Ever wondered why your wages aren't rising?

It’s dawning on people that when the competition between businesses isn’t strong, firms can raise their prices by more than the increase in their costs, and so fatten their profit margins. What’s yet to dawn is that weak competition also allows businesses to pay their workers less than they should.

In standard economic theory, it’s the intense competition between firms that prevents them from overcharging for their products and earning more than a “normal” profit.

Normal profit gives the owners of the firm just sufficient return on the capital they’ve invested to stop them leaving the industry and trying their luck elsewhere.

The theory assumes the industry has numerous firms, each one too small to influence the market price. In today’s world, however, many markets are dominated by just two, three or four huge firms.

These firms are big enough to influence the market price, especially when it’s so easy for them to collude tacitly with their rivals.

We see the four big banks doing this every time interest rates are raised. They have an unspoken agreement not to compete on price.

EverI say they have “pricing power”, but many economists say they have “monopoly power”. How can a handful of firms have monopoly power? Because economists don’t use that term literally. On a scale of one to 1000 firms, we’re right down the monopoly end.

Dr Andrew Leigh, the Assistant Minister for Competition, and a former economics professor, has been giving a series of speeches about recent empirical studies on how competitive our markets are.

In one, he quoted the findings of Jonathan Hambur, a researcher who pivots between Treasury and the Reserve Bank, that Australian firms’ “mark-ups” – the gap between their cost of production and their selling price – have been rising steadily.

But in a further speech this month, Leigh turned the focus from what “market concentration” (among a few massive companies) means for the industry’s customers, to what it means for its employees.

So, in econospeak, we’re moving from monopoly to “monopsony”. Huh? Taken literally, monopoly means a market in which there’s a single seller meeting the demand for the product. Monopsony means there’s a single buyer from the people supplying the inputs to production. Workers supply the firm with the labour it needs.

The term was introduced by Joan Robinson, a colleague of Keynes at Cambridge, who was among the first to question the standard theory of how markets work. She was 30 in 1933 when she published her dissenting view that truly competitive markets were rare.

She argued that monopsony was endemic in the labour market and employers were using it to keep wages low. If there are few employers competing for workers, those workers have fewer “outside options” (to move to another firm offering higher pay or better conditions).

This limits workers’ bargaining power and gives employers the power to keep wages lower.

At the time, few economists took much interest. But in recent years there’s been a growing focus on market power by academic economists.

For instance, monopsony was cited in a US Supreme Court ruling against Apple in 2019. A report by Democrats in the US House of Representatives accused Amazon of using monopsony power in its warehouses to depress wages in local markets.

Evidence from the US, Britain and Europe has demonstrated that increases in labour market concentration – fewer employers to work for – are associated with lower wages.

Leigh says economists have long known that people in cities tend to earn more than those in regional areas. His own research found that when someone moves from a rural area to a major Australian city, their annual income rises by 8 per cent.

“The economics of monopsony suggests that an important part of the urban wage premium can be explained by greater employer competition in denser labour markets,” Leigh says.

Leigh reminds us that Australia’s average full-time wage ($1808 a week last November) was only $18 a week higher than it was 10 years ago, after allowing for inflation. Many things would explain this pathetic improvement, but one factor could be employers’ monopsony.

We know that the rate at which people move between employers has fallen. But over a person’s working life, the biggest average wage gains come when people switch employers. And when some people leave, the bargaining power of those who stay is increased.

This decline in people moving could be caused by increased employer monopsony. Hambur has done a study of employment concentration between 2005 and 2016.

He found that, within industries where concentration rose, growth in real wages over the decade was significantly lower.

When a firm has a large share of the industry’s employment, the gap between the value of the work a worker does, and the wage they’re paid in return, tends to grow.

He found that employment in regions close to major cities is twice as concentrated as in the cities. In remote areas it’s three times.

Read this carefully: Hambur found that labour markets had not become more concentrated over the decade. But at every degree of concentration, its negative impact on wages had more than doubled.

So, employers’ market power could well be a factor helping to explain the virtual absence of real wage growth over a decade. Hambur finds that the greater impact of employer concentration may have caused wage growth between 2011 and 2015 to be 1 per cent lower than otherwise.

This would help explain why not all the (weak) growth in the productivity of labour during the period was passed through to real wages – as conventional economists and business people always assure us it will be. Weak competition allowed employers to keep a lot of it back for themselves.

Part of the competitive process is new firms entering the industry. New firms usually poach staff away from the existing firms. But we know the rate of new entry has declined.

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Don't miss the good news among the bad: we've hit jobs, jobs, jobs

Here is the news: not everything in the economy is going to hell. Right now, jobs, jobs, jobs are going great, great, great.

The news media (and yours truly) focus on whatever’s going wrong – the cost of living, interest rates, to take two minor examples – because they know that’s what interests their paying customers most.

This bias in our thinking exists because humans have evolved to be continually on the lookout for threats. Those threats used to be wild animals, poisonous berries and the rival tribe over the river, but these days they come more in the form of politicians who aren’t doing their job and business people on the make.

If you’re not careful, however, the preoccupation with bad news can leave you with a jaundiced view of the total picture. Everything’s bad and nothing’s good.

But it’s rare for anything to be all bad or all good. And, particularly where the economy’s concerned, it’s common for good things and bad things to go together.

For instance, when unemployment is high, inflation is usually low. And when inflation is high, unemployment’s usually low. (It’s in the rare event where they’re both high at the same time – “stagflation” – that you know we’re really in trouble.)

So, when our present Public Enemy No. 1 – Reserve Bank governor Dr Philip Lowe – began a speech last week by making this point, I realised I should make sure that you, gentle reader, hadn’t missed the rose among all the thorns.

Lowe said the high inflation we’re experiencing was “one of the legacies of the pandemic and of Russia’s invasion of Ukraine”. But “another remarkable, but less remarked upon, legacy of the pandemic is the significant improvement in Australia’s labour market”.

“Significant improvement” is putting it mildly. Have you heard of “full employment”, where everyone who wants a job has one? It’s the way our economy used to be for about three decades following World War II.

But you have to be as ancient as me to remember what it was like. One reason I quit my job and embarked on a course that eventually led me to this august organ was the knowledge that, should I need to get a job, all I had to do was wait until next Saturday’s classified job ads, and pick the one I wanted.

That’s full employment. And the world hasn’t been like that since Gough Whitlam was prime minister. Until now. We have more people with jobs than ever in our history.

At about 3.5 per cent, the rate of unemployment is lower than at any time since 1974. And before any of the imagined experts let fly on Twitter, this is not because any government, Labor or Liberal, has fiddled the figures.

What’s true is that, in recent decades, more people have been under-employed – they haven’t been able to get as many hours of work as they’ve needed.

But as Lowe says, in recent times, people have found it easier to obtain more hours of work. So the rate of underemployment is at multi-decade lows, and the proportion of jobs that are full-time is higher than it’s been in ages.

We now have 64 per cent of people of working-age actually in a job, the highest ever. The proportion of people either already in a job or actively seeking one – the “participation rate” - is also at its highest.

A lot of this is explained by the record high in women’s participation in the labour force.

Lowe says the rate of participation by young people is “the highest it has been in a long time” and the youth unemployment rate is “the lowest that it has been in many decades”.

If all that’s not worth celebrating, I don’t know what is.

But for all those desperate to find a negative – often for reasons of partisanship – it’s not that you can’t believe the figures. It’s this: can you believe they’ll continue?

With the Reserve raising interest rates so fast and far to slow the economy’s growth and reduce inflation pressure, it’s clear that this is as good as it gets in the present episode.

For the past couple of months, we’ve seen the figures edging back a fraction from their best, and on Thursday we’ll see if that’s yet become a trend.

At present, Lowe is at the controls bringing the economic plane in to land. He’s aiming for a soft landing, but may miscalculate and give us a bumpy landing which, to mangle the metaphor, will send unemployment shooting up.

If so, we may have had just a fleeting glimpse of full-employment nirvana before it disappeared into the mist.

But for the more optimistically inclined, even if the landing is harder than planned, we’ll have started from a much lower unemployment rate than in past recessions, meaning it won’t go as high as it has before, and it should be easier to get back to the low levels we’d now like to become accustomed to.

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Why economists keep getting it wrong, but never stop doing sums

Why are economists’ forecasts so often wrong, and why do they so often fail to see the freight train heading our way? Short answer: because economists don’t know as much about how the economy works as they like to think they do – and as they like us to think they do.

What happens next in the economy is hard to predict because the economy is a beehive of humans running around doing different things for different reasons, and it’s hard to predict which way they’ll run.

It’s true we’re subject to herd behaviour, but it’s devilishly hard to predict when the herd will turn. Humans are also prone to fads and fashions and joining bandwagons – a truth straightlaced economists prefer to assume away.

I think it embarrasses economists that their discipline’s a social science, not a hard science. Their basic model of how the economy works became entrenched long before other social sciences – notably, psychology – had got very far.

