High unemployment rates that have persisted in most OECD countries over the last twenty years remain one of the main global economic problems. The worrying fact is that after two decades of supply-side policies, whose collateral damage has included greater job insecurity and rising income inequality (Galbraith, 1998), unemployment rates are quickly increasing again as falling aggregate demand levels push the world economies towards recession. The problem is compounded by a reluctance of most governments to use demand-side policies to attenuate these costly cyclical episodes (Mitchell, 2001b).
Figure 1 shows that since the mid-1970s, the labour market experiences of Australia, Japan and the United States (US) have been distinct. Japan maintained full employment until its recent economic problems have pushed the unemployment rate from 3.2 per cent in 1995 to 5.4 per cent in October 2001 with recent GDP figures recording the 4th official recession in the last decade (Japan Institute of Labour, 2001). Its vacancy rate shows cyclical patterns without any obvious trend decline. The unemployment rates in Australia and the US have been significantly higher with three strong upturns coinciding with demand failures. Both economies experienced strong real output growth and falling unemployment over the last 8 years. Despite this growth Australia’s unemployment rate remained stuck at around 6 per cent while the US achieved historically low unemployment rates.
With the downturn now apparent, the October figures show that Australia’s unemployment rate has risen to 7.1 per cent (ABS, 2001). Similarly, the unemployment rate in the US has jumped to 5.7 per cent in November 2001 after several months of major job losses. This was the highest level since August 1995 (BLS, 2001). The other interesting observation is that Australia’s vacancy rate underwent a mean-shift coinciding with the mean increase in the unemployment in the mid-1970s.
To help understand the evolutions of unemployment and vacancies shown in Figure 1, this paper investigates whether the labour markets in Australia, Japan and the US exhibit similar dynamic behaviour when shocks are experienced. The comparison between the three economies is motivated by the perceived differences in the way their respective labour markets operate. The substantially deregulated US economy has been advocated as a model for other countries to follow (OECD, 1994). Conversely, Japan has adopted active macroeconomic policy and increased regulation to maintain low unemployment rates (OECD, 1996). They have also not embraced widespread supply side reforms, although there are now pressures for labour market, as well as product market and financial market reforms. Australia has adopted a hybrid approach with substantial deregulation and privatisation. It has abandoned full employment as a policy goal (Mitchell, 2001b). In summary, the three economies have adopted a range of policy approaches to the problem of unemployment and they have experienced different outcomes over the past three decades as shown in Figure 1.
The analysis uses two distinct techniques. First, we examine phase diagrams to determine the presence and stability of attractor rates of unemployment and vacancies (Ormerod, 1994). The behaviour of the three economies is sharply contrasting and provides insights into their relative unemployment experiences. Second, we estimate a recursive Vector Autoregressive (VAR) model to examine the relative dynamic impacts on vacancies and unemployment (both expressed as a percentage of the labour force) of various shocks (monetary, output, sector-specific, and external). We extend Genay and Loungani (1997) who study the way that “intrinsic and qualitative differences between the economic, financial, and legal structures of Japan and those of the U.S.” condition “the relative importance and propagation of various economic shocks.”
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Exploring labour market shocks in Australia, Japan and the USA
