Monday, August 21, 2017

Metrics-obsessed managers must be careful what they wish for

In decades to come, when the history of business endeavour in the early part of the 21st century is written, I predict it won't be kind to the great management fad of "metrics".

When you look at the terrible mess the Commonwealth and the other big banks have got themselves into, it's hard not to suspect that misuse of KPIs – key performance indicators – and incentive pay do much to explain their predicament.

It's not that I'm against measuring what can be measured about the activities of businesses. As a lifelong bean-counter, I'm a great believer in measurement as an aid to decision-making and accountability.

And it's certainly true that the digital revolution has made it much easier and cheaper to measure multiple dimensions of a business's activities.

No, the problem is the naivety with which so many top executives have leapt into the metrics fashion, seeing it as a magic answer to their management task, a simple and easy way to incentivise their troops and ensure they're all working to further the company's greater good.

Their trouble is that their inexperience in the measurement business stops them understanding its awesome power. Measurement's immense power for good – or ill.

Its ability to keep the business surging forward, or running off the rails. Indeed, its ability to convince you you're going great guns until the very moment disaster looms.

Use metrics as a substitute for thought rather than as an aid to hard thinking and there's a high chance it'll bring you undone.

The slogans of the metrics brigade say "you can't manage what you don't measure" and "what gets measured gets done".

Trouble is, that latter slogan is more a warning than a promise. The psychologist Martin Seligman observes that "if you don't measure the right thing, you don't do the right thing".

The notion that you can't manage what you don't measure is a trap. A smarter conclusion is that "not everything that counts can be counted". Lose sight of that and you're headed for mediocrity at best.

Which brings us to the importance of motivation. Money-obsessed managers who see attaching money to performance indicators as the perfect way to ensure people are motivated to achieve the firm's goals have failed to think hard about motivation.

Like managers, staff have many motivations, only one of which is to make more money. But there's plenty of research evidence that money tends to overpower other motives – even such a worthy (and, to bosses, cheap) motive as taking pride in doing your job well.

Attach monetary rewards to some dimensions of a person's responsibilities but not others and just watch as the non-incentivated dimensions are pushed to back of mind.

Give a pep talk about how important those other aspects are, and you won't be believed. Money speaks louder than words.

Then watch as the extra-reward-for-effort mentality takes hold. I'll try harder for extra money but, if you're not offering extra, why would I bother? Do you take me for a mug?

Two academics at Macquarie University, Associate Professor Elizabeth Sheedy and Dr Lyla Zhang, conducted a lab simulation using 306 financial professionals recruited with help from an industry body.

Participants were asked to do some simple analysis and then make up to 60 decisions about buying securities, granting loans and underwriting insurance, all within company policies designed to control the amount of risk it took on.

These policies could mean that potentially profitable deals weren't pursued, or that time was "wasted" that could have been devoted to generating profits.

Participants were randomly assigned to five different groups, which varied according to how employees were paid – fixed, or variable according to profits generated – and whether managers emphasised making profits or controlling risks.

"We found that when people had variable payments that [were] linked to profits, their compliance with risk management was significantly reduced," the researchers found.

"When managers and co-workers were also profit-focused, compliance reduced even further. Interestingly, the variable payments did not produce significant increases in productivity" relative to participants on fixed pay.

"On the other hand, when participants were paid a fixed amount regardless of profit, compliance with risk management policies was higher, although still not perfect."

The researchers conclude that "since incentives structures that are profit-based have an adverse impact on risk compliance and do little for productivity, such remuneration programs should be reconsidered".

"Our research shows that it is difficult to have high rates of risk compliance in the presence of profit-based payments. Staff are likely to believe that profit-based payments signal the true priorities of the organisation and they modify their behaviour accordingly."
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Saturday, August 19, 2017

Seeking the truth about the extent of unemployment

So, the Australian Bureau of Statistics told us this week, the rate of unemployment fell a tick to 5.6 per cent in July. Trouble is, most people know the official unemployment rate understates the extent of the problem.

What many people don't know, however, is that when you take the rate of unemployment and add the rate of under-employment, which in May took us up to 14.5 per cent, you overstate the extent of the problem.

