This highlights the key problem for Australia’s labour market: a lack of demand.
With the private sector economy having contracted at an unprecedented rate:
There is now a gaping output gap and there simply aren’t enough jobs to go around.
Sadly, the 2020 Federal Budget does little to remedy the situation.
For example, most of the extra disposable income from bringing forward the Stage 2 tax cuts will likely be saved, thereby it won’t significantly boost aggregate demand.
Ditto the Business Investment Incentives. Given the gaping output gap and oversupply everywhere, most businesses are unlikely to ramp-up investment. To the extent that some businesses do, it will likely be in labour-saving technologies which, while good for productivity, will drive up unemployment even further.
This brings me to the Morrison Government’s other signature policy – the JobMaker wage subsidy. While this program could help at the margins, it doesn’t boost the overall demand for workers and also incentivises employers to substitute a pre-existing employee for a part-time subsidised worker.
Moreover, empirical evidence on these types of wage subsidy programs shows that employers will generally substitute a worker receiving a wage subsidy for another worker who would otherwise have been hired.
In short, Australia’s economy and labour market faces a demand problem. Therefore, the 2020 Budget should have included measures that boost income support to the unemployed (e.g. by permanently lifting JobSeeker), as well as provided traditional Keynesian stimulus via big investments in public building works and infrastructure, among other things.
Because of these oversights, the Australian economy will face a longer and deeper downturn than necessary with stubbornly high real unemployment, widespread business failures, and increased homelessness.