Australian ‘kurzarbeit’

As the Unconventional Economist describes today, yesterday’s employment number although excellent contained one dark spot, a big fall in hours worked. The trend in hours worked has also very clearly been down through the last quarter of last year:

The unemployment rate, however, has essentially been unmoved. I can think of two explanations for this.  The first is that most most commonly put today, that the inflating sectors of the economy have enough momentum to absorb resources from the deflating sectors. So, although man hours are sliding in total, jobs are plentiful enough.

An alternative explanation is that the Australian labour market has developed along lines more redolent of Europe than the US. By that I mean we have something more akin to Germany’s “kurzarbeit” system than we do the slash and burn approach of US laissez faire capitalism. The basic difference is that Germany has a formal system of automatic stabilisers called “kurzabeit” that revolves around private firms reducing man hours (and the government making up some of the difference in pay) versus the US approach of treating jobs as a variable cost that gets cut when trouble starts. In short, the Germans cut hours while the Americans cut people.

Critics of the German system tend to see it as a kind of zombie capitalism. But it has certainly worked for Germany, especially so since the GFC during which its labour market eased much less than many other nations and rebounded more quickly as well. Though one could certainly argue the system is being subsidised by the rest of Europe via a weak euro.

If Australia is more oriented towards the former it has important implications for policy and national productivity. Australia does not have a heavily regulated labour market like Germany, as the following OECD chart of Indicators of Employment Protection shows:

Unfortunately this measure is only updated infrequently and this is 2008. No doubt we have shifted some since but it does give  a guide to how liberal, in fact, our labour market is.

Nonetheless, for the last decade the Australian labour market has been so strong that a private approximation of the German kurzabeit system has developed. Some call it labour hoarding and it is the willingness to use such approaches as reduced hours across a majority of staff rather than cut a minority owing to the fear that skill shortages will cost more in the long run if staff are let go. I think values also play a part. To support a US-style slash and burn system you need a very powerful underlying identity of individual empowerment. Australia’s “fair go” culture is more collectively supportive.

In the dark days of the GFC , “Australian kurzabeit” is widely accepted to have prevented much larger job losses. Take a look at this chart of average hours worked:

Note that the average work week rose through the downturn across the millennium as employers sought to make more from less people but the opposite occured in the GFC as employers sought to do less with more people. This certainly protected jobs. The downside, however,  is that this is also a contributor to our productivity problem, as businesses spreads less hours over more people to ensure they have the depth of staff needed to address demand.

It has been one of my key tenets for the year ahead that Australia’s big employment sectors are likely to move from denial that the good times are over into acceptance and, with that, shift to accelerated job losses and rising productivty. There has been evidence that this is transpiring as the average work week trended up through 2011. And more so recently with the announcement of mass layoffs in the reporting season. But as you can see, with the  accelerating trend in falling man hours and the big January drop (which is seasonally adjusted), it looks like many businesses may still be holding to the informal kurzarbeit system that has defined the labour market for a decade.

It’s either that or, as Saul Eslake suggests in today’s AFR, they are struggling get around a newly rigid labour market:

Given the inadvisability of drawing conclusions about productivity from data over relatively short periods, it is not yet possible to make any reliable statistically based inferences about the effects of the present government’s changes to workplace relations arrangements on economy-wide productivity growth. Although there does appear to be a growing body of anecdotal evidence that some businesses are seeking to make productivity-enhancing organisational changes in workplaces, they are finding those changes more difficult to implement than might have been the case hitherto.

As I have said before, I do think the pendulum on labour regulation has swung too far back. For instance, I don’t see why small businesses should be so shackled by unfair dismissal laws. But at the same time, I am a fan of a balanced approach to industrial relations. As the US example of the past cycle shows, overly liberated capital and labour markets tend, over time, to hollow out your middle class.

A couple of final points then. If this supposition is right then the current labour market shakeout has a long way yet to run. That’s not to say it will get dramtically worse. It may be that the current pace of correction continues but is extended and we get a slow rise in the unemployment rate throughout the year. It may also be that the inflating sectors are enough to keep the rate flat. In either case, I’m not sure we should be rushing in to liberalise the labour market at this point (even though I agree we need to). As we deflate the borrow and spend economy of yesteryear, our informal (and newly more rigid) labour market may be helping prevent a more swfit and disorderly unwind.

Comments

  1. This seems to be a very pragmatic response by employers to unfair dismissal laws. They have the choice of retaining all their existing workers, who they are generally happy with, on reduced hours, or sacking a worker (who might take action against them for unfair dismissal), then recruiting another worker (who might require training, or prove unsuitable but difficult to sack) when the economy picks up. Its a no-brainer.

    • PS, as you say, it also fits better with the Australian ethos. Spread the pain equally if possible.

  2. I think the brainwashing “Australia is different” extends to senior management in Australia.

    This means that when slow months or quarters occur, no layoffs occur, as “we are different” and the market will pick up.

    It could be argued that because CEO’s bonuses are linked to performance, they always push the boundaries of optimism, and only slash and burn workers once the company is part of the point of no return.

    I also find that AU employers are a little more compassionate, with the majority of job cuts cutting contractors and older people who are financially secure. I’ve quiet often seen people with children/mortgages who are useless retaining there jobs because the bosses know they need the money, and a younger/older employee has more financial security/less financial commitments.

    Will the Baby Boomers use this opportunity to finally retire, and leave the jobs to the children?