It's well known by now that the official definition of unemployment is a very narrow one because you only have to do one hour's work in a week to be classed as employed.

A lot of people also know – or think they know - that this amazing definition was introduced by the government some years ago to stop the figures looking so bad.

Labor voters know it was a Coalition government that fudged the figures; Liberal voters know the villain was a Labor government.

Sorry, this is an urban myth. It is just not true. The bureau would never allow any bunch of politicians to fiddle with the definitions it uses.

As it has explained many times, the bureau uses internationally agreed standards to define unemployment, which are set by the International Labour Organisation, part of the United Nations.

They had to draw the dividing line between unemployed and employed somewhere, and they chose one hour – a choice that was easier to make in the days when almost all the jobs were full-time.

Even today, there'd be very few people actually working just an hour or two a week. Most would work at least one shift of seven or eight hours.

Even so, there's no denying that such a narrow definition understates the extent of joblessness. This is why the bureau also publishes a measure of underemployment.

The underemployed consist of all those people who are working part-time – defined as less than 35 hours a week – but would prefer to be working more hours.

When you take the rate of underemployment and add it to the rate of unemployment (with both unemployment and underemployment expressed as proportions of the labour force) you get what the bureau calls the "labour underutilisation rate", which we can think of as a broader measure of unemployment.

If you look over the years, the rate of unemployment tends to go higher and lower in line with the downs and ups in the business cycle.

You can also see the business cycle reflected in the rate of underemployment, but it has a much clearer underlying upward trend. It was 2.6 per cent in 1978, but 8.3 per cent in November 2015 and 8.8 per cent this May.

Until early 2003, the unemployment rate was higher than the underemployment rate, but since then the underemployment rate has been higher, with a growing gap.

Between February 2015 and this May, the unemployment rate fell by 0.5 percentage points, whereas the underemployment rate rose by 0.3 points.

The underemployment rate is a lot higher for females, 11 per cent, than for males, 6.9 per cent.

It's also greatest among people in lower-skilled occupations and lowest among people in higher-skilled occupations. (Uni students please note.)

Now get this: although workers of all ages suffer underemployment, it's much more a problem for the young. More than a third of the underemployed are aged 15 to 24, and their rate is 18.5 per cent.

But why has the trend rate of underemployment been rising steadily since the late 1970s?

Since underemployment is an affliction of part-time workers, the steady rise in part-time employment over that time – so that it now accounts for about a third of all jobs – does much to explain why there's more part-timers who happen to be saying they'd prefer to be working more hours.

Professor Jeff Borland, of the University of Melbourne, adds that "younger workers appear to have experienced the largest increase in underemployment because they have had the largest growth in part-time employment".

He reminds us that more young people have part-time work because more of them are in full-time education and needing a part-time job.

But here's my punchline: although the official unemployment rate understates the size of the problem, just adding the underemployment rate goes to the other extreme of exaggerating it.

Why? Because it adds apples to oranges. We worry most about underemployment because we assume it involves people who need full-time jobs but have had to settle for part-time.

It does. But it also includes people who are happy to stay part-time but, even so, would prefer to work an extra shift or maybe just a few more hours.

It doesn't make sense to add people with such a small problem to people with the much bigger problem of needing a full-time job but not being able to find one, as though they were similar.

Remember, too, that almost a third of the people included in the official unemployment rate are looking only for part-time work.

This is why, if you search very deep on the bureau's website (clue: catalogue no. 6291.0.55.003, table 23b) you find that, as well as just counting heads, it also does a more accurate measure of underemployment that counts the hours people are looking for – meaning part-timers needing a full-time job count for a lot more than those just wanting a few more hours.

This "volume" measure shows that, in May, the underemployment rate was 3.2 per cent of all the potential hours the whole labour force could work, and the unemployment rate was 4.3 per cent, giving an hours-based measure of labour underutilisation of 7.5 per cent.

