First, the jobless recovery. Next, the job-keeping recession

We’ve long lived in strange economic times. But is it possible to have an economic downturn while maintaining something close to full employment?

Photo by krakenimages on Unsplash

In my last Substack missive, I argued that central banks raising interest rates to reduce discretionary spending was bad news for those dependent on such spending (think Uber drivers, bar staff, waiters, shop assistants, travel agents, ushers, baristas and personal trainers). I also noted that lots of tech companies, including the one that facilitates this very newsletter, have started laying off workers.

I still believe we are in for a year or two of vigorous creative destruction, but I’m not sure that will result in a significant uptick in unemployment. More on that shortly, but first a little background.

Miracle economies
Capitalist economies are meant to go through economic (aka business) cycles. Long story short, central banks lower interest rates, people start consuming more and taking advantage of cheap capital to launch businesses, the economy booms but then starts to ‘overheat’ (i.e. inflation reaches disturbing levels) causing the central bank to raise interest rates, causing consumers to buy less and entrepreneurial types to think twice about launching a new business or expanding an existing one, at which point the economy goes into recession, which then results in the central bank lowering interest rates and restarting the cycle.  

That’s the theory, but it hasn’t mapped neatly onto reality in Australia, or even in nations such as the US and UK, for quite some time. Famously, prior to an economy-shuttering, once-in-a-century plague, Australia avoided the bust part of the boom-bust cycle for three decades and, at least at the time of writing, appears to have rebounded strongly from a relatively short-lived Corona recession.

The citizens of many other developed nations, notably the US and UK, haven’t been so lucky. But their economies have also defied what were long believed to be the economic laws of gravity. Interest rates have been at or near, and in some circumstances less than, zero per cent for almost a decade and a half. Yet we are only now starting to see inflation rise. And at least some of that has to do with supply shocks related to geopolitical events rather than an unprecedentedly long period of loose monetary policy.

Indeed, inflation remaining stubbornly subdued despite consumers and investors having access to ‘free money’ (i.e. loans with minimal interest payments) led some economists to start believing, contra Milton Friedman’s famous dictum about the non-existence of free lunches, that governments could endlessly print money without needing to worry about inflation skyrocketing. Granted, those economists have now been proved mistaken. But it looked like they might be onto something right up until early 2022.   

But enough with the Econ 101. The point I’m making is that many first-world economies have been behaving in unexpected, even theoretically impossible, ways for quite some time. This leads me to hope that, while some degree of economic discomfort is unavoidable, we won’t see too many people have to endure the soul-crushing misery of long-term unemployment.

Labour supply and demand    
In the months leading up to the pandemic, many first-world nations experienced a phenomenon unknown for half a century: full employment. Even more surprisingly, after the economic body blow of a global pandemic, many of those nations quickly returned to full employment.

Perhaps most surprisingly of all, after four decades of Capital ruthlessly lording it over Labour, Labour began pushing back. As has been widely publicised, a significant number of middle and upper-middle class white-collar workers decided to partake in the Great Resignation.

Lots of minimum-wage-earning pink-collar and blue-collar workers in the US, notably Starbucks employees and Amazon warehouse workers, have begun unionising and striking.

Yesterday, I had to look after my children while the teachers at their Catholic school joined their public school counterparts in striking. Rail workers in Sydney have spent this week working to rule while nurses keep holding stop-work meetings. As not a few commentators have noted, it’s beginning to feel a lot like the 1970s, a decade of industrial strife that I’m just old enough to have some childhood memories of.   

Most things in life come down to supply and demand. Workers certainly haven’t been behaving like jobs are in short supply in recent times. Of course, there’s always the possibility we are in the midst of an Indian Summer of employee empowerment and that workers will soon be desperate for any job, no matter how poorly paid and humiliating it is. But given the mismatch of labour supply and demand, I don’t see that happening barring a truly catastrophic economic calamity or employers succeeding in convincing politicians spooked by Brexit and Trump to throw open the migration floodgates.

The migration wildcard
Some of my best friends are migrants. I’ve dated migrants. I patronise and work for businesses run by migrants. I’m the child of an economic migrant. But I’ve always been sceptical of the proposition – advanced with equal fervour by both left-wing and right-wing elites (the one thing they remain in furious agreement on even in these hyper-polarised times) that high migration intakes are all upside.

In particular, I’ve always struggled to understand how flooding a labour market with people from developing nations with modest expectations of employers doesn’t undercut the wages and conditions of ‘entitled’ local workers. I’ve become even more sceptical of this notion, beloved of economists and employer groups, after seeing the balance of power shift from the bosses to the workers, even in nations such as the US, during several years of negligible migration.

At present, an Australian software developer who loses their job at a large start-up or listed tech company can almost certainly find another position at a smaller start-up or listed tech company. Sure, they might have to accept a slightly lower wage and less lavish conditions, but I don’t think anyone needs to shed any tears for a software developer having to move from a $200,000 job to a $175,000 one for a little while.

What’s more, at present local tech businesses have never been more incentivised to train up local workers. As a result of the tech talent shortage, tens and possibly hundreds of thousands of Australians will have the opportunity to access high-paying jobs they would otherwise have missed out on.

Australia’s Tech Council claims that Australia’s tech sector already employs 861,000 people and will employ 1 million by 2025. While Australian tech companies, like their counterparts in other first-world nations, would no doubt prefer to import foreign workers under conditions as close to indentured servitude as possible, they seem to have accepted they need to do their bit to “grow the pipeline of skilled workers and pathways into tech sector jobs” and “to support STEM skills development and encourage careers in tech-related fields”.

But what about the workers who aren’t so highly educated and don’t possess rare skill sets? While I’m a congenital pessimist, I’m uncharacteristically also optimistic about their prospects in a drum-tight labour market.

Let’s say trade drops off for, say, an Uber driver as people paying higher interest rates on their huge mortgages either stop going out as much or use public transport when they do. In the context of a normal recession, of the kind Australians used to experience between the mid-1970s and early 1990s, that Uber driver would be screwed. Very few businesses would be hiring and the erstwhile Uber driver would be competing with lots of other newly unemployed workers for any available positions. But, as anyone who has walked down a street festooned with ‘Help wanted’ signs in shops, pubs and restaurants can attest, that Uber driver currently has plenty of alternative options.

After many years of calling all the shots, a tight labour market is not something employers find agreeable. But I suspect a significant majority of voters are enjoying the return of full employment and will punish any prime minister or president who endangers it.