Why structural unemployment rate will get higher and STAY HIGHER
One day, when structural changes happen to the economy, the ensuing unemployment will be structural too
A curious phenomenon is occurring in the economy. Employers are complaining of ‘skills shortage’. Yet, at the same time, more and more people are giving up looking for work, while those who try to find one are demoralised by rejection after rejection. For those who are lucky enough to be employed, many are feeling that they are underemployed or stuck in insecure dead-end jobs that under-utilise their potential.
It is clear that there is a dysfunction going on. Employers are complaining that they simply cannot find the right candidate while job seekers cannot find the right job in this brutal job market (see Why is the job market so brutal? Because it’s RIGGED AGAINST you!). It looks like some kind of misalignment between demand and supply of labour is happening.
As this news article reported,
Even behind closed doors, Lowe argues his case: “At many of the business functions I go to, business lunches, the most common topic is how they can’t find workers with the right skills.
Meanwhile, economists are scratching their heads and wondering whether there is some kind of structural change in the economy that they cannot see. As this economist wondered,
The last twelve months has seen GDP per capita fall in Australia, but the Government and its key advisers still expect the economy to recover to trend rates of growth in the current financial year. Nevertheless, the Reserve Bank is still calling for more fiscal stimulus, while on the other hand the new Secretary of the Treasury has raised the possibility that wage growth (and by implication economic growth) may not return to past trend rates of increase because of structural changes in the economy.
In this article, I will explain why this is happening.
The dysfunctioning and brutal job market show a deeper rot in the economy. I have written in-depth about this problem at Why is the job market so brutal? Because it’s RIGGED AGAINST you!. What are the consequences of such a rigged job market?
Mass skills stagnation in the economy
It is a widespread practice for employers to hire people primarily based on their past experience. That is, they will hire the person who had done exactly the same in his or her previous job. As I wrote in Why is the job market so brutal? Because it’s RIGGED AGAINST you!, this way of hiring is convenient and cheap for the employer. And therefore, it becomes a widespread practice.
But this leads to a very obvious question.
If the reason why you got your current job is that you did exactly the same as your previous job, and your next job will be doing the same as your current job, then where is your growth in personal skills? If you repeat this en masse to the rest of the economy, you will get a huge swathe of the workforce facing skills stagnation. With widespread skills stagnation, is there any wonder why Australian workers’ productivity have fallen a cliff?
Inflexible economy
This kind of hiring practice boxes people in.
Job vacancies become a game of musical chairs for people within the same industry and profession. People move along a very narrow deep groove, unable to break free. It becomes very easy to get trapped in a particular industry and profession. If you extrapolate this to the rest of the economy, it implies that millions of people are trapped in mediocrity, unable to excel in their natural strengths and talents, unable to grow their potential and unable to broaden their skillset.
So, what happens if an external economic shock hits a particular industry and causes widespread unemployment in that industry? You will get a huge chunk of unemployed people who are unable to find meaningful and secure work for the rest of their lives.
The economy has become inflexible and ossified. This is the very opposite of a dynamic and innovative economy. An inflexible and ossified economy will stagnate. It cannot recover quickly from any shock.
Lack of innovation in companies
Next, think about this.
Employers who hire only people with the exact past experiences show that they only want the same results and outcome. That implies they do not want change. They only want the status quo.
Since this is a widespread hiring practice, it is an indication that we have an economy that is no longer innovating. An economy that is failing to innovate will stagnate. It can no longer grow meaningfully. That probably explains why wages are stagnating because everyone’s skills and experiences are not expanding meaningfully. We are all doing the same thing over and over again.
Nationally, this means the country is getting less and less competitive. This shows in the dismal productivity statistics.
Youth unemployment can only increase over time
You need the pre-requisite experience in order to get a job. But if you cannot get that job, where are you going to find the pre-requisite experience in the first place?
This is the problem faced by our youth, under-employed and unemployed. Their lack of experience causes them to be unable to find a job. Their inability to find a job results in a lack of experience, which in turn makes it even harder to find a job. This is a self-reinforcing vicious circle. Young people, by definition lack experience. It is their lack of experience that causes them to be discriminated against in the job market.
The rigged job market is to blame for this vicious cycle, entrenching the unemployability of our youth, under-employed and unemployed. No wonder more and more of them have given up looking for work.
Skills shortage will get worse
Chronic under-investment in skills and training
As I wrote in Why is the job market so brutal? Because it’s RIGGED AGAINST you!, companies are only looking for those with the exact configuration of previous experiences to fill vacancies. This implies that companies are hiring people who are trained and experienced at others’ expense. There is widespread reluctance to invest in the skills, training and development of both existing and new staff.
This hiring culture betrays an underlying selfish motivation. If companies invest in developing their staff, then when these staffs are poached by others, then they are, in effect, subsidising the training and development of staff for other companies. Therefore, companies are adopting the attitude of NOT training their staff. Why invest in training and developing their staffs’ skills, only for them to be poached by other companies, who will then enjoy the fruits of their investment? Therefore, companies would rather be the ones poaching other companies’ staff.