Which is closer to the truth of the matter.
Read more >>

Wednesday, August 16, 2017

How we delude ourselves about the cost of living


Let me tell you a home truth no politician would dare to: We don't have a problem with the cost of living. In fact, consumer prices rose at the unusually slow pace of just 1.9 per cent over the year to June.

I don't expect that telling you you're kidding yourself will make me popular – which, of course, is why the pollies aren't game to tell you, even though they know it's true.

But how on earth can I claim there's no problem with the cost of living when, in this column only last week, I wrote that the retail cost of electricity had more than doubled over the past decade, and was now rising by a further 15 or 20 per cent?

Because electricity bills do not the cost of living make.

Households have to buy a hundred other things apart from power, and it's changes in the combined cost of all those things that determine what's happening to the cost of living.

Trouble is, humans are not good at keeping track of what's happening to all the prices of the 101 things we buy.

We tend to focus hard on some price changes, while ignoring loads of others. Which ones do we focus on? The ones that are rising rapidly, of course.

Which ones do we ignore? The ones that don't change much. We even fail to notice or remember for long the prices that are falling.

Nothing's better suited to misleading us than bills for water, gas or electricity. They tend to come only once a quarter, which makes them a large dollar figure.

When they're a lot higher this quarter than they were last – and when we struggle to find the money to pay them – we're left convinced the cost of living is out of control.

Actually, it says we could be better at budgeting – could hold more spare cash aside for unexpected bills. But it's easier for us to shift the blame to someone else – the gov'ment, for instance.

All this subjectivity is why we get a reasonably realistic picture of changes in the cost of living only by accepting what we're told by the people whose job it is to keep a careful record of price changes, the Australian Bureau Statistics, with its consumer price index.

The index measures changes in the prices of a fixed basket of goods and services bought by households in the eight capital cities. The bureau conducts a detailed survey every six years to ensure the items in the basket reflect changes in our purchasing habits.

The basket includes 87 different classes of expenditure, covering – as we'll see – far more than just the things we buy in supermarkets. The bureau checks about 100,000 individual prices every quarter, across the eight capitals, mainly by having its workers go into shops to see for themselves, or by contacting service providers.

It tries to get the actual prices people are paying, and to adjust for changes in quality and quantity (such as when a producer reduces the size of a tin or package without reducing the price commensurately).

The index confirms that, over the decade to June, the price of electricity rose by 116 per cent, while the combined price of all the goods and services in the basket rose by just 26 per cent.

How is that possible? Because most prices rose by far less than electricity did, some prices actually fell, and – get this – electricity accounts for less than 2 per cent of the cost of all the many things we buy. (For age pensioners, it's 3.4 per cent.)

Let's look closely at that 1.9 per cent rise in consumer prices over the year to June. It includes a 7.8 per cent rise in electricity prices.

But food prices (accounting for 17 per cent of the total cost of the basket) rose 1.9 per cent, alcohol and tobacco prices by 5.9 per cent, clothing and footwear prices fell by 1.9 per cent, housing costs rose 2.4 per cent, while prices for furnishings and household equipment and services were unchanged.

Out-of-pocket health costs rose 3.8 per cent, transport costs rose 2.1 per cent, communication costs (mainly phones) fell 3.8 per cent, recreation costs (mainly audio, visual and computer costs) fell 0.1 per cent, education costs (mainly private school and uni fees) rose 3.3 per cent, and the cost of insurance and financial services rose 2.1 per cent.

This means prices fell for categories worth 17 per cent of the total cost of the basket and were unchanged for a category worth 9 per cent of the basket.

The truth so many people can't see is not that the cost of living – consumer prices – has been rising rapidly, but that wages are only just keeping up with prices.

Over the four years to March, consumer prices rose by 8.3 per cent, whereas the index for wage rates rose by an unusually weak 9.2 per cent.

What's really making us dissatisfied is not that the cost of living is rising rapidly, but that our wages haven't been rising by the 1 per cent or so per year faster than prices that we're used to, thus preventing us from increasing our standard of living.

That is, our ability to buy a bit more stuff than we bought last year.
Read more >>

Monday, August 14, 2017

Why wage growth will strengthen before long

It's become deeply unfashionable to presume any of the present weakness in wage growth is merely cyclical (and thus temporary) rather than structural (and thus lasting). Sorry, my years of economy-watching tell me it's never that simple.