They dealt with the human problem by assuming it away. Let’s assume everyone always acts in a rational, calculating way to advance their self-interest. Problem solved. And then you wonder why your predictions of what “economic agents” will do next are so often astray.

Actually, the economists don’t wonder why they’re so often wrong – we do. They prefer not to think about it. Anyway, there’s this month’s round of forecasts we need to get on with.

The economists’ great mission over the past 80 years has been to make economics more “rigorous” – more like physics – by expressing economic relationships in equations rather than diagrams or words.

These days, you don’t get far in economics unless you’re good at maths. And the better you are at it, the further up the tree you get. The academic profession is dominated by those best at maths.

Trouble is, although using maths can ensure that every conclusion you draw from your assumptions is rigorously logical, you’ll still get wrong answers if your assumptions are unrealistic.

In the latest issue of the International Monetary Fund’s magazine, the ripping read named Finance and Development, a former governor of the Bank of Japan reminds his peers about the embarrassing time in 2008, after the global financial crisis had turned into the great recession, when Queen Elizabeth II, visiting the London School of Economics, asked the wise ones why none of them had seen it coming.

With frankness uncharacteristic of the Japanese, the former governor observed that King Charles could go back and ask the same question: why did no one foresee that the economic managers’ response to the pandemic would lead to our worst inflation outbreak in decades?

One answer would be: because all our efforts to use computerised mathematical modelling to make our discipline more rigorous have done little to make us wiser. The paradox of econometric modelling is that, though only the very smart can do it, the economy they model is childishly primitive, like a stick-figure drawing.

The best response some of the world’s economists came up with, long after the Queen had gone back to her palace, was that academic economists had largely stopped teaching economic history.

These days, economists can’t do anything much without sets of “data” to run through their models. And before computerisation, there were precious few data sets. But those who forget history are condemned to . . .

The great temptation economists face is the one faced by every occupation: to believe your own bulldust. To be so impressed by the wonderful model you’ve built, and so familiar with the conclusions it leads you to, you forget all its limitations – all the debatable assumptions it’s built on, and all the excluded variables it isn’t.

As part of the academic economists’ campaign for an inquiry into the Reserve Bank, some genius estimated that the Reserve’s reluctance to cut its already exceptionally low official interest rate even lower in the years before the pandemic had caused employment to be 250,000 less than it could have been.

Only someone mesmerised by their model could believe something so implausible. Someone who, now they’ve got a model, can happily turn off their overtaxed brain. There’s no simple linear, immutable relationship between the level of interest rates and the strength of economic growth and the demand for labour.

At the time, it was obvious to anyone turning their head away from the screen to look out the window that, with households already loaded with debt, cutting rates a little lower wouldn’t induce them to rush out and load up with more – the exception being first-home buyers with access to the Bank of Mum and Dad, who as yet only aspired to be loaded up.

To be fair to the Reserve in this open season for criticism, it’s far more prone to admitting the fallibility of its modelling exercises than most modellers are – especially those “independent consultants” selling their services to vested interests trying to pressure the government.

In its latest statement on monetary policy, the Reserve explains how its modelling finds that supply-side factors explain about half the rise in the consumer price index over the year to September 2022.

But then it used a more sophisticated “dynamic stochastic general equilibrium model” which found that supply factors accounted for about three-quarters of the pick-up in inflation.

The Reserve’s assistant governor (economic), Dr Luci Ellis, told a parliamentary committee last month that this “triangulation” left her very confident that the demand side accounted for at least a quarter and probably up to a third of the inflation we’ve seen.

(Remembering the debate about the extent to which the present inflation surge reflects businesses sneaking up their profit margins – their “mark-ups,” in econospeak – note that this second model includes “mark-up” as part of the supply side’s three-quarters. Always pays to read the footnotes.)

One of the tricks to economics is that many of the economic concepts central to the way economists think are “unobserved” – the official statisticians can’t measure them directly. So you need to produce a model to estimate their size.

A case in point is the economists’ supposed measure of full employment, the NAIRU – non-accelerating-inflation rate of unemployment – the lowest the rate of unemployment can fall to before this causes wage and price inflation to take off.

Some of those business economists who believe the Reserve hasn’t raised interest rates nearly enough to get inflation down justify this judgment by saying our present unemployment rate of 3.7 per cent is way, way below what conventional modelling tells us the NAIRU is: about 5 per cent.

But Ellis told the parliamentary committee that the Reserve had rejected this estimate. The “staff view” was that the NAIRU had moved from “the high threes to the low fours”, and this was what its forecasts were based on.

So why dismiss the conventional model? Because, Ellis explained, it’s driven solely by demand-side factors. It’s “not designed to handle the supply shocks that we have seen over COVID”.

Oh. Really. Didn’t think of that. Mustn’t have had my brain turned on.

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If only Labor's wage changes were as bad as the bosses claim

Have you ever wondered why capitalism has survived for several centuries in the advanced economies? How a relative handful of rich families and company executives have been getting richer and more powerful for so long in countries where everyone gets a vote and could, if they chose, insist on something different?

It’s because the capitalists, counselled and coerced by politicians anxious to keep the peace, have made sure that the plebs, punters and ordinary working families have been given enough of the spoils to keep them reasonably content.

I remind you of this because, for 30 or 40 years in America, and now about a decade in Australia, the capitalist system – economists prefer calling it the market system – hasn’t been giving ordinary workers enough to keep them getting better off, while the few people at the top of the tree have been doing better, year after year.

If you wonder why so many Americans voted for a man like Donald Trump, and now delude themselves that he didn’t lose the last election, why the Yanks seem to be rapidly dismantling their democracy, a big part of their discontent is their loss of faith that the economic system is giving them a fair shake.

Fortunately, it’s nothing like that bad in Australia. Not yet, anyway. What’s true is that the average standard of living in Australia today is no better than it was a decade ago – something that hasn’t happened before in the more than 75 years since World War II.

Over the eight years before the pandemic, wages rose barely faster than inflation. We’ve had wage stagnation, now made a lot worse by the supply-chain disruptions of the pandemic, soaring electricity and gas prices caused by Russia’s war, and by the way floods keep wiping out our fruit and vegetable crops.

When Labor went to this year’s federal election promising to “get wages moving”, I think it struck a chord with many voters.

After we ended centralised wage-fixing by the Industrial Relations Commission in the early 1990s, we moved to collective bargaining at the level of the individual enterprise. Workers’ right to strike was hedged about with many requirements and limits.

At the beginning, more than 40 per cent of workers were covered by enterprise agreements. By now, however, some academic experts calculate that the proportion of workers covered by active agreements is down to about 15 per cent.

At the jobs and skills summit in September, all sides agreed that the enterprise bargaining system had broken down. Last week the government introduced its answer to wage stagnation, the Secure Jobs, Better Pay bill.

It would make a host of changes, many of which strengthen existing provisions of the Fair Work Act, and most of which the industrial parties agree would be improvements. It makes job security and gender pay equity explicit goals of the act, prohibits sexual harassment and requirements that workers keep their pay secret, and strengthens the right of workers with family responsibilities to request flexible working hours. More debatably, it abolishes the Australian Building and Construction Commission.

To repair enterprise bargaining, it clarifies the BOOT – better off overall test – requiring that agreements leave no worker worse off. This was the Business Council’s greatest complaint against enterprise agreements.

One reason such agreements now cover so few workers is that they’re expensive and complex for small and middle-size employers to organise. Hence, the proposal to widen the existing provision for “multi-employer bargaining”: workers in similar enterprises allowed to bargain collectively with a number of employers.

This would widen access to enterprise bargaining. It’s aimed particularly at strengthening the bargaining position of women in low-paid jobs in the aged care, childcare and disability care sector.

Ambit claims and exaggerated rhetoric are standard fare in industrial relations, but the cries of fear and outrage coming from the various employer groups are over the top.

It would “create more complexity, more strikes and higher unemployment,” said one. It was “so fatally flawed” it would “emasculate enterprise bargaining”, according to another outfit. It was “seismic” in its impact, claimed a third.

Methinks they doth … I’d be amazed if they actually believe that stuff. They’re probably still adjusting to the shock of having the unions back in the government tent. They know they won’t be able to stop the bill being passed, so they want at least to be seen opposing it with all their voice.

What changing the law won’t change is that the proportion of workers in a union has fallen from 50 per cent to 14 per cent. The small and middle-size businesses we’re talking about have even fewer union members than that.

No union members, no strike. No strike, no big pay rise. In any case, really powerful unions get big pay rises without needing to strike.

This is an attempt to make bargaining provisions that didn’t work last time, work this time. I doubt if these modest changes will do much to “get wages moving” again. More’s the pity. If I’m right, Australia’s capitalism will remain broken.

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Helping the disadvantaged find jobs is now the Hunger Games

Some injustices get huge publicity, others get little attention from the media because they’re not expected to arouse much sympathy from a hard-hearted public. But I was raised in a strange religious sect whose mission was to care for the down and out.

