Joe Hockey has called for an “end to the age of entitlement”. He added on Lateline that “we need to compare ourselves with our Asian neighbours where the entitlements programs of the state are far less than they are in Australia”. He says that “the age of unlimited and unfunded entitlement to government services and income support is over”. He compares the 16% of GDP that Australia devotes to social spending with Korea’s figure of “around 10%,” which is actually 7.6% on the latest OECD figures.
A discussion of Australian political and economic issues and ideas, by Matt Cowgill.
Archives for posts with tag: unemployment
It’s hard to sum up the state of the labour market in one statistic, but that doesn’t stop us trying. The most commonly used figure is of course the unemployment rate, but that can hide some interesting developments in the world of work, like if people have their hours cut or if others leave the labour force entirely. I generally prefer the employment-to-population ratio, which tells us the proportion of working age people (usually just everyone aged 15 and over) who are in work. Still, the employment-to-population ratio doesn’t tell us about changes between part-time and full-time work.
For that reason, I’ve been looking at this measure that I’ve spliced together from the Labour Force statistics: the number of hours worked in a given month, per working age person (everyone 15+). This is a bit like the employment-to-population ratio, but it uses hours rather than employed persons as the numerator.
The hours worked-to-population ratio
This chart tells us that there isn’t as much work to go around as there was before the GFC, but we’re doing better than we were in early 2009. The number of hours per person flattened out in 2011, dipped in January and has recovered some lost ground in March.
I’d like to quickly address this claim made by RBS, reported by Christopher Joye:
teenage unemployment has fallen, but at 16½% it is still very high as many youths have found it hard to get a job with recent legislative changes making it more difficult to employ younger workers on short shifts.
The Financial Review ran an article on its front cover yesterday about the perils of wage inflation (it’s paywalled, so no use linking). Wages are apparently rising at an unsustainable level, threatening the only economic indicator that matters, the overnight cash rate:
The mining boom has triggered a wages blowout that could ignite inflation and tip the Reserve Bank of Australia into raising interest rates more quickly than planned. Labour costs rose by 4 per cent in the year ended August 31, up from 3.7 per cent in July, according to NAB’s monthly survey of business conditions.
Oh no! A 0.3 percentage point increase in year-ended terms!
Note that the entire story hangs off one data source, the NAB business survey. Even then, the crux of the story is a rise in year-on-year wages growth from 3.7% to 4%, hardly the stuff of central bankers’ nightmares.
The evidence of wage pressures comes as the ACTU secretary Jeff Lawrence and president Ged Kearney will have their first meeting today with the Gillard Government.
Oh no! Unionists!
It’s the full scare campaign. News of the apparently unsustainable wages growth is mixed in with news that union officials are meeting with ministers. The clear implication for readers is that the two are connected and there’s cause for concern. The problem for the Fin is that there are hardly any facts to support its strongly-worded warnings.
The available ABS wages data would give the RBA no cause for alarm.
Here’s the quarterly growth in the Wage Price Index for the past three years, with the long term average (1997-2010) as a dotted line. Wage growth dipped below average in January 2009, and still hasn’t recovered. Private sector wage growth has flatlined for the past few months, while public sector wage growth has fallen. There is no evidence here to support the Fin’s claim that wages are spiralling out of control.
If we set aside the fact that the NAB survey results seem like an aberration, what about the article’s suggestion that wage rises necessarily imply unsustainable inflation?
Although the increases aren’t big by historic standards, the survey showed wages are growing faster than prices.
Oh no! Real wage growth!
I had a look at how common it is for wages to grow faster than prices. I compared year-on-year WPI and headline CPI and found that wages have in fact grown faster than prices for 37 of the past 48 quarters. It’s far from unusual for wages to grow in real terms; in fact, it’s the norm. I don’t recall too many hyper-inflationary price spirals over that period.
And yet, we have ANZ Banking Group economist Katie Dean claiming that:
Catch up or not, higher wages are inflationary.
Really, Katie? I would have thought that if there are productivity improvements then real wage growth is justified, even within a neo-classical economic framework.
So, what has happened to productivity? An easy way to measure the relationship between productivity and wages is to look at real unit labour costs. This measures the average cost of labour per unit of output, adjusted for inflation. If real unit labour costs are falling, then it costs employers less, in real terms, to employ people to produce a given quantity of goods or services.
Here’s what has happened to real unit labour costs over the past 25 years:
Inconveniently for a newspaper wanting to run a 1970s-style “unions lead wage breakout” story, real unit labour costs are at their lowest on record. They were roughly stable throughout the 1990s, and fell steadily in the 2000s, with sharp falls in the past year. Productivity is rising, real unit labour costs are falling and the wage price index is stagnant. Not exactly the perilous, overstretched labour market the newspaper depicts.
Let’s instead focus on the Fin’s other claim, that we’re reaching “full employment”. Forget for a moment the theoretical debates about where the full employment level lies, or the ideological debates about whether we should accept the concept. Instead, we’ll just take the Fin’s assumptions as given.