It's the mark of an amateur – a journalist who prefers sexy stories to boring stories that are more likely to be true; a youngster who believes all they're told on social media – to believe the established patterns of the past have no bearing on the present.

Note, I'm not denying the likelihood that a significant part of the problem may arise from deep, structural causes requiring correction by judicious government intervention.

What I'm saying is it's far too soon to conclude no part of the weakness is temporary. We'll know the truth of the matter only with hindsight.

We know the importance of "confidence" in driving the business cycle, but it doesn't just apply to businesses and consumers. It also applies to workers negotiating pay rises.

There's a chance that, with all the union movement's exaggerated talk of an ever-rising tide of "precarious employment", organised labour has spooked itself into accepting lower pay rises than it needs to.

As Reserve Bank governor Dr Philip Lowe keeps hinting, one day workers will decide to contest bosses' claims that they couldn't possibly afford more than a 2 per cent pay rise.

For another thing, it's surprising the wage-rise pessimists have failed to take heart from the Fair Work Commission's decision in June to raise not just the national minimum wage, but the whole structure of award minimums, by 3.3 per cent.

This compares with a rise last year of just 2.4 per cent.

It's true that only about a quarter of employees are directly affected by this decision, but many more are affected indirectly because the "individual arrangements" by which their wages are set consist merely of a set margin above their award rate.

And why would the supposedly more industrially powerful workers on enterprise agreements settle for another 2 per cent rise when, all around them, weaker workers were getting 3.3 per cent?

But there's a more technical argument that a period of weak wage growth was just what was needed as part of our transition from the decade-long resources boom. With that transition close to completed, it shouldn't be long before wage growth strengthens.

As Professor Ross Garnaut warned in 2013 in his book, Dog Days, the big fall in the nominal exchange rate that (eventually) followed the collapse in mining commodity prices wasn't all that was needed to restore the international price competitiveness of our export and import-competing industries.

We also needed the nominal depreciation to become a "real" depreciation, with the costs faced by Australian firms rising much more slowly than the average of costs faced by firms in our major trading partners' economies.

Garnaut doubted we could achieve the high degree of wage restraint need to make the depreciation stick but, as former top econocrat Dr Mike Keating pointed out in a recent blog post, that's just what's happened.

Keating says you'd expect that, over the medium to longer term, real wages, the productivity of labour and "real net national disposable income" per person (a version of gross domestic product that's adjusted for swings in our terms of trade) would each grow by about the same amount.

Between 2002 and 2012, the period of the resources boom, real wages grew faster than productivity, though by less than the strong growth in the real national income measure.

But Keating notes that, following the 2012 peak in the resources boom, these relationships were reversed, with real national income actually falling between 2012 and 2016. Real wages then needed to rise by less than productivity, which is just what's happened.

"My judgement is that equilibrium between productivity, [real] wages and real net national disposable income per person has now been restored," Keating concludes – implying there's now scope for real wages to grow in line with improvements in productivity.

This fits with the Reserve Bank's conclusion in its May statement on monetary policy that, as measured by comparing our "nominal unit labour costs" (nominal wage growth versus the change in labour productivity) with those of our trading partners, our real exchange rate has fallen to about its post-float average. This wouldn't have changed much since May.

So there's been a sound economic justification – the need to restore our industries' international price competitiveness – for our weak wage growth over the past three or four years.

But that need has now been satisfied, allowing us to hope for a return to real wage growth.
Read more >>

Saturday, August 12, 2017

The way wages are set is changing

Since we've all got so excited about the weak growth in wages, let me ask you a personal question: How much do you know about how wages are set?

For instance, how many workers are affected by the 3.3 per cent increase in the federal minimum wage, announced by the Fair Work Commission in June?

Some people say the weak wages growth is explained by the efforts to discourage collective bargaining under John Howard's Work Choices and neo-liberalism more generally. Any signs of this?

Wages can be set in different ways. So what are they, and how many workers are affected by each?