At a time when the official unemployment rate is down to 3.4 per cent, job vacancies are at a record high and employers are crying out for more immigrant labour, there are still about a million people on unemployment benefits – JobSeeker, to use its latest euphemism – of whom three-quarters have been on benefits for more than a year.

How could this be? Well, one explanation is that the world is full of people who, unlike you and me, prefer not to work for their living. While we’re slaving away at the daily grind, they’re at the beach surfing, or sitting at home with their feet up watching daytime television, living the life of Riley on $46 a day.

Actually, it’s just going up to $48 a day. Think of it. Almost $50 a day for doing precisely nothing. While you and I are struggling with the soaring cost of living, these people don’t have a worry. There are jobs going begging, but they aren’t interested. If only we were as bone idle as them, we too could live life free of care.

That’s one explanation – one many people believe, or want to believe. The world is full of people who prefer taking it easy, so they must be forced back to work by keeping the dole low and penalising them if they don’t even bother to apply for jobs.

An alternative explanation was offered in a little-noticed speech to the jobs summit by Dr Peter Davidson, an adviser to the peak welfare body, the Australian Council of Social Service, and in a recent report by Anglicare.

The alternative explanation is that most of those who stay unemployed for long periods face serious impediments to getting a job. They have health or family problems that make it hard for them to search for a job, or limit the times when they’re available to work.

Or they’re not particularly attractive to employers. They have limited education, skills or experience, they’re too young or too old, or they don’t live where the jobs are.

And here’s the worst of it: they’ve been without a job for so long because they’ve been without a job for so long. It’s a catch-22. The longer it’s taking you to find a job, the less willing an employer is to offer you one.

The good news is that, now we’re so close to full employment – now employers can’t be so choosy – we’ve started making inroads into the backlog of long-term unemployed. But it will take a long time to shift, especially if the businesses that taxpayers pay to help them find jobs find it more profitable to waste their time and trip them up.

We all have our own mental picture of who’s unemployed. Match your picture against what Davidson told the summit: of all the people on unemployment benefits, 57 per cent are 45 or older, 40 per cent have a disability, 20 per cent have what he calls “culturally and linguistically diverse backgrounds”, 13 per cent are First Nations people and 12 per cent are sole parents, mainly women.

One reason there are a lot more long-term unemployed than there were in the old days is the decision that benefit recipients of working age – including widows, many sole parents and the less-than-fully disabled – should be on (the much lower and more tightly regulated) unemployment benefit.

At the time, those transferred to a lower benefit were to be given special help with training and job-finding. But after the Howard government abolished the Commonwealth Employment Service, and the provision of “employment services” was contracted out to charities and, increasingly, for-profit providers, their role became more about policing and punishing.

Davidson says the new Workforce Australia scheme – which is little better than the Jobactive scheme it’s replacing – is “more of an unemployment-payment compliance system than an employment service”.

It sends people out into the labour market and, when they don’t find jobs, tells them to search harder. People are told “it’s not our role to find you a job”.

It locks people into an endless cycle of make-busy activities like Work for the Dole and poor-quality training courses. It reaches less than 10 per cent of employers, and offers them little assistance.

This is confirmed by detailed research by Anglicare Australia. Director Kasy Chambers says they found that “private providers are being paid millions of dollars to punish and breach people”.

“Work for the Dole and Jobactive have repeatedly been shown to fail ... yet the people we spoke to also told us that they want to do activities that matter, and that lead them into work.”

Last word to Davidson: “This is supposed to be an employment services system, not the Hunger Games.”

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Why labour shortages can be good for you - and the economy

In Professor Ross Garnaut’s much-praised speech to last week’s jobs summit, he told a story about politicians desperately seeking workers. At about the time Anthony Albanese was in Fiji talking about recruiting nurses, the West Australian premier was in Ireland, also trying to recruit nurses.

He sought a meeting with the Irish minister for health, but without success. Why? Because the Irish minister was in Perth trying to recruit nurses.

Garnaut’s point was that, when a country underpays its nurses, it’s open to having them pinched by another, better-paying country.

But I drew a different conclusion. It’s all very well for the nation’s employers to go to Canberra complaining about the desperate labour shortage and demanding that the government lift its target for how many visas for permanent immigrants it will issue this year.

Albanese was persuaded to raise the target from 160,000 to 195,000. But when we’re short of skilled labour at the same time many other rich countries are also short, raising the target and achieving the target are two different things.

My guess is that we’ll be hearing complaints about labour shortages for years to come. And I’m not sure that will be a bad thing. Give me a choice between a jobs market that’s “tight” – as it is now – and one that’s “loose”, with high unemployment, and I know which I’d prefer.

Journalists are trained to be sceptical of claims people make. And when economists hear people complaining that they can’t get enough workers, or that there’ll be shortage of X thousand teachers/doctors/chicken sexers by the year Y, they’re more questioning than sympathetic.

For a start, some part of the worker shortages we keep hearing about is caused by people off work because of COVID. This, surely, must be a problem that will ease in coming months. For another thing, while shortages of skilled workers get the most publicity, many of the shortages are actually for relatively unskilled work as a waiter or behind a counter.

When economists hear businesspeople complaining they “can’t get the staff”, their first question is: have you tried offering a higher wage? What employers never say is “with the low wage and bad conditions I’m offering, I can’t get any takers”. Think fruit-picking.

When you hear of bosses so desperate that they’re giving their existing workers a “loyalty bonus” or offering new workers a “sign-on bonus”, remember this: paying any kind of once-off bonus is a way of avoiding granting a proper pay rise.

This means they’re not yet at desperation point. Sometimes I wonder if businesses are delaying improving pay and conditions while they increase pressure on the government to solve their problem the easier and cheaper way, by hastening the post-pandemic inflow of skilled workers on temporary visas, plus backpackers and overseas students.

But though employers have used high levels of immigration to keep wages low and reduce the need for educating and training our own young people, I doubt they’ll be able to return to that lazy, second-rate world.

Garnaut says immigration is much more likely to raise, rather than lower, average real wages if it’s focused on the permanent migration of people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian production, and which cannot be provided by training Australians.

The other much-praised speech at the jobs summit came from the boss of the Grattan Institute, our top independent think tank, Danielle Wood. Garnaut and Wood had the same message: with the unemployment rate down to 3.4 per cent, we must seize this chance to return to the “full employment” Australia hasn’t enjoyed since Garnaut (and I) were growing up in the 1950s, ’60s, and early ’70s.

Wood wants achieving and maintaining full employment to be our “economic lodestar”. Already being so close to it “means that more people who want a job now have one. It means that some people otherwise at the fringes of the labour market – young people looking for their first job, people with a disability, older workers, and the long-term unemployed – are now seeing doors open in ways they haven’t in the past,” she said.

“When unemployment is low, it lowers the cost of leaving a bad job and finding a better one. This is good for productivity.

“Poor-performing businesses that survive, not on the strength of their products or services but off the back of exploiting their workers, are driven out. Investments and workers flow instead to better-run businesses.

“And when workers are harder to find, businesses have an incentive to invest in new equipment and processes, which ultimately boosts productivity and drives higher living standards,” she said.

Garnaut agrees. “Full employment is hard work for employers,” he said. “Many prefer unemployment, with easy recruitment at lower wages. Yet full employment has advantages for many employers. It brings larger and more stable demand for consumer goods and services for businesses selling in the Australian market.

“And for employers who identify as Australians, it brings enjoyment of a more cohesive and successful society.” Sounds good to me.

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Look up, we're on the verge of employment greatness

“Visionary” and “inspirational” aren’t words normally used about economists, but they certainly apply to Professor Ross Garnaut, of the University of Melbourne, and to his Thursday dinner speech to the jobs and skills summit. His message to Anthony Albanese is that he’s taken the helm at the worst of times. But, if he can rise to the challenge, he can lead us to the best of times.

Garnaut’s message is in two parts. First, we must stop kidding ourselves about the state of the economy and the budget. Second, we can make the seemingly impossible changes needed to gain all the material and social advantages of economic success.

First, we are kidding ourselves about how well our economy has been performing. It’s true our economy bounced back more quickly from the COVID-19 pandemic recession than did most developed economies - because our stimulus from the budget was bigger and faster.

Since then, however, Garnaut says, “we have looked ordinary in a troubled developed world”.

“We can’t turn the economy back to before the pandemic,” he says. “Even if we could, pre-pandemic conditions aren’t good enough. That’s high unemployment and underemployment and stagnant living standards.”

Recently, our problems have been compounded by the invasion of Ukraine and its disruption of global energy markets. But, unlike the Europeans and most other rich countries, Australian energy companies benefit when gas and coal prices rise.

“We are kidding ourselves if we think no deep wounds will be left in our polity from high coal and gas – and therefore electricity - prices bringing record profits for companies, and substantially lower living standards to most Australians,” he warns.

