What happens to the Australian labour market in recessions?

Jeff Borland has a splendid article (gated, sorry) in the latest Australian Economic Review on what happens to the labour market in recessions. From it, I learned:

1. The impact across industries differs greatly. In past recessions, employment tends to fall in agriculture, manufacturing and construction, but also tends to rise in ‘recreation and personal services’, and sometimes also in the ‘community services’ industry.

2. In percentage point terms, youth unemployment tends to rise more than prime-aged unemployment in recessions, but the proportional increase is the same. For example, in the early-90s recession, unemployment rose from 10.4% to 18.4% for 15-24 year olds, and from 4.3% to 8.5% for 25-54 year olds. So both rates approximately doubled, but that represented an 8pp increase for kids, and a 4pp increase for adults.

3. In recessions, long term unemployment tends to increase more than short-term unemployment.

4. Unemployment inflows and outflows both increase. Jeff explains the puzzle.

The flows between employment and unemployment in Australia have followed a regular pattern during recessions and upswings. In particular, both tend to increase during recessions. It should not be surprising that the inflows to unemployment from employment increase during a recession, as this is a time when we expect many workers to lose jobs due to a reduction in demand for firms’ output. However, it might seem curious that the outflows from unemployment to employment also rise during a recession. How can it be that more people are finding jobs in recessions than upswings?

This phenomenon can be explained as follows. The magnitude of the outflows from unemployment to employment from one month to another depends on the number of persons who were unemployed in the initial month and on the probability that a person who was unemployed in that initial month shifts to employment by the next month. Even though the probability of an unemployed person moving to employment falls during recessions (that is, it becomes harder, on average, for any individual unemployed person to find a job), there is also a much larger number of unemployed persons during a recession, and it turns out that the effect of having more unemployed persons is the dominant effect on the magnitude of the flows from unemployment to employment. Hence, the outflows from unemployment to employment are at a peak during recessions.

This finding has quite important implications; for example, for agencies (such as Job Network providers) who are seeking to place unemployed persons into employment. It suggests that their total number of successful placements of unemployed clients into jobs is likely to be the highest during recessions.

5. According to 1997 time use data, 15-20% of unemployed people report job search activity on any given day, with the average time spend searching among those people being 80-100 minutes per day. Multiplying these numbers together, the average time spent job searching across all unemployed people is 16 minutes per day, or a little less than 2 hours per week.

If you can get access to the article, it’s highly recommended reading.

(xposted @ andrewleigh.com)

One thought on “What happens to the Australian labour market in recessions?”

  1. Point 4 is very interesting. I read (sorry, forget where) that in the US in the September quarter last year 7.8 million jobs were lost but 6.8 million jobs were created. This was compared with Japan, where during their long recession the average rate of job creation is far lower. The ABS reports the flows over the month in the latest labour force data, but I’m not sure how easy that is to convert to the quarterly or annual flows. In any event I guess what Jeff is saying is that we look like the US – we create a lot of jobs even during recessions.


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