Unfortunately, this widespread practice results in a chronic under-investment in skills, training and development in the economy.
Outflow of skills caused by retirement
Every year, a certain number of people will retire and leave the workforce, taking away their skills with them. That, combined with chronic under-investment in skills means that the overall level of skills in the economy is falling with each retirement. The outcome is that the economy is unable to replace the shortfall in skills caused by those who retire.
Before the Covid-19 pandemic, this problem could be easily masked by generous skills migration program. But today, with all inbound skills migration halted, the problem will be unmasked.
Therefore, we are going to see worsening skills shortage problems in the years to come.
Companies will be looking for unicorns
In this Information Age, changes are happening at an accelerating rate. There will always be new processes, new technology, new software, new hardware and new information coming in.
The work that you do will always be changing. Your experience will grow along with your work, even in the absence of training and development by your employer.
But there is one problem.
The specific configuration of experiences you gain will be unique to your company only. Since no two companies are identical, no two people with the same job title in different companies will have an identical configuration of experiences. In other words, you, along with many others, have become a unicorn.
Then, let’s say you leave your company. The company need to find someone to replace you.
What if that company base their hiring decision on the assumption that there will always be someone, somewhere who is going to have the exact configuration of experiences as you? Chances are, they will not be able to find such a person. They will have to either scale down their expectations or leave your former position vacant. Very often, companies rather leave your position vacant than hire someone who does not have the exact configuration of experiences as you. It is cheaper to offload your entire workload to your former colleagues and make them work harder than to hire someone and train them to become your carbon copy in terms of experience.
That is why nowadays, we see companies complaining of ‘skills shortages’. If companies are looking for unicorns, of course, they will run into what they perceive as a ‘skills shortage’.
Unemployment, once it goes up, will stay up
Let’s say, for whatever reason, there is a structural change to the economy, causing the unemployment rate to go up. The dysfunction in the job market is going to make it extremely difficult for a large number of people to find jobs. That means the unemployment rate will stay up.
Technically, the unemployment rate only measures those who are actively looking for work. As more and more people lose hope in finding a job and give up looking for work (thanks to the dysfunctional job market), they will be excluded from those who are deemed ‘unemployed’. Or they may find low-quality jobs that they are overqualified for. Or they can only find casual and part-time jobs that are too easy. Either way, the technical unemployment rate is going to under-measure the real number of people who are unemployed, under-employed and under-utilised.
Economists use past recessions as a gauge to guess how long unemployment stays up. But I suspect the real (not the technical) unemployment (and under-employment) rate is going to stay up for much longer than they expect. Also, the number of people whose skills are under-utilised is going to increase too and unfortunately, this is not going to be captured in any statistics. Since the rigged job market is a fairly recent phenomenon that has gotten worse over the years. It is going to exacerbate the structural dysfunction of the job market.
Government budget deficits will stay elevated for longer
As the unemployment rate goes higher and stays higher, the government budget will be strained because it has to fork out huge sums of money to pay for welfare for an extended period of time. They will find themselves trapped in growing the national debt indefinitely because the rigged job market is not fulfilling its function of matching the demand and supply of labour.
Unemployed people do not pay tax. As more and more become unemployed for a longer period of time, the government has to spend more and more supporting these people, for less and fewer taxes in return.
For countries that are highly indebted in terms of the national debt, this is another economic time bomb waiting to explode.
Banks will be in trouble
In countries like Australia where households are deeply mired in mortgage debt, an economy with elevated unemployment and under-employment for an extended period of time will spell serious trouble in their loan books.
Unemployed people cannot pay their mortgage debt. They also cannot pay rent, which causes landlords to be unable to meet their mortgage payments. Also, under-employed people are more at risk of defaulting on their massive mortgage debt.
As the banking system is a too-big-to-fail sector of the economy, further government support and central bank money printing will be required to prop it up. But this cannot go on indefinitely because eventually, a financial crisis will happen.
Rise of socialism
What if governments do everything to protect the banking, financial system and the elites, while at the same time, acting to protect the sustainability of their own sovereign debt.
Well, obviously this will create social problems and make socialism even more popular.
The Covid-19 pandemic has resulted in mass unemployment never seen since the Great Depression. Government finances are stretched to the breaking point. Post-pandemic, unless urgent actions are taken, a sovereign debt crisis will follow. The only way out is for economies to grow their way out of the crisis. In order to do that, business-as-usual cannot continue. The rigged job market cannot be allowed to operate as usual because it is the biggest single impediment to the de-ossification of the economy.
A national inquiry is required to look at:
Jobs hiring culture and process
Recruitment industry
The dearth of training and mentoring, especially for those with the least experience and skills
Misuse and overuse of using migration and population growth to mask the rot in the economy
If the dysfunction of the job market is not fixed, one thing is clear: we will see more social problems along with the rise in popularity of socialism.