And “we have to stop kidding ourselves about the budget”. We need unquestionably strong public finances to have low cost of capital, private and public, for our transformation from fossil-fuel loser to Superpower exporter of clean energy and minerals, and to shield us from a disturbed international economy and geo-polity.

We’ve emerged from the pandemic with eye-watering public debt and large budget deficits, when high commodity prices should be driving budget surpluses.

“We talk about [the need for] much higher defence expenditure, but not about higher taxes to pay for it.

“We say we are underproviding for care and underpaying nurses, and underproviding for education and failing to adequately reward our teachers.”

The latest Intergenerational Report tells us that the ratio of over-65s to people of working age will rise by half over the next four decades, bringing higher costs and fewer workers to carry them, he says.

But, “in the face of these immense budget challenges, total federal and state taxation revenue as a share of gross domestic product is 5.7 percentage points lower than the developed-country average”.

Get it? Yet another economics professor telling us taxes must go up – not down.

The budget update issued at the start of this year’s election campaign predicted real wages would decline by 3 per cent over the two years to next June. Treasurer Jim Chalmers’ update three months later increased the decline to 7 per cent.

So, says Garnaut, “the facts have changed, and we should be ready to change our minds”. When we stop kidding ourselves, we’ll recognise the need for policies we now think impossible. That’s Garnaut’s second, more inspiring point.

“Australians accepted change that had been impossible on two earlier occasions when we faced deep problems, and responded with policy reforms that set us up for long periods of prosperity, national confidence and achievement.”

The most recent was the reform era starting in 1983. The first was postwar reconstruction of the economy in the 1940s, which was followed by a quarter of a century of full employment and rising incomes.

Back then, the Curtin and Chifley governments were determined Australians would not return to the high unemployment and economic insecurity of the interwar years.

“The 1945 white paper on full employment was premised on the radical idea that governments should accept responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment ...

“This would achieve the highest possible standards of living for ordinary Australians.”

The Menzies Liberal government’s political success – it stayed in power for 23 years – “was built on full employment, helped by Menzies insulating policy from the influence of political donations to an extent that is shocking today”.

Garnaut says he grew up in a Menzies world of full employment. (So did I, as it happens.)

The authors of the white paper wondered how low the rate of unemployment could fall before it caused high or accelerating inflation. They were surprised to find it fell to below 2 per cent, and stayed there for two decades without a problem.

It’s tempting to think that, with all the problems of controlling inflation and decarbonising the economy, this brush with our glorious past will soon disappear, and we’ll be back to the 5 to 6 per cent unemployment we’ve learnt to think is the best we can do.

But Garnaut’s inspiring vision is that, with the right, seemingly impossible policy changes, we can complete the return to a fully employed economy and stay there, reaping its many material and social benefits.

In the world he and I grew up in, “workers could leave jobs that didn’t suit them and quickly find others – often moving from lower- to higher-productivity firms. Employers put large efforts into training and retraining workers.

“Labour income was secure and could support a loan to buy a house. Businesses that could not afford rising wages closed and released their workers into more productive employment.”

Steadily rising real wages encouraged firms to economise in their use of labour, which lifted productivity.

Sounds worth striving for, to me.

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Good news: why our low unemployment rate will last

Nobody’s noticed, but something really good has come out of the upheaval of the pandemic: more than 100,000 people who’d spent ages searching for a job without success, finally found one. The benefit to them – and the economy – will last a long time.

When I say nobody noticed, I mean no economist or econocrat. The person first to notice was a former economics writer for this august organ, now economics editor for The Conversation website, Peter Martin.

Because no one had experienced a pandemic, and because it was feared initially that the disruption to the economy would be much greater than it proved, both the Reserve Bank, with its cuts to interest rates, and the government, with its spending and tax cuts, responded to the need for lockdowns by giving a huge boost to demand.

The authorities responded as though the lockdowns were an ordinary recession, not something much more short-term and limited to particular parts of the economy. The economy bounced back strongly after each of the two lockdowns.

So, the surge in demand for goods and services led to a surge in demand for workers to produce them. Adding to the demand for workers were the high levels of absenteeism caused by the virus.

Normally, much of this increased demand for workers would have been satisfied by bringing in workers from abroad. This time, however, our borders were closed. Worse, we’d sent home many overseas students and backpackers.

So what happened? If they wanted more staff, employers were obliged to be less choosy about the workers they hired.

Some people in the pool of unemployment get to find a job and escape the pool after only a few weeks. Others take a lot longer. And the harsh truth is that the longer it takes you to find a job, the less likely an employer is to want you.

Employers think, “if no other employers have wanted you, why should I risk it?” It’s as though the longer you stay in the pool, the further down you sink until eventually, you get stuck in the mud at the bottom.

The Bureau of Statistics defines “long-term” unemployment as having been jobless for a year or more. The number of long-term unemployed always rises greatly in the years following a normal recession.

That’s because the normal pattern is for unemployment to shoot up at the start of the recession, but then take six or seven years to come back down.

Among the greatest victims of recessions are students who have the misfortune to be leaving education at the time. Economists say such unfortunates get “scarred” by the long delay in finding an appropriate job. Research shows it can take them up to 10 years to get their careers going properly.

But though Treasury economists feared the pandemic would leave many young people scarred, it didn’t happen because the “coronacession” proved so short and sharp.

Martin is the first person to shout that, over the year to June, the number of long-term unemployed fell from 218,200 to 130,100. And then to join the dots.

Over the 14 months to June, the fall’s even bigger: 125,000 – almost 1 per cent of the labour force.

This week, we learnt that the unemployment rate has fallen to 3.4 per cent, its lowest in almost 50 years. For the sceptics who think this a fudge, at 6 per cent the rate of underemployment is its lowest in more than 30 years.

This isn’t surprising since 98 per cent of all the extra jobs created since March 2020 have been full-time – suggesting the labour shortage has prompted employers to turn many part-time jobs into full-time.

Since March 2020, the rate of youth unemployment (people aged 15 to 24) has fallen from 11.6 per cent to 7 per cent. And you’d expect the labour shortage to have increased the labour-force participation of older workers, as employers encouraged them keep working or switch to part-time rather than retire.

All this is more than just good news for the people who’ve finally been able to find jobs, move from part-time to full-time, or keep working despite getting older.

It has important implications for the economy’s prospects, and for its ability to achieve lower rates of unemployment before this causes wage inflation to take off. By changing so many people’s category from unemployable to actually employed, it’s increased the effective supply of homegrown labour.

By getting 125,000 long-term unemployed back into the working world, it’s lowered the floor under the unemployment rate by about 1 percentage point. So even if the economy turns down in coming months or years, the unemployment peak, however high, is likely to be about 1 percentage point lower than it otherwise would have been.

It gets us closer to a level of full employment that makes more sense to an ordinary person who thinks full employment surely must mean unemployment close to zero.

It means a rare conjunction of circumstances – strong demand while the economy was closed to imported labour - has brought about a structural change in our labour market that makes nonsense of economists’ conventional estimates of our NAIRU - the “non-accelerating-inflation” rate of unemployment.

When the Morrison government decided to spend big in the 2021 budget to improve its political chances, the econocrats decided to make a virtue of necessity by moving to what I call Plan B: keep stimulating demand to get unemployment so low that employers would have to bid wages up to get all the workers they needed.

This week’s news that wage growth over the year to June has soared to the frightening rate of 2.6 per cent suggests that Plan B hasn’t been a roaring success, and certainly isn’t a reason to worry that labour shortages will lead to wage growth that threatens our return to low inflation.

But the econocrats could claim credit for an unintended consequence of Plan B: it’s helped bring about a long-term reduction in the rate of unemployment.

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I foresee a world where workers gain the upper hand

Former NSW premier Neville Wran was the first politician – but far from the last – to say the election would be about “jobs, jobs, jobs”. That line captured perfectly one of the great economic certainties of our age: you can never, ever have enough jobs to go around.

That’s what most of us think, and the reason we think it is that it’s been true for the past 50 years. That’s how long it’s been since we had a rate of unemployment so low no one worried much about it.

But, as my colleague Jessica Irvine reminded us only yesterday, at 3.5 per cent, unemployment is at its lowest in almost 50 years.

To put it more positively, at more than 64 per cent, the proportion of the working-age population with a job is higher than it’s ever been. If you don’t find that gratifying news, there’s something wrong with you.

At present, we have a record number of unfilled job vacancies, about as many as we have unemployed workers. (Of course, not all the jobless have the right training – or live in the right part of the country – to fill those vacancies.)

Now, you can argue this happy outcome is just a temporary consequence of the pandemic. For two years, the official interest rate was almost zero, and governments – federal and state – were spending like wounded bulls.

So we had a huge increase in the demand for labour, but at a time when there was a two-year ban on imported workers. Little wonder employment grew strongly, vacancies shot up and employers complain incessantly about skill shortages.