The paper claims that unemployment is “dangerously close to the 5 per cent mark, which economists say is the lowest level the jobless rate can go before tightness in the labour market pushes inflation above the Reserve Bank’s target band”.
There’s good reason to think that 5% unemployment in 2010 does not look like 5% unemployment did in 2008. We have more underemployment (people who are working part time, but want more hours) and we’re working fewer hours, on average. The labour force underutilisation rate, equal to unemployment plus underemployment, is at 12.5%, still well above its pre-financial crisis low (9.9%).
Employees are still working fewer hours, on average, than they were before the downturn.
This doesn’t look to me like a labour market with no spare capacity. The ‘headline’ unemployment rate only tells part of the story.
I don’t quibble with the basic point that things are getting better in the labour market: wages are going up, unemployment is coming down. The RBA might well start increasing rates soon, though the futures market still only sees an increase at the next meeting as a one-in-four chance. We know that the Bank has its eye on the medium-term (ie. a couple of years out), so it’s more concerned about emerging trends than the current state of play. It may well be tilting towards a more hawkish position, and the Fin’s readers would want to know that.
What I take issue with is the Fin’s shallow analysis, based on one survey, that seeks to whip up unjustified consternation about moderate wage rises and imply that unions are somehow behaving irresponsibly. As usual, the real story here is subtle, one of slightly improved conditions in the labour market, with the potential for moderate impacts on inflation over the medium term. The problem is that that doesn’t make for very appealing front-page copy, so instead we get the typical hyperbole.
The ABS released the results of its August Labour Force survey today. Unemployment fell from 5.3% to 5.1% in one month. There were 30 900 more employed Australians in August than in July, with full time employment surging and part time employment falling. There are still problems, to be sure. There are still hundreds of thousands of people unemployed, underemployed or discouraged from seeking work. But virtually every other developed nation would fall over themselves for labour force figures like these.
I would have thought that any competent journalist could write a compelling story about this beautiful set of numbers. There are any number of angles. They could write about the light that these figures cast on the election result: a first-term government struggled to get re-elected with a world’s-best unemployment rate. They could write about the rise of full time employment, as workers whose hours were cut during the downturn have them restored. They could write about the gender split in the numbers, or the breakdown by State. They could write about the sheer alleviation of human misery that these numbers represent: find someone who has found a job after a while out of work, and talk to them about what it means for their family and their self esteem.
What do we get instead?
Instead of stories about the news itself, we get some market economist speculating about the potential implications for the overnight cash rate.
Employment and unemployment don’t matter in themselves, apparently. They’re only evaluated in light of the sole arbiter of economic performance that some journalists seem to understand. Forget the tens of thousands of people who now have jobs, forget the thousands already working who can feel a little bit more secure. No, all that matters is that the increase in employment might make the RBA more likely to increase the overnight cash rate.
For what it’s worth, the futures market is now pricing in a 24% likelihood that rates will increase at the next RBA board meeting, up from only a 7% likelihood yesterday. It seems like a minor aspect of this story to me, but I’m not a journalist.
(I should say that the ABC’s excellent business reporter Michael Janda wrote a balanced piece that covers the detail of the employment numbers themselves, not just the interest rate angle).
Those of you who are not from Western Australia will be unaware of Paul Murray, and for that I envy you. Murray is like Paul Kelly without the sparkling wit and partisan neutrality. His stentorian prattlings fill the pages of the West Australian, managing to be at once infuriating and utterly boring.
Today he leads off his tedious screed with the following predictable quasi-secessionist burbling:
The productive parts of Australia gave Labor a big kick in the backside – but maybe not quite hard enough to dislodge it from office. Those parts reliant on Labor’s handouts – Victoria, Tasmania and South Australia – stuck firmly on the teat.
I don’t want to talk about his election “analysis” today, such as it is, but instead the WA hard-done-by-ism that underlies the quote above.
I am a bit sick of hearing about how WA pays more than its fair share and about how it’s the productive part of the country and the ‘Eastern states’ are just a big rust belt.
Do you own the ore?
I don’t understand what makes West Australians, particularly anyone other than the 79 600 people who work in mining, feel some sort of proprietorial pride at the mineral wealth under the ground in the State’s far north. I speak as someone born in Perth who lived there for 27 of my nearly 28 years. I never felt as if I had done something special to deserve any greater share of revenue from iron ore than, say, Tasmanians or Northern Territorians.
Cross subsidy was OK when the money went the other way
WA has spent most of federation living off transfers from the more populous states. Lang Hancock didn’t discover iron ore until 1952, and then he spent twenty years trying to get the West Australian iron ore and steel industries off the ground. Then there was a long term decline in global commodities prices, reflected in our terms of trade, that meant that WA still received a slight subsidy. In fact, let’s have a look at how things stood in 1993-94, when the Commonwealth Grants Commission undertook a review of intra-federation financial transfers.