These questions are answered by a box on the minimum wage decision in the Reserve Bank's latest statement on monetary policy, issued last week. Many of its figures came from the Australian Bureau of Statistics publication, employee earnings and hours, catalogue number 6306.0, for May 2016.

The bureau finds three main ways of setting the wages of employees: "award only", collective agreements and individual arrangements.

Industrial "awards" are legally enforceable determinations made mainly by the federal Fair Work Commission, which set the minimum pay and conditions for employees in a particular industry or occupation.

They form a safety net for the great majority of employees. Any employer paying less than the minimum wage specified in the relevant award is breaking the law and could be prosecuted.

Every year the commission reviews, and usually increases, the "national minimum wage", which is the lowest amount any adult employee may be paid. In this year's review, the national minimum was increased by 3.3 per cent to $18.29 an hour.

What's less well understood is that, at the same time it adjusts the national minimum wage – the minimum minimum, so to speak – the commission also adjusts all the various minimums for workers in different classifications set out in each of the many industrial awards.

Since 2011, the commission has increased the full set of award minimum wages by the same percentage as its increase in the national minimum wage.

According to the bureau's latest figures, for May last year, about 23 per cent of our 10.1 million employees were totally reliant on the relevant minimum wage set out in their award.

Next on the list of wage-setting methods is the 36 per cent of employees whose wages are set by "collective agreements".

Most of these agreements are "enterprise bargaining agreements" negotiated with employers by a union representing the workers at the enterprise.

Enterprise agreements – which should be registered with the commission – build on the provisions of the employees' award, usually involving wage rates and conditions (such as paid leave) that are more generous than provided for in the award.

That leaves 41 per cent of employees – the largest share – having their wages set by "individual arrangements". But this is a rag-bag group.

It may include some people still on formal "individual contracts" left over from the Work Choices era, and it certainly includes managers and employees in highly paid professions whose wages and conditions have always been set by direct negotiation with the boss.

But there's another, big and interesting group: all those ordinary workers whose "individual arrangement" is that they get the award wage plus $X a week, or plus Y per cent.

This means a lot more workers' pay is protected by the award system than a quick look at the figures would suggest. Similarly, the commission's annual increase in award wage rates has a bigger effect on overall wage growth than you'd think.

So how have the proportions of employees in the three wage-setting categories been changing?

Over the 14 years to the start of 2016, the share of employees covered by collective agreements has fallen by 1.8 percentage points to 36 per cent, while the share of individual agreements has fallen by 0.4 points to 41 per cent, meaning the share of award-only employees has increased by 2.2 points to 23 per cent.

But before you take this as proof that a campaign against collective bargaining has forced more workers back to mere reliance on their award, remember there are other possible explanations.

Changes in the composition of the workforce, for instance. Since most part-time employees are award-only, the slowly increasing proportion of part-time jobs could explain much of the increase in the award-only share.

And remember this: some industries are growing faster than others, but different industries have different degrees of reliance on particular wage-setting methods.

For instance, collective bargaining is most common in public administration (covering 78 per cent of employees), education and training (63 per cent), utilities (60 per cent), and health care (55 per cent). That is, industries dominated by the public sector.

Individual arrangements are most common in professional and technical services (80 per cent), wholesale trade (70 per cent), rental and real estate services (63 per cent), construction (58 per cent) and – get this – manufacturing (55 per cent).

That leaves the award-only method most common in hospitality (43 per cent), admin services (42 per cent) and retailing (34 per cent).

It's true that hourly rates of pay are highest for employees with collective bargaining ($39.60), with individual arrangements next on $38.50, and award-only last on $29.60.

But the gap has been narrowing, with the average hourly rate under collective bargaining growing by 89 per cent in nominal terms over the 16 years to May 2016, while award-only grew by 97 per cent and individual arrangements by 109 per cent.

Again, however, this is likely to be explained more by the changing structure of industries and occupations – for instance, a higher proportion of high-paid managers and professionals in the individual arrangements category – than by campaigning against collective bargaining.