You can also argue that, now our borders have reopened, our normal high inflow of foreign students, backpackers and skilled workers on temporary visas will resume, and the jobs market won’t stay nearly so tight.

Then you can argue that it only needs Reserve Bank governor Dr Philip Lowe to step too hard on the interest-rate brakes and we – as with many other developed economies – will be plunged into recession and rising unemployment.

You can argue all that. But I think these short-term factors are hiding deeper, longer-term trends that have brought us to a turning point. We’re going from never having enough jobs available for people to fill, to never having enough people available to fill all the jobs.

And here’s the bonus: if I’m right, we’ll be going from insecure jobs and stagnant wages to much higher wages and bosses falling over themselves to attract and retain the workers they need.

Business people are nothing if not opportunistic. When workers are plentiful, they pick and choose and make demands. But when workers are hard to find, they become wonderful people whose only concern is their workers’ welfare.

The first factor that’s working to turn the tables is the ageing of the population: more oldies leaving the workforce than youngsters joining it. Fertility has fallen below the replacement rate of 2.1 kids per woman.

For many years we’ve sought to slow population ageing by maintaining one of the advanced economies’ highest rates of immigration, with an emphasis on young, skilled workers.

Skilled immigration is also used to keep downward pressure on wage rates. With the pandemic receding, big business is desperate for high immigration to resume ASAP. And the Albanese government is likely to oblige.

But setting high immigration targets is one thing; attaining them is another. These days, migrants come mainly from developing countries. But all the other rich countries have an ageing problem, so we’ll be competing against them for takers.

China’s population is also ageing rapidly. Our intake of foreign students – some of whom are allowed to stay on – has been reduced by our falling out with China, but has always been a temporary play while Asia’s emerging economies get their universities going.

The final factor that will keep the demand for workers growing faster than the supply is the way the rich economies are becoming service economies, much of which represents the growth of the “care economy”.

Australia has already reached the point where 80 per cent of our production and 90 per cent of our employment is from the services sector. The thing about services is that they’re mainly delivered by people. As the Productivity Commission has noted, it’s much easier to use machines to replace people in farming, mining and manufacturing than it is in the services sector.

As people become old, they need more services – from doctors, nurses, paramedics and age care workers. All these people require education and training – by more services-sector workers.

Have you noticed all the stories lately about shortages of teachers, GPs, hospital workers and, before that, aged care and childcare workers? We’re going to get them all from overseas? I doubt it.

I noticed a tweet from an economics professor: “‘skill shortage’ = wages too low to attract workers”.

Get it? If we want all these people, we’ll have to pay them a lot more than we do now – and treat them a lot better.

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Fixing inflation isn't hard. Returning to healthy growth is

Despite any impression you’ve gained, fixing inflation isn’t the end game. It’s getting the economy back to strong, non-inflationary growth. But I’m not sure present policies will get us there.

The financial markets and the news media have one big thing in common: they view the economy and its problems one day at a time, which leaves them terribly short-sighted.

Less than two years ago, they thought we were caught in the deepest recession since the 1930s. By the end of last year, they thought the economy had taken off like a rocket. Now they think inflation will destroy us unless we kill it immediately.

For those of us who like to put developments in context, however, life isn’t that disjointed. The day-at-a-time brigade has long forgotten that, before the pandemic arrived, the big problem was what the Americans called “secular stagnation” and I preferred calling a low-growth trap.

In a recent thoughtful and informative speech, Treasury secretary Dr Steven Kennedy observed that the pandemic “followed a period of lacklustre growth and low inflation”. (It was so low the Reserve Bank spent years trying to get inflation up to the target range, but failing. Businesses didn’t want to raise wages – or prices.)

So, Kennedy said, “when assessing the policy decisions made during the pandemic there was an additional consideration for policymakers in wanting to not just return to the pre-pandemic situation, but to surpass it.”

One economist who shares this longer perspective is ANZ Bank’s Richard Yetsenga. He describes the 2010s as our “horrendum decennium” where unemployment and underemployment were relatively high, consumer spending relatively weak and business had plenty of idle production capacity.

He reminds us that real average earnings per worker in 2020 hadn’t budged since 2012. “The resulting weakness in consumer demand meant that ‘need’ – the most critical ingredient [for] business investment – was missing,” he says. “Excess demand, and the resulting lack of production capacity, is a pre-condition of investment.”

See how we were caught in a low-growth trap? Weak growth leads to low business investment, which leads to little productivity improvement, which leads to more weak growth.

During the Dreadful Decade, the prevailing view among policymakers was that high unemployment was preferable to high inflation, which might become entrenched. So, unemployment was left high, to keep inflation low.

Yetsenga says this decision to entrench relatively high unemployment was a mistake. “Unemployment, underemployment and the inequality they contribute to, all affect macroeconomic outcomes [adversely]“.

“Those on higher incomes tend to save more, reducing consumption, but those on lower incomes tend to borrow more. Inequality, in other words, tends to lower economic growth and exacerbate financial vulnerability.”

Even so, Yetsenga is optimistic. The policy response to the pandemic has “changed the baseline” and we’re in the process of escaping the low-growth trap.

Unemployment is at its lowest in five decades and underemployment has fallen significantly. Real consumer spending is 9 per cent above pre-pandemic levels, and businesses’ capacity utilisation has been restored to high levels not seen since before the global financial crisis.

As a result, planned spending on business investment in the year ahead is about the highest in nearly three decades.

Yetsenga says the Reserve would like some of the rise in the rate of inflation to be permanent. “If monetary policy can deliver [annual] inflation of 2.5 per cent over time, rather than the 1.5 to 2 per cent that characterised the pre-pandemic period, it’s not just the rate of inflation that will be different.

“We should expect the ‘real’ side of the economy to have improved as well: more demand, more employment and more investment.”

“The role of wages in sustaining higher inflation is well known, but wage growth doesn’t occur in a vacuum. To employ more people, give more hours to those working part-time, and raise wage growth, business needs to see demand strong enough to pay for the labour.

“Some of the additional labour spend will be passed on to higher selling prices. The need to invest in more labour is likely to go hand-in-hand with more capital investment.”

I think Yetsenga makes some important points. First, the policy of keeping unemployment high so that inflation will be low has come at a price to growth and contributed to the low-growth trap.

Second, inequality isn’t just about fairness. Economists in the international agencies are discovering that it causes lower growth. So, the policy of ignoring high and rising inequality has also contributed to the low-growth trap.

Third, the idea that we can’t get higher economic growth until we get more productivity improvement has got the “direction of causation” the wrong way around. We won’t get much productivity improvement until we bring about more growth.

Despite all this, I don’t share Yetsenga’s optimism that the shock of the pandemic, and the econocrats’ switch to what I call Plan B – to use additional fiscal stimulus in the 2021 budget to get us much closer to full employment, as a last-ditch attempt to get wage rates growing faster than 2 or 2.5 per cent a year – will be sufficient to bust us out of the low-growth trap.

Yetsenga’s emphasis is on boosting household income by making it easier for households to increase their income by supplying more hours of work. He says little about households’ ability to protect and increase their wage income in real terms.

Another consequence of the pandemic period is the collapse of the consensus view that wages should at least rise in line with prices. Real wages should fall only to correct a period when real wage growth has been excessive.

But so panicked have the econocrats and the new Labor government been by a sudden sharp rise in prices (the frightening size of which is owed almost wholly to a coincidence of temporary, overseas supply disruptions) that they’re looking the other way while, according to the Reserve’s latest forecasts, real wages will fall for three calendar years in a row.

Since it’s the easiest and quickest way of getting inflation down, they’re looking the other way while the nation’s employers – government and business - short-change their workers by a cumulative 6.5 per cent.

This makes a mockery of all the happy assurances that, by some magical economic mechanism, improvements in the productivity of labour flow through to workers as increases in their real wage.

Sorry, I won’t believe we’ve escaped the low-growth trap until I see that, as well as employing more workers, businesses are also paying them a reasonable wage.

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Cutting real wages will help inflation, but weaken the economy

At last, as the election campaign reaches the final stretch, we’ve found something worth debating. Anthony Albanese has found his spine and supported a big rise in award wages, while Scott Morrison says a decent rise for the masses is a terrible idea that would damage the economy.

First the politics, then the economics. My guess is history will judge this to be the misstep that did most to cost Morrison the election. Successful Liberal leaders – John Howard, for instance – know never to be caught within cooee of a sign saying “wages should be lowered”. It’s not the way to woo outer-suburbs battlers to the Liberal cause.

That Morrison should defy this precedent in a campaign where the cost of living has become by far the biggest issue is all the more surprising.

Between them, the two contenders have revived and highlighted the oldest stereotype in Australia’s two-party politics: the Labor Party is - surprise, surprise – the party of ordinary workers, and will always champion their interests, whereas the Liberals are the party of business, and will always champion the interests of business.

It’s because the Libs are seen as the bosses’ party that they’re instinctively regarded as better at managing the budget and the economy – a mindset Morrison is desperately seeking to exploit in “these uncertain times”.

