Wednesday, February 15, 2012

Jobs market isn't nearly as bad as you think

Economists don't have a good record on forecasting what will happen to the economy, but here's a prediction I make with great confidence: whatever happens, it won't be as bad as you think it is. That applies particularly to the jobs market.

Consider this. One day you pick up a newspaper and on page five you read a small story saying employment grew by 10,000 last month, leaving the rate of unemployment unchanged at 5.2 per cent. A couple of days later, every time you turn on the car radio or look on the internet, then settle down at home to watch the evening news, you're told about the car company that's announced its intention to lay off 350 workers. The next day the big news is that a bank intends to lay off 1000 workers.

Question is, what conclusion do you come to about the state of the jobs market? You wouldn't be human if you didn't think things were in pretty bad shape.

You'd need the steel-trap mind of an economist to say to yourself: "These stories I'm hearing about layoffs here and there are sad news for the individuals involved, but they don't really prove anything. To make a balanced assessment of what's happening in the labour market I need aggregate statistics, not anecdotes - and the last stats I saw said that, overall, employment is growing sufficiently to hold the unemployment rate steady at 5.2 per cent."

The human mind isn't particularly good with statistics. Some people even have trouble pronouncing the word. Figures are too cold and impersonal. We're interested in other people, not numbers. So there's a sense in which we're moved more by a story of 350 people losing their jobs than by one saying 10,000 jobs had gone. Of course, what would really engage us is a story, with pictures, about the plight of just one sacked worker, worried about the mortgage and not at all sure where their next job was coming from.

But there's a distinction between fellow-feeling for someone who's struck hard times and assessing how worried we should be about the state of the world.

Already this year we've heard a lot of stories about people being laid off in manufacturing, retailing and now banking. It's a safe bet we'll be hearing a lot more, and that each announcement will get much attention.

How could this not leave most of us with the impression the economy's going to hell in a foreign-made handcart? Yet this impression will almost certainly be exaggerated, and may well disguise a position where, overall, the economy is holding its own.

One reason we're misled is that we're unduly impressed by very small figures. To put it another way, we don't appreciate just how big the economy is. There are 11,421,300 people in the labour force, either in a job or actively seeking one. So 350 people represent 0.003 per cent of the total.

The point is not that the fate of 350 people is unimportant, but that it makes a minuscule difference to the fate of workers generally. Make it 10,000 people and we're still only up to 0.09 per cent.

Another reason we're unduly impressed by news of people losing jobs is we don't realise how much turnover there is in the labour market. Julia Gillard keeps saying that every year about a million workers change jobs - with about a quarter of them also changing the industry they work in. When I checked that surprisingly large figure with an expert, he said it was too low.

(Gillard emphasises the remarkable degree of change in the economy by adding that, every year, about 300,000 businesses close - and 300,000 new ones start up.)

So every month many thousands of people leave their jobs - voluntarily or involuntarily - and many thousands move into jobs. What's another 350?

By now you may have realised we get told about only the tiniest fraction of all the coming and going. In fact, we get told when a big company announces it's decided to get rid of a block of workers. It makes an announcement because it wants to impress the sharemarket or pressure the government for assistance.

But we don't get told when big companies decide to hire a block of workers or, more usually, to hire people in dribs and drabs. And we're told virtually nothing about the hiring and firing by small business. Get the feeling we're being given a biased impression?

There is, however, another, more fundamental reason we'll be getting a distorted impression of what's happening in the economy this year. We're getting the idea the high dollar is causing the economy to slow down and shed jobs.

In truth, the high dollar and the factors that brought it about aren't destroying jobs so much as shifting jobs from one industry to another. That's painful for the contracting industries - and we're hearing their cries loud and clear - but, predictably, we're not hearing much from the expanding industries.

While jobs are being lost in manufacturing and elsewhere, employment will be growing in mining and the construction industry, pretty obviously, but also in the services sector, including in health, education and training, public administration, the science professions and arts and recreation.

I'll be surprised if, overall, we don't see continuing growth in employment. Whether this growth will be sufficient to cope with the natural growth in the labour force and thus hold unemployment steady, I'm not as sure.

But I do know this: with inflation under control, if the Reserve Bank sees unemployment drifting up it will cut interest rates further to encourage borrowing and spending and thus foster faster growth in employment.