The Myth of the Short, Sharp Shock

Policy induced recessions in 1983 and 1991 were responsible for up to 80 per cent of today’s 200,000 long-term unemployed, according to a paper released today.

In an article in the BCA Papers, Professor Bruce Chapman of the Australian National University argues that macro-economic policy decisions in those two years that were specifically designed to inflict short, sharp shocks on the economy have also had long and costly consequences.

The article says higher employment growth in 1983 and 1991 would have resulted in a considerably lower level of long-term unemployed.

“At the end of the 1990s … long-term unemployed would have been not much more than 100,000 if employment growth in 1983 and 1991 had been just 0.4 per cent per annum higher, and about 50,000 if these years had instead experienced an increase in employment growth equal to the average annual employment growth (between 1966 and 1999),” it says.

“What actually transpired was long-term unemployed of well over 200,000 in the last half of the 1990s. This suggests that better employment growth in only two years could have reduced long term unemployed by around 50 to 80 per cent.”

The paper says there is no doubt that just a few poor years of economic growth have very significant medium-term implications for high duration employment.

“The analysis strongly reinforces the notion that there are significant potential dangers from restrictive macroeconomic management,” it says.

“The challenge lies in avoiding policies that increase the likelihood of recessions, given that they are so expensive. Prevention is better than cure.”