Three types of blog posts I’m sick of writing, and I’m sure you’re sick of reading, are generic defences of the Fair Work Act, angry screeds against predictable partisanship from The Australian, and basic summaries of labour force data. Yet every time I swear to myself that I’m going to take a break from each of these genres, someone writes something that gets me sufficiently riled up that I feel compelled to respond. John Black’s piece in yesterday’s Oz, titled ‘Workers at the mercy of a jittery economy‘, ticked all the boxes. He uses a highly selective and skewed bundle of labour force data to try to make the case that the Fair Work Act is the cause of rising unemployment. Here’s my response.

Black: In the year to August, the potential Australian workforce grew by about 335 000 people.

This is true, but misleading. By ‘the potential workforce’, Mr Black means ‘the civilian population aged 15 and over’. If we just look at the civilian population aged 15 to 64 (see Table 18), the potential labour force rose by only around 205 000 over the same period. That means that around 130 000 of the extra members of the population added over the year to August were aged 65 or above. People aged 65+ represent only 17% of the 15+ population, but accounted for 40% of the population growth in the past year. If population growth is disproportionately concentrated among older people, you’d expect to see a decline in the participation rate for purely demographic reasons.

The population is getting older. 70 year olds are less likely to be in the workforce than 35 year olds. Mr Black ignores this issue, which seriously skews his analysis.

2010 was the 65th anniversary of the end of World War Two. A demographer such as Mr Black may be familiar with the fact that the end of WW2 marked the beginning of a baby boom. Those babies turned 65 years old during the last term of government, an age at which the propensity to participate in the workforce tends to decline. By ignoring this, Mr Black falsely implies that the decline in participation is entirely due to weak labour force conditions created by the Labor Government’s labour laws.

Black: With a long-run participation rate of 65.5 per cent…

Do you see what the game is here? If you pick a high participation rate (or a low unemployment rate) and call it the ‘trend’ or ‘long-run’ rate, anything worse than that looks bad and can be said to reflect poorly on current public policy. But it’s worth taking a close look at the rate Mr Black has chosen as the “long-run” rate.

Over the past 30 years, the average (trend) participation rate was 63.5%. Under the Howard Government the average was 63.7%, and reached 65.5% in only one month – November 2007, the month it lost office. At that point, 65.5% was the highest participation rate recorded in Australia’s post-war history.  Have a look at the chart below – this shows the actual participation rate over the past 30 years, compared with the rate Mr Black nominates as the “long-run” rate and the average of the three decades.

Screen Shot 2013-10-05 at 3.03.03 PM

The latest Intergenerational Report, released in 2010, projected a steady fall in the participation rate for people aged 15 and above, sliding to below 61% by the middle of the century. Most of this fall, it’s expected, will come due to the ageing of the population. Treasury’s projections are shown below – you can see that they expect the participation rate for people aged 15-64 to stay high, and even rise a little, while the overall rate for everyone aged 15+ will fall due to the ageing of the population. Remember that it’s the 15+ rate that Mr Black uses to make his case about the current labour laws.

Screen Shot 2013-10-05 at 3.08.15 PM

Mr Black seems to view the fall in the participation rate from the near-record level of 65.5% as evidence that the current labour laws are damaging. I think it’s more likely to be related to the ageing of the population. Analysis in the latest Budget concurs with my view, finding the following:

The most significant factor weighing on participation is Australia’s ageing population, resulting in fewer potential workers as a share of the total population…

This demographic change is already having an effect, with the changing age distribution accounting for around 80 per cent of the decline in the participation rate since 2010.

In particular, the increase in those aged 65 and over as a share of the working‑age population (aged 15 and over) has accelerated in recent years, resulting in a higher proportion of workers reaching retirement age.

Perhaps Mr Black is one of those who views Treasury’s analysis during the Labor Government to be untrustworthy, but the facts are quite clear. The participation rate of people aged 15-64 remains near its record high – nearly all of the decline over the past couple of years is due to the ageing of the population, not due to a declining participation rate among particular age groups.

Screen Shot 2013-10-05 at 3.28.43 PM

Black: …with unemployment running at a steady 4.5 per cent – about half a percentage point above the level inherited by the Rudd Government in November 2007…

Nope. The seasonally adjusted unemployment rate in November 2007 was 4.5%, not 4%. In trend terms it was 4.3%. Mr Black is incorrect here.

Note also that in comparing the current rate to that of November 2007 (although he gets that rate wrong), not only does he ignore changes in the demographic structure over the period, but he also ignores  changes in the world economy. Does Mr Black really think that the global economy is in the same state now that it was in late-2007? Is China growing as strongly? Is the Australian dollar valued at the same level? Is demand from the US and Europe as robust? Are Australian consumers spending the same proportion of their incomes? Mr Black must believe the answer to all these questions is ‘yes’, because he ascribes the rise in unemployment to the labour laws alone.

Black: The year-on-year growth in unemployment numbers has increased for the past two years and the 90,000 figure is higher than we saw during the stock market crash of the mid-1980s and the Asian financial crisis of 1997. We are now closing fast on the 112 300 jobless created in the year to October 2001…

There’s a reason why unemployment is typically measured as a proportion of the labour force – the unemployment rate – rather than in absolute numbers of people. Using the latter method makes comparisons over time quite misleading. Back in the Great Depression, the formal unemployment rate in Australia topped 20%, but the working-age population numbered less than 5 million. Mr Black’s methodology would downplay the seriousness of the Depression, on the basis that the absolute number of people who lost their jobs seems somewhat modest by contemporary standards. This is a bit silly.