Statistics – especially these broad averages – can be misleading. But ignoring the stats and listening only to anecdotes will leave you with a much more distorted picture of reality.
Read more >>

Wednesday, August 9, 2017

Why electricity prices are high and going higher

It's never my policy to feel sorry for any politician, so let's just say I wouldn't like to be in Malcolm Turnbull's shoes when he meets the electricity retailers he's summoned to Canberra on Wednesday.

His hope is to persuade them to do more to help their customers find the best prices on offer, so that any savings customers make reduce, to some extent, the further big price rises that are on the way.

Trouble is, it's long been the practice of many big businesses – telcos, internet service providers, electricity retailers – to make it as hard as possible for their household customers to find the "plan" that meets their needs most economically, and also to take advantage of any trusting customer on a more expensive plan than they need.

So, whatever noises they make after their meeting with the Prime Minister, I can't see the likes of Energy Australia, Origin Energy and AGL – which between them have about 70 per cent of the retail market – volunteering to help their customers pay less.

Turnbull seemed to begin the year hoping to shift the blame for high electricity prices to Labor – which, federal and state, certainly has contributed to the problem – but it finally seems to have dawned on him that, if further big price rises are coming through right now, voters are likely to lay most of the blame on whoever happens to be prime minister at the time.

And, after all, it was Tony Abbott who sought election in 2013 on the claim that the big rise in power prices was caused almost solely by Ju-liar Gillard's price on carbon, and that abolishing the tax would fix things.

In truth, the story of why retail electricity prices have risen so far – doubling over the past decade, even after allowing for inflation – is long. But let me summarise.


About the first 30 per cent of the retail price is accounted for by the wholesale price – the cost of generating the power.

This component didn't contribute greatly to the price doubling of the past decade, but is now the chief source of the recent price rises of 15 to 20 per cent in some states, with more to come.

About the next 40 per cent of the retail price comes from network distribution costs – the cost of taking electricity from the power stations and transmitting it, first, through the high-voltage power lines and then through the poles and wires that distribute it to our homes.

It's this component that explains the great bulk of the doubling in the real retail price.

Because the distribution network is a natural monopoly, the prices the privatised or still government-owned distribution companies are allowed to charge are controlled by the Australian Energy Regulator, using a cost-plus formula.

Trouble is, with connivance by the NSW and Queensland governments, which retained government-owned distributors, the companies soon found ways to game the formula.

They claimed they needed to spend big on strengthening their networks to ensure that the spike in demand for power on just a few hot afternoons each year could be met without blackouts.

There were much cheaper ways to reduce the risk of blackouts – such as by rewarding some users for cutting back on those few days of peak demand – but these wouldn't have been as lucrative for the companies.

After years of big price rises to pay for this "gold-plating" of the network, the regulator finally woke up and tried to wind back some of the increase.

The NSW Coalition government, anxious to maximise the sale price of the poles-and-wires companies it was about to partially sell off, took the regulator to court and got the price roll back stopped in its state.

This brings us to the final 30 per cent or so of the retail price accounted for by the electricity retailers' margin.

Price control over these margins was lifted some years ago in the belief that competition between retailers would keep their margins in check, but it hasn't really worked.

This is partly because the companies try to avoid competing on price, and partly because not enough people use the government website, energymadeeasy.gov.auhttps://www.energymadeeasy.gov.au, to check every few years that their existing supplier isn't taking advantage of them.

But now the formerly stable wholesale generation part of the market has begun producing big price increases, with more to come.

This is partly because very old power stations are being closed and not sufficiently replaced by new generators, thanks to uncertainty about how the transition from fossil fuels to renewable energy is to be managed.

Having abolished Labor's carbon tax, the Coalition has so far failed to replace it with any other mechanism because of opposition from its climate-change deniers.

But also partly because miscalculations by one of the three gas companies permitted by the previous Labor government to build big gas export facilities in Queensland has pushed gas prices way above even the higher export-parity price.

Apart from crippling some industries, this has greatly reduced the ability to use gas-fired power stations to cover the "intermittency" of wind and solar power, pending the arrival of adequate storage technology.