But the other side of the penny is that Labor, the party of the workers, is the party that cares, and will spend more on providing government services. Which party’s best at industrial relations and wages? One guess.

But how do the minimum wage arrangements work? And what are the broader economic implications of a rise high enough to cover the 5.1 per cent rise in consumer prices over the year to March - or not high enough, so that wages fall in “real terms”?

The Fair Work Commission conducts an annual wage review to determine the increase in the national minimum wage on July 1. Last year’s increase of 2.5 per cent applied to the 2 per cent of employees on the national minimum rate, but also the 23 per cent of employees whose wage is set by one of the various minimum rates for workers in different job classifications set out in each of the more than 100 industrial awards established by the commission.

The national minimum wage rate is about $20 an hour, or about $40,000 a year for a full-time worker. About 2.7 million workers have their wage set in this way.

A 5 per cent increase in the national minimum wage would be worth about $1 an hour or about $2000 a year. Note, however, that many of those in more skilled award classifications would be earning much more than that.

The rises the industrial parties ask for in hearings before the commission are always “ambit claims”. The Australian Council of Trade Unions wants a rise of 5.5 per cent.

On the employer side, the Australian Industry Group says the most its member businesses could possibly afford is 2.5 per cent. The Australian Chamber of Commerce and Industry says the most it could run to is 3 per cent.

Morrison has implied it would be quite improper for a federal Labor government to seek to influence the decision of the independent commission. But the fact is federal and state governments routinely make submissions to provide information about the state of the economy and indicate how generous or tight-fisted they think the commission should be – though they rarely suggest a specific figure.

The commission will give due consideration to a government’s submission but, rest assured, it will do as it sees fit, usually awarding an increase somewhere between the employers’ lowball and the unions’ highball.

My guess is this year’s decision will be a lot higher than last year’s 2.5 per cent, but not nearly as high as 5.5 per cent.

That’s particularly because the commission can be expected to allow for the 0.5 percentage-point increase in employers’ compulsory contributions to their workers’ superannuation accounts this July. The unions would love to have their cake and eat it, but I doubt they’ll be allowed to.

Albanese says, “the idea that people who are doing it really tough at the moment should have a further cut in their cost of living is, in my view, simply untenable”.

Morrison claims a minimum-wage increase sufficient to stop wages falling behind the rise in consumer prices would be “reckless and dangerous”.

The Ai Group warns that “an excessive minimum wage increase would fuel inflation and lead to higher interest rates . . . than would otherwise be the case”. It would be detrimental to economic growth and job creation.

The chamber of commerce says “any increase of 5 per cent or more would inflict further pain on small business, and the millions of jobs they sustain and create. Small business cannot afford it”.

So, what do I think? I think it’s easy to exaggerate the economic cost of giving our lowest-paid workers a decent pay rise. Small business always cries poor and warns jobs will be lost. But there’s little empirical evidence that higher wages lead to job losses.

It’s true that giving a quarter of our workers little or no compensation for the jump in prices caused by pandemic supply disruptions and the Ukraine war would be the quickest and easiest way to get inflation back down to the Reserve Bank’s 2 to 3 per cent target range.

But it would also be hugely unfair to load that burden onto our lowest paid workers, while business profits escaped untouched. The Reserve will just have to be more patient if it doesn’t want to crunch the economy with big rate rises.

And here’s the bit the business lobby groups seem too short-sighted to see. The more we cut the real incomes of our businesses’ customers, the less businesses will be able to sell to them, and the more the economy will be in anything but the “strong” condition Morrison keeps claiming it’s in.

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It's not jobs we're short of, it's jobs that pay decent wages

When it comes to knowing what’s going on in the jobs market, there’s a bit more to it than being able to remember the present rate of unemployment. It helps to know why the unemployment rate is at the level it is, and what that implies for the family’s future finances.

In case you’ve gone deaf – or just stopped listening – Scott Morrison wants you to know the rate of unemployment has been falling rapidly over the past six months, and is now a fraction under 4 per cent.

That’s the lowest it’s been in about 50 years.

But wait, there’s more. Morrison said last week his priorities are “jobs, jobs, jobs, jobs and jobs”. To which effect he’s promising to create a further 1.3 million over the next five years. This will be on top of the 1.9 million jobs already created since the Coalition returned to power in 2013.

The growth in employment and the fall in unemployment since the economy’s massive contraction during the “coronacession” in the June quarter of 2020 is a truly remarkable achievement, for which the Morrison government deserves much credit. Don’t let any carping Labor critic convince you otherwise.

Don’t let anyone tell you the government has changed the definition of unemployment. It isn’t true. What is true is that the problem of underemployment – people who have jobs, but aren’t able to find as many hours as they’d like – is a bigger problem today than it was 50 years ago.

But the rate of underemployment has fallen to 6.3 per cent, down from 8.8 per cent two years ago, and the lowest it’s been since 2008.

In any case, almost all the 395,000 net extra jobs created since the start of the pandemic two years ago are full-time.

Next, get this. The proportion of the working-age population holding a job now stands at 63.8 per cent – the highest it has ever been.

And the biggest winners in this have been young people. Their rate of employment is 4.6 percentage points higher than it was two years ago. The rate for people aged 25 to 64 is up 1.9 percentage points, while the rate for those aged 65 and over is up 0.4 points.

But all the growth in employment hasn’t been sufficient to meet the demand from employers. The number of job vacancies is at a record level of 423,500. That is, getting on for a half a million job openings are going begging.

Now, let me ask you a question: does it sound to you as though our big problem at present is an acute shortage of jobs, jobs, jobs?

If you’ve heard of generals fighting the last war rather than coming to grips with the present one, now you know that prime ministers are prone to the same mistake.

So, why is Morrison claiming to have made getting us a lot more jobs his priority, when there must surely be more pressing problems he should be focused on? Two reasons.

One is that Australia’s had a problem with insufficient jobs – aka high rates of unemployment – since the late 1970s. This was the case for so long – did I mention 50 years? – the notion that a shortage of jobs is an eternal feature of economic life is now lodged deeply in many people’s minds.

And, as is the practice of modern politicians, Morrison finds it easier to pander to our misconceptions than to straighten them out.

“You think we can never have enough jobs? OK, I promise to create another 1.3 million of ’em.”

But how on earth do we finally seem to have got on top of a 50-year problem? Mainly because our first recession in almost 30 years turned out to be more benign than any we’ve had.

In particular, the government spent unprecedented multi-billions on the JobKeeper wage subsidy scheme, which was designed to preserve the link between employers and their workers, even when they had no work for their workers to do. It worked brilliantly.

The billions federal and state governments spent on this and many other programs to protect the incomes of businesses and workers have given an enormous boost to the demand for workers.

But remember, this surge in demand came at a time when our borders were closed to our usual supply of imported labour: overseas students, backpackers and skilled workers on temporary visas.

Now that our borders have reopened, the demand for workers will increase, but so will their supply. If employment does grow by 1.3 million in the next five years, it will be mainly because of population growth, coming mainly from immigration.

The other reason Morrison wants to talk about jobs, jobs, jobs is to direct our attention towards his economic successes and away from his economic failure: since a year or two before the Coalition’s election in 2013, wages have struggled to keep up with the rising cost of living.

If Anthony Albanese was a sharper politician, he’d be telling us his priorities were wages, wages, wages.

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Interest rates won't rise until wages are higher

Let’s talk about pay. Been getting pretty good rises of late? Well, some people have. But if your pay increases have been small and far between, you’re in good company. And I have some good news. Well, not so much good news as not-as-bad-as-it-could-be news.

In recent times people in our financial markets – including the banks – have been predicting that the Reserve Bank will start raising its official interest rate within a few months and, once it starts, there’ll be more increases in quick succession.

The media have been reporting these predictions with great enthusiasm, almost implying they’re a certainty. The financial types are so confident because interest rates really are about to rise in America, and they save on research time by assuming anything the Americans do, we’ll do a few months later.

The Americans have had a lot of price rises lately and, thanks partly to their Great Resignation, also seen strong growth in wage rates. When prices rise a lot and this flows through to higher wages, that’s when you do have a problem with ongoing inflation – a “wage-price spiral”.

But here’s the thing. We’ve had a smaller rise in prices but, so far, little rise in wages. (We’ll see on Wednesday, with the publication of the Bureau of Statistics’ wage price index, how much that changed in the three months to December.)

And Reserve Bank governor Dr Philip Lowe has said repeatedly that he won’t be raising interest rates until he sees that the rise in prices is also reflected in wage rises. As he put it in his recent parliamentary testimony, “the higher interest rates will be occurring in an environment where people have stronger wages growth and jobs”.

So the banks’ predictions about rising interest rates imply that most workers will be getting a pay rise of 3 per cent or so this year. Find that hard to believe?

According to the wage price index, wage rises have averaged 2 per cent a year over the past six years. And, as you remember, businesses and governments were quick to impose wage freezes when the pandemic began in 2020.

