Saturday, October 13, 2012

Labour market can be flexibile as well as fair

If you listen to business, we still have big problems with the labour market. John Howard deregulated it, but then Julia Gillard re-regulated it and now we can't do a thing with it.

The business people are right to this extent: particularly at a time when the economy is under so many pressures for change in its structure - the rise of the emerging market economies and the resources boom it has produced, the digital revolution, the return of the prudent consumer, and more - we do need a labour market that's "flexible".

But what exactly does flexibility mean? Well, not what some bad employers think: unilateral freedom to change their staff's working arrangements without recompense or consultation. That's one-sided flexibility.

No, what flexibility should mean is the ability of the labour market to adjust to the shocks that hit the economy without generating excessive inflation or unemployment. You get some, but it doesn't linger for years.

Another word for it is "resilience" - the ability to take the punch, then bounce back.

So how are we doing on that score? A lot better than business's complaints may lead you to believe. In a speech this week, Philip Lowe, the deputy governor of the Reserve Bank, reeled off a host of respects in which the labour market is more flexible.

He started by noting that, despite all the gloominess - and notwithstanding its apparent rise to 5.4 per cent last month - the official unemployment rate is still very low by the standards of the past 30 years.

In that time there have been only four years in which the unemployment rate has averaged less than 5.25 per cent. (Note for sceptics: contrary to urban myth, the method of calculating the rate hasn't changed in that time.)

Lowe reminds us Australia has one of the lowest unemployment rates among the advanced economies - "an outcome that seemed improbable for much of my professional career".

Although the unemployment rate has been virtually unchanged for more than two years, this conceals a great deal of coming and going from jobs. The figures show that in February this year, about 2.3 million people - almost a fifth of the workforce - were newly employed, having been in their job for less than a year.

Whereas a little less than half of these people were starting work for the first time (or for the first time in a long time), 1.2 million people moved from one job to another. And this in a year when the net growth in employment was a mere 23,000.

In other words, a fraction more people gained jobs than lost them, even though the media trumpeted the job losses and said next to nothing about the job gains.

About three-quarters of the job changes were voluntary, including for personal reasons or to take advantage of new opportunities. The remaining quarter was involuntary, including because employers went out backwards or changed the nature of their business.

It's always true that far more people move around than we imagine when we see the small net changes from month to month. In the jargon, "gross flows" far exceed net change. But Lowe finds some evidence all the structural pressures affecting the economy at present have led to a higher rate of job turnover.

If you take all the people who left their job over the year to February and compare it with the all people employed at some time during the year, this was the highest in two decades.

That's true for both voluntary and involuntary "separations" - meaning it's a sign of greater flexibility in the labour market. It suggests that, while a lot of jobs ceased to exist, at the same time a lot of new job opportunities opened up in other parts of the economy and many displaced workers were able to find new jobs without much drama.

Another indication some parts of the labour market are expanding while others are contracting is that the official measure of the number of job vacancies has remained relatively high, even though the growth in employment overall has been so small.

Consider this: since 2007, about 300,000 net additional jobs have been created in the health care sector, 200,000 in professional and scientific services, and about 130,000 each in mining and education.

So where's the downside? Employment in manufacturing has fallen by about 70, 000 and the number of jobs in retailing has stopped growing.

Despite this significant variation in employment growth by industry, there hasn't been any widening of the rates of unemployment among the nation's 68 local regions. Compared with 10 years ago, the average unemployment rate is lower and the variation between regions is lower, not higher.

About half the regions have unemployment rates below 5 per cent and almost three-quarters have rates below 6 per cent. In only three regions is the rate above 8 per cent, compared with 13 regions a decade ago. That's lovely, but what about wages? Here there has been increased dispersion. Since 2004, average wages in mining have risen by about 10 per cent relative to the economy-wide average. Workers in professional services have also experienced faster-than-average increases, Lowe says.

Conversely, relative wages have declined in the manufacturing, retail and the accommodation industries, each of which has experienced difficult trading conditions in recent times.

Sounds pretty flexible to me. This adjustment of relative wages has help move workers around the changing economy so shortages of skilled workers in some areas have been fairly limited.

Lowe observes the adjustment of relative wages has occurred "without igniting the type of economy-wide wages blowout that contributed to the derailment of previous mining booms".

He declares the industrial relations system is more flexible than it was two decades ago and says it's essential the labour market retains its flexibility. But though industrial relations laws and practices are important in this, "they are by no means the full story".

"Flexibility also comes from having an adaptable [my emphasis] workforce - one that has the right general skills, the right training and the right mindset," he concludes.

"Whether or not Australia fully capitalises on the opportunities that the growth of Asia presents depends critically upon the ability of both workers and business to adapt, and to build and use our human capital."