Wednesday, December 8, 2010

Creating jobs not the be-all and end-all

I reckon I've had only about half a dozen job interviews in my life and only one - with the Financial Review - where I wasn't offered a job. When I was leaving school in Newcastle in the mid-1960s a local chartered accountant needed a youngster to be a junior audit clerk. He approached the school careers adviser, who recommended me.

I was pleased to take the job, but left after two years to go full-time at uni. Nearing the end of my course but not being worldly wise, I left it too long before lining up a job for the next year. The interviews were over.

Not to worry. I caught the train to Sydney and went to the office of the Institute of Chartered Accountants, which gave me a list of the big city accounting firms. In what was left of the day I managed to visit four of them, walking in off the street to ask for a job.

I retired to my sister's house to consider the four offers, choosing the one that offered slightly higher pay: $4000 a year.

The point of the story is not that I was a great catch, but that in those days finding a job was never hard. In the 30 years of the golden age following World War II, the Australian economy was almost continuously at "full employment", defined as an unemployment rate well under 2 per cent.

Occasionally economists would worry that the economy had hit "over-full employment", meaning job vacancies far outnumbered job seekers, a quite inflationary situation.

But the golden age ended in the mid-1970s with the first OPEC oil shock (just after I'd landed a job at the Herald) and the advent of "stagflation", which plunged Australia and the developed world into a protracted period of economic dysfunction, with high inflation and high unemployment.

It took until the early 1990s to get inflation back under control and until the mid-noughties to get back to full employment, which by then economists were defining as unemployment of about 4.75 per cent.

(Why so high? Perhaps because these days more unemployment is "structural" - people with skills who aren't the ones in demand, or people with needed skills who don't live in the cities where they're needed. In any event, the economists who manage our economy are convinced that if unemployment falls much below 4.75 per cent, shortages of skilled labour will become widespread, employers will start bidding up wages, then pass their higher cost on in higher prices, causing inflation to take off.)

The point is that we went for about 30 years with high unemployment, a period in which the economy was seen to be "demand-constrained" - the demand for labour was insufficient to take up the available supply of labour.

So we had a period of three decades in which to engrave on our minds the assumption that there is always a shortage of jobs; that every new job is an extra job and every extra job - no matter how menial or poorly paid - is a good thing.

It followed that any new project that could be claimed to involve the creation of jobs (which all of them can) was obviously a good thing, worthy of government approval and maybe some sort of concession.

Now, however, with the economic downturn over and the resources boom resuming, it won't be long before the present unemployment rate of 5.4 per cent falls a lot further and labour shortages become widespread.

And adding to this will be the effect of population ageing. The first baby boomers turn 65 this year and, though many will delay their full retirement by continuing to work a few days a week, by the end of the decade most of them will have left the workforce. But there won't be all that many young people joining the workforce.

Population ageing means you have plenty of people consuming - and thus adding to the demand for labour - but a lower proportion of people wanting to work and thus contribute to the supply of labour.

In other words, we're returning to a '60s-style economy in which the demand for labour exceeds the supply, and all our now deeply ingrained thinking about a perpetual shortage of jobs is no longer correct and needs to be abandoned.

When, for all practical purposes, pretty much everyone who wants a job already has one, it is no longer true that a project that will create 200 jobs will increase total employment by 200. Rather, the workers who fill those jobs will have to be attracted from their existing jobs, and it may well be necessary to bid up wages to attract them.

Certainly, it no longer follows that saying a new project will create jobs means governments should applaud it and subsidise it. Nor does it follow that saying a particular industry will have to shed many jobs because it has struck difficulties of some sort obviously obliges governments to step in with subsidies to protect those jobs. Most of the workers involved shouldn't have much trouble picking up jobs elsewhere.

Senator Stephen Conroy recently listed among the national broadband network's many virtues the claim that it would "stimulate the economy". But when the economy is at full employment, the last thing governments should be doing is adding stimulus.

Conroy had no idea he was mounting a good argument against the government spending so much to build a gold-plated broadband network at this time. It will take economists and economics teachers many years of explanation and education to break the public's mindset that creating new jobs is an unmitigated virtue.