Here are the fiscal transfer relativities from 1993-94, adjusted to include the Medicare Agreements. A relativity of less than 1.0 means that the State or Territory received less revenue in grants or other transfers than it would have done if the money had been evenly divided among states according to population. In other words, it received “less than its fair share”, in Paul Murrayesque terns. Conversely, a relativity greater than 1.0 means that the State received “more than its fair share”.
| State/Territory | 93/94 relativity |
| New South Wales | 0.852 |
| Victoria | 0.836 |
| Queensland | 1.093 |
| Western Australia | 1.119 |
| South Australia | 1.222 |
| Tasmania | 1.481 |
| Northern Territory | 4.785 |
| Australian Capital Territory | 0.867 |
| Australia | 1.000 |
Well, look at that. Those ‘unproductive States’, Victoria and New South Wales, were subsidising Western Australia.
What has happened since? Well, of course, there has been a spike in global commodity prices, driven by increasing demand from China and India. As a result, WA has been able to raise more of its own revenue (from mining royalties, stamp duty and payroll taxes) and hasn’t had to rely on transfers from other states. Here’s what WA’s relativity has looked like over the past decade:
| Year | WA’s relativity |
| 00/01 | 0.98 |
| 01/02 | 0.98 |
| 02/03 | 0.98 |
| 03/04 | 0.97 |
| 04/05 | 1.03 |
| 05/06 | 1.03 |
| 06/07 | 1.00 |
| 07/08 | 0.95 |
| 08/09 | 0.86 |
| 09/10 | 0.78 |
In the early part of the decade, WA’s relativity was very close to 1.0, meaning that it received very close to what it would have if the national pool of money was divided by population. In the middle part of the decade, the State received slightly more than its “fair share”. Since then, WA’s relativity has come down. The Grants Commission calculates the States’ shares based on a five-year rolling calculation that includes the States’ revenue from other sources. That means that in the 04-07 period, when mining was in full swing, WA’s royalties hadn’t yet been fully factored in. Now they have, and WA’s share has fallen accordingly.
Now, perhaps West Australians don’t think it’s fair that they should receive less than their (somewhat crudely determined) ‘fair share’. I personally find it a bit hypocritical that a State that has spent most of its existence being subsidised by NSW and Victoria now regards the fiscal equalisation system as unfair.
Note that NSW and Victoria still pay more than their “fair share” too. Tasmania, the ACT and South Australia receive slightly more than an equal proportion per citizen. The Northern Territory receives a lot more than an equal proportion, because it has less capacity to raise its own revenue and has a big population of extremely disadvantaged Aboriginal people.
Some states receive less than other states, per head of population, because of the principle of ‘horizontal fiscal equity’. It sounds horribly wonkish, but really it just means that all citizens should have a reasonable expectation of receiving the same quality of services, no matter the State they happen to live in. Funds are redistributed across the federation to allow this to occur. The principle that is in use to distribute GST funds is:
State governments should receive funding from the Goods and Services Tax revenue such that, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each would have the capacity to provide services at the same standard.
Is that really a controversial suggestion? Would Murray and his ilk prefer that we have an American style system of fiscal disparity, in which being born into a poor area means going to a poor school and attending a poor hospital? Would they really suggest that rather than transferring some of its windfall mining gains to poor Aboriginal kids in the Northern Territory, the West Australian Government should keep all the money for itself? Perhaps they would.
Now, I need to make one thing clear: I am very aware that there is a lot of poverty and disadvantage in WA, and that there are extremely remote parts of the state that are in dire need of more government-funded services. I used to work for the WA Council of Social Service, and before that in the WA public service; I am all too aware of the challenges of delivering services in remote and regional WA. I am not suggesting that WA is all some golden nirvana. Instead, I’m just supporting the principle that Australian citizens should receive government services based on need, not on what state they happen to live in.
WA’s ‘powerhouse’ economy is oddly fragile
WA’s economy actually deteriorated faster than the national economy during the global recession. WA didn’t “get us through” the recession. Its economy has since rebounded more rapidly, but that just demonstrates the State’s reliance on the mining industry and the strongly cyclical nature of that industry (remember that in the six months from November 2008, the mining industry shed 27 300 workers, 15% of its workforce).
Here’s a comparison of the Australian and WA unemployment rates from July 2008 to July 2010:
WA entered the global financial crisis with its unemployment rate a full percentage point or so below the national figure, but then unemployment in that State rose much more quickly than the national average. By mid-2009, the unemployment rate in WA was basically equal to the national unemployment rate.
Another way of evaluating WA’s performance over that period relative to the national economy is by looking at the proportion of Australian employees who are employed in WA, ie. the total number of WA employees divided by the total number of Australian employees.
Around the time the financial crisis hit, nearly 11% of Australian workers were employed in WA. This fell steadily over the next year or so.
The point of this is to show that the WA economy is heavily cyclical, as it’s very dependent on the fortunes of the mining industry, which in turn are determined by the global prices for various commodities, which in turn are determined by global demand, which in turn is driven by the surging fortunes of China.
If things were to change and China were to falter then WA’s miracle economy may begin to appear a lot less miraculous. I suspect at that point we’d stop hearing from Paul Murray et al about West Australian exceptionalism and the need to receive a “fair share”, because the “less productive” States would once again be shovelling funds back across the Nullabor.