Turnbull has threatened to use the feds' export powers to reserve sufficient gas for domestic use, but we're yet to see this have its effect. Much potential price pain lies ahead.
Read more >>

Monday, August 7, 2017

Higher employment our payoff for avoiding recession

When Boris Johnson, Britain's Foreign Minister, visited Oz lately, he implied that our record 26-year run of uninterrupted economic growth was owed largely to the good fortune of our decade-long resources boom.

Johnson, no economist, can be forgiven for holding such a badly mistaken view – especially since many Australian non-economists are just as misguided.

They betray a basic misconception about the nature of macro-economic management and what it's meant to do.

It's clear that Johnson, like a lot of others, hasn't understood just why it is that 26 years of uninterrupted growth is something to shout about.

It's not that 26 years' worth of growth adds up to a mighty lot of growth. After all, most other countries could claim that, over the same 26-year period, they'd achieved 23 or 24 years' worth of growth.

No, what's worth jumping up and down about is that little word "uninterrupted". Everyone else's growth has been interrupted at least once or twice during the past 26 years by a severe recession or two, but ours hasn't.

That's the other, and better way to put it: we've gone for a record 26 years without a severe recession.

But now note that little word "severe". As former Reserve Bank governor Glenn Stevens often pointed out, we did have a mild recession in 2008-09, at the time of the global financial crisis, and earlier in 2000-01.

So, yet another way to put the Aussie boast is that we've gone for a period of 26 years in which the occasional increases in unemployment never saw the rate rise by more than 1.6 percentage points before it turned down again.

What you (and Boris) need to understand about macro-economic management is that its goal isn't to make the economy grow faster, it's to smooth the growth in demand as the economy moves through the ups and downs of the business cycle.

This is why macro management is also called "demand management" and "stabilisation policy". These days, the management is done primarily by the Reserve Bank, using its "monetary policy" (manipulation of interest rates), though both the present and previous governor have often publicly wished they were getting more help from "fiscal policy" (the budget).

When using interest rates to smooth the path of demand over time, your raise rates to discourage borrowing and spending when the economy's booming – so as to chop off the top of the cycle – and you cut rates to encourage borrowing and spending when the economy's busting – thereby filling in the trough of the cycle.

This is why the economic managers find it so annoying when the Borises of this world imagine that the decade long resources boom – the biggest we've had since the Gold Rush – must have made their job so much easier.

Just the opposite, stupid. Introducing a massive source of additional demand in the upswing of the resources boom made it that much harder to hold demand growth steady and avoid inflation taking off.

But then, when the boom turned to bust, with the fall in export commodity prices starting in mid-2011, and the fall in mining construction activity starting a year later, it became hard to stop demand slowing to a crawl.

We're still not fully back to normal.

This is why the macro managers' success in avoiding a severe recession for 26 years is a remarkable achievement, and one owed far more to their good management than to supposed good luck (whether from China or anywhere else).

But what exactly is the payoff from the achievement? Twenty-six years in which many fewer businesses went out backwards than otherwise would have.

Twenty-six years in which many fewer people became unemployed than otherwise, and those who did had to endure a far shorter spell of joblessness than otherwise.

The big payoff from avoiding severe recessions – or keeping them as far apart as possible – is to avoid a massive surge in long-term unemployment that can take more than a decade to go away – and even then does so in large part because people give up and claim disability benefits or become old enough to move onto the age pension.

Dr David Gruen, a deputy secretary in the Department of the Prime Minister and Cabinet, has demonstrated that, though the US economy had a higher proportion of its population in employment than we did, for decades before the global crisis, since then it's been the other way around.

"The key lesson I draw from this comparison is that the avoidance of deep recessions improves outcomes in the labour market enormously over extended periods of time," he concluded.
Read more >>

Saturday, August 5, 2017

All the things that aren't causing weak wage growth

There's just one problem to remember before we work ourselves into a complete tizz over the War on Wages, convincing ourselves globalisation and digital disruption mean we'll never get a steady job or a decent pay rise again.

