage subsidy will not apply to all who are stood down or dismissed because of the negative impact on businesses from COVID-19. Some of this group, including some employed but on low income, can apply for the enhanced JobSeeker payment. Broadly people in receipt of the JobSeeker payment will be classified as unemployed if they have actively looked for full-time or part-time work in the four weeks before the survey date or are available for work in the survey reference week.
But there are a number of reasons why some on the JobSeeker may be classified by the ABS as employed including those who have taken any kind of paid leave; or were away from their job and had been paid for some part of the part of the previous four weeks before the survey; or were away from their jobs for four weeks or less for any reason but believe they still have a job to go back to (e.g. stood down with no pay).
Some on JobSeeker benefit may not be classified as unemployed. What is clear is that all receiving the JobKeeper wage subsidy will not be classified as unemployed (and will have regular income from their employer as if employed) and some on JobSeeker payments will also not be considered as unemployed. The net result is that the unemployment rate will rise much less than would otherwise be the case with a sharp reduction in GDP, which in turn should help to moderate the negative feed-back loop where GDP reduction leads to higher unemployment causing further GDP reduction and so on.
Also helping to moderate the negative feed-back loop is that those who are already unemployed and those who become unemployed are mostly receiving a much higher benefit payment (doubled to $1,100 a fortnight) during the current crisis plus additional concessions relating to loan repayment conditions and housing rental assistance and more.
When making comparisons between the current recession and the last one in the early 1990s or the depression of the 1930s, while GDP reduction may briefly resemble what occurred in those two periods, the unemployment rate is unlikely to rise as high and income support and concessions available for those worst hit in this recession are much more generous than in the early 1990s. Any attempt to compare with the massive reduction in household income and increase in suffering in the 1930s depression is nonsense.