In the past year, the (trend) unemployment rate rose 0.5 percentage points. Over the 1986 calendar year, the rate rose by the same amount. It rose only 0.2 point in the year to mid-1997, but that was a rise from 8.5 to 8.7%. In 2001, Australia’s unemployment rate rose from 6.1% to 7% over a 12-month period, a 0.9 point rise off a higher base.

Black: This private sector pain has not been shared by the industries which tend to be funded or regulated by federal government. These include public administration, education and health, which grew by 528 000 jobs under the national leadership of Kevin Rudd and Julia Gillard and treasurer Wayne Swan. 

The chart below shows employment in the three industries named by Black, as a proportion of total employment. Sure enough, the share is rising, which means that these three industries have seen more rapid employment growth than other industries. But does this look like a new trend to you? It looks to me as if the employment share of these three industries, taken together, has been rising reasonably steadily for the past few decades. I don’t see an inflection point in November 2007.

Screen Shot 2013-10-06 at 1.02.56 PM

It’s worth digging into this a little deeper. Mr Black lumps three industries together. But the rise in the employment share of these industries is pretty much all about health care. You can see below that the employment share in public administration has been fairly steady for the past few decades, education and training has risen a little bit, but employment in health care is now 50% larger as a share of total employment than it was in the mid-1980s.

Screen Shot 2013-10-06 at 1.11.05 PM

This isn’t a story about ‘public sector’ industries gaining at the expense of other industries. It’s a story about booming employment in health care. Unlike Mr Black, I don’t think this is due to decisions made by the Labor Government, whether in industrial relations or any other policy area. I don’t think the chart above supports that interpretation either. I think the story is about a country getting richer, which means we tend to spend more on services as a share of total spending, and a country getting older, which means we tend to need more health care. It’s also a consequence of productivity growth in service industries like health being inherently lower than growth in industries like manufacturing.

It’s also worth noting in passing the slight rhetorical slipperiness that Mr Black uses in this section. Not everyone employed in these three industries works for government, and not everyone who works for government is employed in these industries. Plus, most people who work in health, education and public admin are employed by state governments, not the feds. The number of people employed by the Commonwealth Government actually fell in 2011-12, the latest year for which we have data.

Black: …a disproportionate number – about 167 000 of them according to the ABS – would be members of white-collar unions, many affiliated with the ACTU. 

The data that Mr Black used to measure the number of people employed in those three industries don’t say anything about union membership. Instead, he’s assuming that union membership among the additional employees in those industries is as prevalent as it is among the industries’ existing workers. This might well be true, but this conclusion is the product of that assumption, it is not shown in the data. The reference to ACTU-affiliated unions seems to be gesturing at some sort of conspiracy theory in which the ACTU dictates fiscal policy with the aim of boosting its membership. I would suggest that if this was the case, we may not have seen the most contractionary single-year change in the underlying cash balance since at least the 1960s.

Black: When we look at the detailed breakdown of the regions losing jobs to August…

You should be aware of the limitations of the data that Black uses here. The smaller the region that’s being examined, the larger the standard error. This means the estimate is less reliable, with a wider confidence interval. Take, for example, the Ipswich labour force data.

The ABS thinks there were 74 100 people employed in the Ipswich City region in August 2013, down from 81 900 a year earlier. The standard error on the estimate for August 2013 is 5 700. This means the 95% confidence interval – what is typically termed the ‘margin of error’ when the press reports polling data – spans from 62 700 to 85 500. Last year’s employment level is within the ‘margin of error’ of this year’s estimate. Hanging your polemical hat on such shifts in employment estimates at the local level is not particularly sensible. Ipswich is not unique in this respect. The standard errors at the state level are pretty big, let alone the local level.

Black: The demographic groups concentrated in those regions include two low-income but quite distinct demographic streams.

Let’s be clear what Mr Black is doing here. He’s taking the local labour force data, which are highly volatile as we’ve just seen, and cross-referencing them with data from some other unnamed source, possibly the Census. There is nothing in the labour force data that tells us about the preponderance of agnostic Gen Ys who walk to work within a particular region. Now there’s nothing wrong with using multiple data sources to tell a story, but it’s important to be clear what the jobs data do and do not include.

Black: The first is found in the inner-city regions and includes gen Y singles, living in rental digs and walking to work. He or she is highly mobile, agnostic and voted Green in 2010 but not to the same extent in 2013. The other stream is older, male, unmarried and living alone. He has basic certificate course qualifications, is often unemployed and on some form of welfare and usually votes Labor. He used to ride his motorbike to his part time job at a local pub, but he’s just been laid off and he’s now back visiting the Centrelink office.

Employment losses might be concentrated among these groups. This might be true. This might be nonsense. I have no idea, and neither does John Black. The data do not tell us this sort of detailed information about people. This is pure statistical horse whispering.

Black: Typical examples are Ipswich and far north Queensland. In these two regions, nearly 15 000 jobs have been lost in the past year and yet their counter-intuitive fall in unemployment rates indicates most would have joined the rank of the local discouraged workers…

The existence of areas in which employment and the unemployment rate have both fallen is not at all counter intuitive if you remember that it’s 65 years since the baby boom and a lot of people are moving into retirement. With that sort of demographic shift underway, you’d expect to see employment fall and people leave the labour force.

The point of my post is not to dispute that the labour market has softened over the past year. It has, and this isn’t all due to demographic change. But Mr Black has dramatically exaggerated his case and has failed to substantiate his claim that the deterioration in labour force conditions is due to the industrial relations laws or some other policy action of the former government.

Advertisements