It's this: so far we've heard a lot of suspiciously confident predictions about the way robots and digitisation are about to destroy millions of jobs, a lot of anecdotes about law-breaking employers, a lot of scary stories about "the gig economy" and "portfolio jobs", a lot of adults assuring impressionable school children they'll have 10, or is it 17, different jobs in their working lives, a lot of propagandising by the unions about the rise of "precarious employment" and a lot of speculation about how all this somehow explains why wages growth is the slowest it's been since the early 1990s.

Know what we haven't got a lot of? Hard evidence that any of all that has actually started happening to any significant extent.

This is not to say some version of all that won't happen at some time in the future. I can't say it won't since I don't know that the future holds, unlike all the self-proclaimed experts with their precise predictions.

(Next time you hear someone telling you exactly how many jobs robots will have destroyed by 2020, or how many jobs or occupations you'll have in the next 40 years, ask yourself this question: How – would – they – know?)

But if there's no evidence this frightening future has got going yet, there's no way it can explain why wage growth has been so weak for the past three or four years.

For once, let's take a close look at what we actually know has been happening.

It is true that, as we saw in this column two weeks ago, the structure of occupations in the workforce is changing. Research by Dr Alexandra Heath, of the Reserve Bank, shows the share of routine jobs has fallen by 14 percentage points, while the share of non-routine jobs has risen by 14 points.

Similarly, the share of manual jobs has fallen by 5 percentage points, while the share of cognitive jobs has risen to the same extent.

But this is a long-term trend. These figures are for the change over the 30 years to 2016, and there's no sign of the trend accelerating over recent years.

A lot of detailed – and reassuring – research on the official statistics has been done by one of our leading labour-market economists, Professor Jeff Borland, of the University of Melbourne, and reported on his website, Labour Market Snapshots.

For one thing, Borland's been searching for evidence that our jobs are being taken by robots – and failing to find it. He breaks the issue into two parts.

First, has computerisation reduced the total amount of work needing to be done by humans, as many people assume?

No. The total amount of work available per head of population has bounced around with the ups and downs of the business cycle but, overall, has shown no downward trend. The latest figures show, if anything, a bit more hours of work per person than there were in the mid-1960s.

Second, consistent with Heath's research, Borland finds evidence that the progressive introduction of computers, which began in the early 1990s, is probably changing the types of jobs being done by workers.

But he, too, finds that the pace of change in the composition of employment "is no quicker today than in the period before computers".

"So while computers may be having some impact on the Australian workplace, most claims about their impact are vastly overstated," Borland concludes.

Next, Borland shines his statistical spotlight on all the claims about work becoming more insecure or "precarious".

You don't have a proper, full-time permanent job. You get a bit of work here and a bit there. If you do have a job, it never lasts long.

The Australian Bureau of Statistics has long published figures for job "tenure" – how long people have been with their current employer.

If all the talk of growing instability was a genuine trend – as opposed to the experience of a relatively small number of individuals – you ought to be able to see it in the job tenure figures.

But you can't. The reverse, in fact. Borland finds that, from the early 1980s to the present, the proportion of workers who've been in their job for 10 years or more has been steadily increasing. This is greatest for women, for whom it's gone from 12 per cent to 25 per cent.

At the same time, the proportion of all workers in their job for less than a year has been decreasing.

Next, how insecure do workers feel? When the bureau asks employees whether they expect to be with their present employer for the next 12 months, the proportion of men who don't has been steady at about 9 per cent between May 2001 and May this year.

Over the same period, the proportion for women has fallen steadily from 11 per cent to 9.5 per cent.

From all the talk, you'd expect the proportion of employees working for labour hire companies and temporary agencies to be rising strongly.

It ain't. Actually, between 2001 and 2015 it's fallen from a tiny 3.1 per cent to a tinier 2.2 per cent.

And though it's true the proportion of jobs that are part-time is continuing to rise, over the 10 years to 2016 it rose at the slowest rate for any decade since the mid-1960s.

Of course, none of this is to deny that wages growth in Australia has been surprisingly weak for several years, as it has been in other developed economies.

But in our guessing game about what might be causing that weakness, let's not get too fanciful.
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