A move to 3 per cent rises is always possible of course but, given recent history, I’ll believe it when I see it. And Lowe’s also waiting for the evidence. As he puts it, “is the stronger labour market going to translate to higher wages?”

The fad of assuming that whatever happens in America also happens here has led some to talk about our own Great Resignation. It’s not true.

In the US, many workers have simply given up working or looking for work. Some are staying home to care for family, some to avoid the plague, some because the upheaval has caused them to re-evaluate their lives.

“Especially if you were working in a low-wage job, you probably thought that the risk [of infection] was not worth the return,” Lowe says. Older Americans were “leaving the workforce in droves”.

But whereas the proportion of working-age people who are in the US labour force has fallen heavily – thus requiring employers to offer higher wages to attract the workers they need – this hasn’t happened here. Our rate of people “participating” in the labour force has returned to its record level pre-pandemic.

Which is just one sign of how much “tighter” our jobs market has become. We have 270,000 more people in jobs than we did before the pandemic, and both unemployment and underemployment are at 13-year lows, while the number of job vacancies is at a record high. (Our closed borders to skilled workers, backpackers and overseas students have helped in this, of course.)

This tight market is the main reason the econocrats are hoping it won’t be long before employers are obliged to start offering higher pay rates to get – poach – the workers they need.

When that happens, it will be a new experience for a lot of employers, many of whom have got into the habit of thinking their profitability comes from keeping wage costs as low as possible.

In the old days, the unions and the regulated wage-fixing system could be relied on to ensure that wages kept up with rising prices – plus a bit more to ensure living standards kept rising. Not any more.

These days, few workers belong to unions, and it’s not hard for employers to stop engaging in enterprise bargaining. And, as we’re seeing with the NSW government’s resistance to its transport workers’ wage claim, workers don’t get much sympathy from conservative governments.

These days, if you want a pay rise you have to get it yourself. Although we haven’t had a Great Resignation, the econocrats say we have had a significant increase in workers willing to change jobs for higher pay. We’ve also had employers agreeing to move workers to a higher pay grade.

The top econocrats hope that by keeping the job market tight they’ll finally crack the wages dam, getting the latest generation of employers used to the frightening idea than their workers are entitled to decent pay rises. Good luck, guys.

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This isn't America, so please stop acting like a Yank

If there’s one thing that annoyed me about 2021, it’s the way people have been aping all things American. Our financial markets copped a bad dose of it, the media got carried away, we looked to the Yanks – the smart ones and the crazies - to know what we should think and do about the coronavirus, and many on the Right of politics took their lead from Trump’s Republicans.

One on one, I like the Americans I know. But put them together as a nation, and they seem to have lost their way. We’ve long imagined the US to be the wellspring of everything new and better, but these days it seems to be racing headlong towards dystopia.

Who’d want to be an American? Who’d want to live there?

There’s nothing new, of course, about American cultural imperialism. You’ve long been able to buy a Coke in almost any country. Or, these days, a Big Mac or KFC.

But globalisation has hugely increased America’s influence in the world. Wall Street dominates the world’s now highly integrated financial markets. What’s less well appreciated is the way advances in telecommunications and information processing have globalised the news media. Call it the internet.

These days, news of a major occurrence in any part of the world spreads almost in real time. One thing this means is that you can read the latest from The Age or The Sydney Morning Herald in almost any country.

But another thing is that we get saturation coverage of all things America. These days, America’s greatest export is “intellectual property” – patents and copyright covering machines, medicines and software, but also books, films, TV shows, videos and recorded music, and news and commentary from all of America’s great “mastheads”.

Of course, the little sister syndrome applies. Just as Kiwis know more about us than we know about them, so we and people in every other country know more about the Americans than they know about us. Just ask John Fraser, Malcolm Trumble and “that fella from Down Under”.

And remember this: when you’re as big and as rich as America, you’re the best in the world at most things – but also the worst in the world. These guys win the Nobel Prize in economics almost every year but, no doubt, have the biggest and best Flat Earth Society. They have loads of the super-smart, but even more of the really dumb.

Back to this year’s Yankophile annoyances, as soon as Wall Street decided America had an inflation problem and would soon be putting up interest rates, our local geniuses decided we’d soon be doing the same.

Small problem – we don’t have a problem with inflation. Our money market dealers know more about the US economy than they know about their own. To them, we’re just a smaller, carbon copy of America. If you’ve seen America, you’ve seen ’em all.

The Americans have a lot of people withdrawing from the workforce – leaving jobs and not looking for another – which they’re calling the Great Resignation. Wow. Great new story. So, some people in our media are seizing any example they can find to show we have our own Great Resignation.

Small problem. Ain’t true. Following the rebound from the first, nationwide lockdown in 2020, our “participation rate” – the proportion of the working-age population participating in the labour force by having a job or actively looking for one – hit a record high. With the rebound from this year’s lockdowns well under way, the rate’s almost back to the peak.

A lot of America’s problems arise from the “hyperpolarisation” of its politics. Its two political tribes have become more tribal, more us-versus-them, more you’re-for-us-or-against-us. The two have come to hate each other, are less willing to compromise for the greater good, and more willing to damage the nation rather than give the other side a win. More willing to throw aside long-held conventions; more winner-takes-all.

The people who see themselves as the world’s great beacon of democracy are realising they are in the process of destroying their democracy, brick by brick – fiddling with electoral boundaries and voting arrangements, and stacking the Supreme Court with social conservatives.

Donald Trump continues to claim the presidential election was rigged, and many Republicans are still supporting him.

It’s not nearly that bad in Australia, but there are some on the Right trying to learn from the Republicans’ authoritarian populism playbook.

When your Prime Minister starts wearing a baseball cap it’s not hard to guess where the idea came from. Or when the government wants to require people to show ID before they can vote, or starts stacking the Fair Work Commission with people from the employers’ side only. Enough.

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Like election promises, many budget forecasts never materialise

You’d think after the fiasco of Back in Black, Josh Frydenberg would have learnt not to count his budgets before they’re hatched. But no, he’s a politician facing an election and nothing else matters.

His message in this week’s mid-year budget update is: the virus is in the past and the economy is fixed – as you’d expect of such great economic managers as our good selves.

Well, it’s not certain the pandemic has finished messing with the economy. Unmessed with, we can be confident the economy will bounce back the way it did after last year’s national lockdown. But there’s no guarantee it will be soaring high into the sky.

The main thing to remember is that a budget forecast is just a forecast. Under all governments – but particularly this one – a lot of forecasts never come to pass.

It was the unexpected pandemic, of course, whose arrival stopped the budget deficit ever turning into a surplus, despite Morrison and Frydenberg’s repeated claim in the last election campaign that we already were Back in Black. They even produced coffee mugs to prove it.

Frydenberg’s big word this week for the economy under his management is “strong”. He is sticking to the government’s “plan to secure Australia’s strong recovery from the greatest economic shock since the Great Depression”.

“Having performed more strongly than any major advanced economy throughout the pandemic, the Australian economy is poised for strong growth” in real gross domestic product of 4.5 per cent this calendar year and 4.25 per cent next year, his budget outlook says.

This reflects “strong and broad-based momentum in the economy”. “Income-tax cuts and a strong recovery in the labour market are seeing household consumption increase at its fastest pace in more than two decades” while “temporary tax incentives will drive the strongest increase in business investment since the mining boom, with non-mining investment expected to reach record levels”.

Consistent with the “strong economic recovery”, the rate of unemployment is forecast to reach 4.25 per cent in the June quarter of 2023 which, apart from a brief period before the global financial crisis in 2008, would be the first time we’ve had a sustained unemployment rate below 5 per cent since the early 1970s.

This, should it actually come to pass, really would be something to crow about. But the return to a goal of achieving genuine full employment has been made necessary by this government’s chronic inability to achieve decent growth in real wages.

Without such growth you don’t get sustained strong growth in consumer spending and, hence, adequate growth in the economy overall. Thus the economic managers have become so desperate they’re trying to create a shortage of labour, as the only way of forcing employers to resume awarding decent pay rises.

Trouble is, this could become a vicious circle: you won’t get employment growing strongly and unemployment falling without sustained strong growth in consumer spending, but you won’t get that until real wages are growing strongly.

Frydenberg’s advance advertising for the budget update said that, under his revised forecasts, the rate of increase in wages will get greater each year for the next four years. According to his modelling, he said, on average a person working full time could see an increase of $2500 a year till 2024-25.

But, assuming it happens, that makes it sound a lot better than it is. Comparing the rise in the wage price index with the rise in the consumer price index, real wages fell by 2.1 per cent last financial year, 2020-21.

Since that’s in the past, we know it actually happened. Turning to the budget’s revised forecasts, real wages are expected to fall by a further 0.5 per cent this financial year, before rising by 0.25 per cent in the following year, then by 0.5 per cent the next year and by 0.75 per cent in 2024-25.