  3. A question if I may. Are you suggesting that as hours and income falls, the centrelink benefits such as rental assistance, low income assistance etc take up some of that ‘slack’ and negate the downward effect on the economy?

    Is that the practical outcome?

    • No, you can’t beneifits for being underemployed. But I guess I am arguing that being underemployed is better than being unemployed and when you have the kind of potenitally unstable transition we’re going through especially so.

      • Well I agree absolutely that many with half a job is much better than a few with full time employment, if I may put it that crudely.

        There are some reasonably generous benefits for the lower income workers especially those with children that would help to bridge the gap for workers here who found themselves losing hours, and thus income. Income falls – benefits increase.

        http://www.centrelink.gov.au/internet/internet.nsf/filestores/co029_1107/$file/co029_1107en.pdf

        But it wouldn’t completely bridge the gap.

        • > But it wouldn’t completely bridge the gap.

          No, it wouldn’t — and that’s why we’re in trouble, Peter. We’re working less, earning less and spending less. And if the high dollar should persist, a terrible storm is brewing. It’s no wonder our stockmarket is underperforming globally at the moment.

  4. If full time employment (> 40 hours weekly) and part time employment numbers are both up (seasonally adjusted), but the total hours worked are down (seasonally adjusted), this means that full time employer are doing less overtime, maybe going from 46 to 42 hours for example, and part time are doing less hours (by choice or not, I do not know)

    This may mean a structural inability to expand the workforce in “good times”, when the unemployment rate already at 5%, it is not easy to find the right skills, so the same people get to work longer and earn more.

  5. Had Workchoices been allowed to stand, I suspect we would be having a very different conversation today about employment figures. But as you suggest, the fog of denial will fade into reality eventually, just as it would for German industries not cushioned by a weak currency. I wish there were more substantive similarities between Australian and German culture vis employer-employee relations, but this is probably a case of Wunschdenken.

    • Yes, I argued when Work Choices was proposed that it was fair weather policy. The electorate thougth so too. Still think we need to wind back a bit from here, though, eventually.

      • The hysterical beat-up over Work Choices were straight out lies. The TV advertising etc became more and more way out as it was realised that it was a convenient road to power for Labor.
        ‘Fair weather’ ,maybe, but your own very worthwhile observations on employer/employee relations in Australia indicate that these are something better than ‘fair weather ‘ notions.

        • Are our employer-employee relations so deeply culturally entrenched that they are impervious to the will of ideologically wrought IR policy ? We’ll get a chance to find out eventually – no country has this much fair weather.

          If you’re a keen observer of beat-ups, flawse, then you must be revelling in Abbott and Hockey’s own particular election winning blend of focus group driven hysteria.

  6. I have another spin on why hours are decreasing – and it’s a much simpler one. I’m an accountant and approximately 50% of my small business clients in the past few months have started offshoring. Some have replaced the staff members completely, but the majority have just cut the hours of their local staff. I know offshoring has been happening for years, but it’s becoming a trend for smaller business, and for service industries now (not just manufacturing and IT). I think this will only increase over the next few years.

    • This is a very good point. In the past, offshoring was only for the larger companies who could arrange it profitably. There are now websites where individuals, sole traders, SMB’s etc can engage workers from anywhere in the world.
      I know a business owner who gets his web design work done by a bloke in Russia for $7/hour.
      He has also laid off two PT staff, and has a person in the Phillipines run his on-line businesss for $4/hour instead.

      • Also, I might add that you can hire and fire immediately, no super/sick days/holidays and you can monitor their output in real time with screen shots and work diaries.

      • I use a couple of contractors (graphics and infographics mainly, I can do the IT stuff myself) that I found through odesk.com.

        The site works very well for me and gives you the chance to select exactly what price / quality ratio you want. I’ve found top-end contractors there who do work for $30-50/hr that would cost $100-200 here (particularly for smaller pieces of work).

        • Great site. Had I known Filipino architects would work for $6.67 US an hour I could have saved tens of thousands of dollars recently. But where’s the good ol’ Aussie Kurzarbeit spirit ?

  7. Nice post HnH. Doesn’t this explain the apparent ‘contradiction’ between the ABS and Ray Morgan unemployment figures? There’s not necessarily a contradiction: employment is holding up but underemployment growing quite rapidly.

  8. If we offshore everything who’s going to have an income to consume the things we are producing offshore?
    Anyway what happens to offshore when $AUS tanks?
    I wouldn’t give too much credit to Fair Work Act influencing Kurzarbeit. Small business was still hanging in there through 2011 but I suspect for some that is now over. When a small business owner can’t use the ATM house to prop up the ailing business employees have to get cut. Unfair dsimissal or not, they have to cut or be cut.

    • “Small business was still hanging in there through 2011 but I suspect for some that is now over.”

      Probably right, we had 2 years of solid spin explaining how we had dodged the GFC.

  9. Interesting data and discussion but be careful to consider all explanations of the data, and exclude those first before jumping to conclusions.

    It could be negative elasticity of labor – ie as people get rich beyond a certain point, they chose to reduce work hours since they are “rich enough”. I recently read this in my CFA textbook and it struck me as very interesting (and true to the real world I know).

    That could fit the data also.

    I know many guys who are on “fly-in, fly-out” packages that pick the agreement that gives them the most days at home for a given income level. My brother in-law prefers less work to spend more time with the kids these days.

    To prove conclusively the cause you would need specific examples of Australia companies hoarding labor and the reasons why they were doing so. It might also be related to strike action which I believe ticked upwards in recent times.