RDP 2016-06: Jobs or Hours? Cyclical Labour Market Adjustment in Australia 2. Changes in Labour Market Adjustment over Time

To analyse cyclical adjustments in the Australian labour market, the total hours worked, employment and average hours worked variables are detrended (see Appendix A for further details). This helps to isolate changes related to the business cycle, by abstracting from the trend decline in average hours worked since the late 1970s and the trend increase in employment. For example, while total employment was little changed during the 2008–09 downturn, it went from being 1.1 per cent above its trend level in September quarter 2008 to 0.6 per cent below its trend in September quarter 2009 – a cyclical change of −1¾ percentage points.

To assess whether labour market adjustment has changed over time, the cyclical decline in total hours worked is calculated for each of the past four economic ‘downturns’, as well as the contributions of employment and average hours worked to each decline (Figure 2).^[5]

The first point evident from this analysis is that the cyclical declines in total hours worked were larger in the 1980s and 1990s recessions, reflecting the greater severity of these recessions compared with the economic downturns in the 2000s. Second, in the early stages of each downturn both employment and average hours worked contributed to the cyclical decline in total hours worked. Third, the absolute cyclical decline in average hours worked was similar in all four downturns, with the peak-to-trough declines in the 2000s downturns (2¼ per cent) only slightly larger than the declines in the 1980s and 1990s recessions (1¾ per cent). Finally, a larger proportion of the declines in total hours worked during the 1980s and 1990s recessions came about through reductions in employment, rather than via average hours; employment accounted for around 75 per cent of the peak-to-trough decline in total hours worked during the 1980s and 1990s recessions, compared with a contribution of only around 45 per cent in the 2000s downturns.

Decomposing the overall cyclical variation in total hours worked since 1978 – using the entire sample of quarterly data and taking into account the correlation between employment and average hours – provides further evidence that relatively more adjustment has occurred through average hours worked since the late 1990s (Table 1). This decomposition follows Merkl and Wesselbaum (2011) (see Appendix A for details). While estimates suggest that average hours worked have accounted for around one-quarter of the variability in total hours worked since the late 1970s, statistical tests point to a structural break in the cyclical relationship between total hours and average hours in the late 1990s (see Appendix A). The estimated contribution of average hours tripled after the late 1990s, to 58 per cent. This reflects both an increase in the variability of average hours worked and a decrease in the variability of employment over the past two decades (Figure 1).

Comparable estimates for other countries suggest that average hours worked in Australia now play a much larger role in labour market adjustment compared to the United States and Germany, but a smaller role than in Japan (Figure 3). However, Australia is the only one of these countries to have experienced a substantial pick-up in the contribution of average hours since the 1990s. Some potential explanations for this are discussed below.

Footnote

The term ‘downturn’ is used in this paper to refer to the recessions in the early 1980s and the early 1990s, and the growth slowdowns in the early 2000s and late 2000s. This captures every period since 1978 (our period of data availability) in which there was an increase in the unemployment rate of at least 1 percentage point over a period of less than twelve months. [5]