Jobs Or Working Hours In The Labour Market?

Interesting paper from the RBA, released today, “Jobs or Hours? Cyclical Labour Market Adjustment in Australia.” It looks at how the labour market has adjusted over the economic cycle, and concludes that in recent times reduced job working hours, rather than job cuts have been the order of the day. One reason why measuring underemployment is so vital.

They argue this is because of the more mild downturns, and labour hoarding.

We find that, while both employment and average hours worked tend to adjust over the cycle, the share of labour market adjustment due to changes in average hours worked has increased since the late 1990s. Indeed, the contribution of average hours to the cyclical variability in total hours worked has tripled, from 20 per cent over 1978–98 to 58 per cent over 1999–2016. Such a large increase in the importance of average hours adjustment was not observed in other developed economies.

jogbs-and-hoursSince the late 1990s, a larger share of cyclical labour market adjustment in Australia has come about via changes in average hours worked, as opposed to changes in employment. While empirical evidence is inconclusive (partly due to the difficulty in modelling average hours worked), our view is that the relatively short and shallow economic downturns in the 2000s have played a role in this. Had these downturns been more severe, like the recessions in the 1980s and 1990s, firms eventually may have needed to shed more workers than they did. In other words, it is likely that both employment and average hours tend to adjust in the early stages of a downturn, but relatively more adjustment occurs through employment as the downturn persists and becomes more severe. It is also possible that labour market reforms over recent decades have provided firms with more scope to reduce their use of labour by reducing working hours rather than by redundancies.

We also find that the main driver of the adjustment in average hours during the 2008–09 economic downturn was a reduction in hours worked for employees who remained in the same job (i.e. labour hoarding). Consistent with this, a longer-run historical analysis suggests that changes in the composition of employment have not been the main driver of the decline in average hours during downturns and recessions.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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