The Victims of the RecessionP.N. (Raja) Junankar

University of Western Sydneyand

IZA, Bonn, GermanyJune 2009

The Victims of the Recession

• 1. Introduction• The Global Financial Crisis has now become a Global Economic Recession• Australia has so far done better than other OECD countries, but we cannot escape the

recession.• The Government’s stimulus packages have helped to maintain consumer and business

confidence• The First Home Owners grants have helped to keep the housing market from collapsing• It has helped to slow down the impact of the Global Economic Recession. • Indeed the resilience of the Australian economy to external shocks has been quite

remarkable (similarly to the Asian Financial Crisis of a decade earlier)

1. Introduction (continued)

• In a recession firms usually follow this pattern:• Stop hiring new workers• Put full time workers on part time• Part time workers have their hours cut• Start laying off workers/redundancies• Sometimes the firm goes bankrupt and closes down

and all the workers are made redundant.

• When a firm closes down• The building starts to fall into disrepair• The machinery is left to rust and depreciate• Workers are made redundant• Plant and equipment may be sold to another firm or to the Third

World, or recycled• These are inanimate objects: they do not think!

1. Introduction (continued)

1. Introduction (continued)

• The redundant workers skills also “rust” and become obsolescent.• But the unemployed workers think! They cannot be recycled or sold to some Third World country!• They become disheartened, dejected, they fall ill with continued unemployment.• Household income drops, problems arise in the household, arguments take place between the unemployed

worker and spouse• Children get upset because they have to do without things that their friends enjoy.• Family life gets difficult• Sometimes it leads to family breakdowns, some unemployed workers enter crime• Some lapse into depression and illness• This may lead to suicidal thoughts, and perhaps increased suicides• The costs of unemployment are significant and long term.

2. The Recession and unemployment: some evidence

• If we look at the recessions of the early 1980s and 1990s we see that in terms of GDP growth the recessions were short

• The 1980s recession was deeper but did not last as long as the 1990s recession.

• However, the labour market response is slower and much longer.• For the 1982 recession it takes males six years for Unemployment to get

back to pre-recession levels and thirteen years for the 1990 recession.• For the 1982 recession it takes females five years and ten years for the

1990 recession.

3. Who suffers? The unemployed

• In a recession, long term unemployment increases.• They have a significant loss in income: unemployment

benefits are very low compared to their previous incomes.• The new start allowance is less than the pension - why?• Who are the workers most likely to become unemployed

and long term unemployed?

3. Who suffers? The long term unemployed

• The Long Term Unemployed (LTU) are those workers who have been continuously unemployed for 12 months or longer.

• After the 1980s recession the percentage of those unemployed for more than 12 months never got back to the pre-recession period! Another recession hit the economy.

• After the 1990s recession it took LTU almost 15 years for males and 12.5 years for females to return to the pre-recession period.

3. Who suffers? The unskilled and the young

• Unemployment is usually a very “undemocratic” punishment!• Those who have unskilled jobs suffer high unemployment• People who left school early (year ten or twelve) find difficulty keeping or getting a job.• The young who typically are the last in employment, are likely to be fired first (Last In

First Out)• The young who are more mobile and leave a job are unlikely to find another job easily• The new entrants into the labour force, school leavers, college and university students

completing degrees find it difficult to find jobs.• The unemployment rate of young people is always very high compared to “prime age

workers”.

2. Who suffers? Women, migrants, and the old

• Older workers who work in manufacturing, for example, who are made redundant are unlikely to ever find another job

• Anyone over 50 years of age who loses a job is unlikely to ever get a job again.• Migrant workers who are unskilled or who have less experience in Australia are more likely to lose their jobs• Women, who are usually part time workers find they lose their jobs or have their hours of work cut.• Many of the unemployed have had previous spells of unemployment• Many of the long term unemployed leave the labour force, some move to disability benefits.• There are big increases in the unemployment rates of the young and old, and it takes a long time for the

unemployment rates to come down to their earlier levels.• In the 1990s recession it took 14 years before the 20-24 year olds unemployment rate went back to the pre-

recession levels. In the 1980s recession it took about six years.• In the 1990s recession it took 13 years for the 50-59 year olds unemployment rate to get back to the pre-

recession levels.

3. Who suffers?

• Employed workers find that they are required to work harder as there is a credible threat of unemployment

• Even professional workers are worried about losing their job and have to keep their bosses happy.

• Work related stress would increase.• Pensioners find their superannuation funds have evaporated!• Firms go bankrupt, and the owners suffer, as well as the

workers who lose their jobs.

4. Who benefits from a recession

• People with secure employment (say about 90 % of the labour force) are better off:

• Interest/mortgage rates are low• Inflation comes down• Firms that are not affected by the fall in demand can keep

wages low

5. Conclusions

• The Global Economic Recession has a long way to run• Unemployment has already started increasing from the middle of 2008, or

certainly since September 2008• The massive fall in private investment last quarter suggests a further slowing

down of the economy and increases in unemployment.• Unemployment has significant social and economic costs for society• Unemployment is likely to increase and remain high for several years.• We need to have labour market programs to tackle the problem of

unemployment and long term unemployment, in addition to the fiscal expansion.