Doesn’t sound like a lot to boast about. If it actually happens, Frydenberg’s “plan to secure the recovery and set Australia up for the future” will have taken another three or four years before it’s delivering for wage earners.

To be fair, this week we did get impressive evidence that the economy is rebounding strongly from the lockdowns in Sydney, Canberra and Melbourne. In just one month – November – employment grew by a remarkable 366,000, while the unemployment rate fell from 5.2 per cent to 4.6 per cent. And there was a big fall in the rate of underemployment.

It’s a matter of history that the economy did bounce back strongly from the initial, nationwide lockdown last year. (This, by the way, shows the pandemic bears no comparison with the Great Depression.)

It’s noteworthy that, whereas the update’s fine print says the economy is “rebounding” strongly, Frydenberg says the economy is “recovering” strongly. The two aren’t the same. This week’s wonderful employment figures say we can be confident the economy is rebounding after the latest lockdowns just as strongly as in did the first time.

But a rebound gets you quickly back to square one. It doesn’t necessarily mean that, having rebounded, you’ll go on growing at a faster rate than the anemic rate at which we were growing before the pandemic.

That remains to be seen. And that’s where Frydenberg is being presumptuous with all his confident inference that a strong recovery’s already in the bag.

Lots of things could confound his happy forecasts. The obvious one is more trouble from the virus. Less obvious is this. You may think that getting unemployment down to 4.6 per cent in November means we’ll have no trouble achieving the forecast of getting it down to 4.25 per cent by June 2023.

But you’ve forgotten something. One important reason we’ve had so much success getting unemployment down to amazing levels is because we’ve done it with closed borders. When the borders reopen, it will become a lot harder.

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Don't believe the boys who cry 'interest rates to rise'

Heard the talk that a rise in interest rates is getting closer? So’s Christmas. Here’s my advice: the greatest likelihood is that a rise is still years away. But between now and then you’ll keep hearing stories that it’s on the way. Ignore them.

Why? Because though nature abhors a vacuum, it doesn’t do so as much as the financial markets and the financial media do. They form an unholy alliance because both make their living speculating about changes in interest rates.

They cannot abide a situation where rates don’t change for years on end. So they keep trying to convince themselves something’s about to happen. The financial markets jump at shadows and, whenever they do, the media breathlessly report this worrying development.

The plain truth is, no one knows what the future holds – not even me. But all of us crave to know what’s coming, and keep searching for the person who may be able to tell us. The traders in the financial markets – who do infinitely more buying and selling of securities and currencies than is required to meet the needs of their business customers – earn a well-buttered crust by betting with each other on what’s coming down the pipe.

The media make their living partly by catering to their customers’ unquenchable curiosity about the future. Any interesting opinion will do, though they know that bad news sells better than good. A rise in rates would be bad news for people with mortgages, but good news for people living on their savings in retirement. But the people who choose what news we’re told about can’t imagine they’ll be old themselves one day.

Although no one but God knows for certain what will happen to interest rates, you’d think the person likely to be best informed on the subject is the person with most influence over interest rates in Australia, the boss of our central bank, Reserve Bank governor Dr Philip Lowe.

For more than a year, Lowe has kept telling us – and the markets – that the Reserve is “unlikely” to raise the official interest rate “until 2024 at the earliest”. But there was much excitement last week when he changed this to saying the Reserve’s “central scenario” is that a rise won’t be needed “before 2024″ – that is, not for another two and a half to three years.

What this means is that, whereas it couldn’t see any likelihood a rise would be needed until 2025, it can now see a “range of plausible scenarios” where “further positive surprises” could make a rise appropriate some time during 2024.

The further surprises would mean that annual growth in wages exceed 3 per cent earlier that in the Reserve’s “central scenario”. Although its target is annual inflation of 2 to 3 per cent, and its statutory duty is to achieve full employment (something it now sees as necessary to get inflation back up into the target zone), wage growth of 3 per cent-plus is a key indicator because “history teaches that sustained [my emphasis] changes to the inflation rate are accompanied by sustained [ditto] changes in growth in labour costs”.

Our annual rate of wage growth hasn’t exceeded 3 per cent since March 2013 – more than eight years ago, long before the pandemic – so you see why the Reserve’s “central scenario” is that getting back to it is likely to take several years yet.

For much of this year, however, the financial markets have thought they knew better that the Reserve governor. And nothing he said last week persuaded them he might know more about his likely decisions than they did.

There was little change in futures market prices showing they expect a rate rise in a year’s time – July 2022 – and another in the first half of 2023.

Why do the markets think they know better? Well, because the world’s national financial markets are now so highly integrated, traders probably spend more time thinking about the global market leader, the US economy and Wall Street, than they do about our economy. And they’re always tempted to follow a simple decision rule: whatever the US Federal Reserve is doing, we’ll be doing soon enough.

They may be right in believing rising inflation pressures in the US will lead the Fed to start raising interest rates sooner than sometime in 2024 at the earliest. But what they miss is the big differences between our circumstances and the Yanks’ when it comes to prices and wages.

None of the advanced economies were roaring ahead before the arrival of the pandemic, but the US was travelling a lot faster than we were. So we have a lot more ground to make up than they do. Although most advanced economies have long had inflation rates below their central banks’ target range, ours has been a lot further below than the Americans’.

That’s probably because, over recent years, their market for labour has been a lot “tighter” than ours. Their rate of wage growth has been much less weak than ours has.

A big reason for this is that, in our labour market, the increased demand for workers has been more closely matched by an increase in the supply of workers, whereas theirs hasn’t been. Our rate of working-age people already participating in the labour force has risen to near-record highs, whereas theirs has been much lower.

A lot of the increase in our supply of labour has come from our relatively higher levels of immigration. This has ceased to be true since we closed our borders – which does a lot to explain why employment and unemployment have bounced back to their pre-pandemic levels much earlier than we were expecting – so one of Lowe’s uncertainties is how long this strange form of stimulus will last.

The American financial markets began worrying about the risk of rising inflation earlier this year. This is partly because President Biden has been applying huge amounts of budgetary stimulus, and because of rising commodity prices and reports of shortages of the supply of semiconductors and other things, caused by the pandemic’s disruption.

By contrast, our government is busy ending its big stimulus programs. And supply shortages are temporary. Increases in prices don’t become a lasting increase in the rate of inflation unless they lead to higher wages. That’s what Lowe means when he stresses that he won’t be putting up interest rates until enough time has passed to convince him the increases in inflation and wages are “sustained”.

The final thing to remember is that one reason the financial markets are so quick to jump to conclusions about what lies ahead is that, because they lay new bets every day, they know they can jump to a different conclusion in a few weeks’ time. To them, it’s all part of the fun of being a professional gambler.

If you actually enjoy worrying that interest rates may rise – all the thrills and spills along the way – then be the media’s guest. But if you have better things to do and just want a credible view about the future that doesn’t change any more often than it has to, feel free to ignore the markets’ fun and games.

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Slowly, economists are revealing the weaknesses in their theories

Economics is changing. It’s relying less on theorising about how the economy works, and more on testing to see whether there’s hard empirical (observable) evidence to support those theories.

Advances in digitisation and the information revolution have made much more statistical information about aspects of economic activity available, and made it easier to analyse these new “data sets” using improved statistical tests of, for instance, whether the correlation between A and B is causal – whether A is causing B, or B is causing A, or whether they’re both being caused by C.

But another development in recent decades is economists losing their reluctance to test the validity of their theories by performing experiments. Let me tell you about two new examples of empirical research by Australian academic economists, one involving data analysis and the other a laboratory experiment.

We see a lot of calls for reform that take the form: change taxes or labour laws in a way that just happens to benefit me directly, and this will make “jobs and growth” so much better for everyone.

These reformers always convey the impression that the changes they want are backed by long established, self-evident economic principles. And they can usually find professional economists willing to say “yes, that’s right”.

But what gets me is that, when the self-declared reformers get their “reform”, it’s rare for anyone to bother going back to check whether it really did do wonders for jobs and growth. Wouldn’t there be something to learn if it was a great success, or if it wasn’t?

Do you remember back in 2017, when employers were campaigning for a reduction in weekend penalty rates? The retailers and the hospitality industry told the Fair Work Commission that making them pay much higher wage rates on Saturday and Sunday was discouraging some businesses from opening on weekends, to the detriment of the public’s convenience.

If only penalty rates were lower, more businesses would open on weekends, or stay open for longer, meaning consumers would spend more, and more workers would be employed for more hours, leaving everyone better off.

The employers got strong support from the Productivity Commission and some economist expert witnesses. So the commission decided to reduce the Sunday and public holiday penalty rates in the relevant awards by 25 to 50 percentage points, phased in over three years.

Associate Professor Martin O’Brien, of the University of Wollongong’s Sydney Business School, commissioned a longitudinal survey (looking at the same people over time) of about 1830 employees and about 240 owner-managers or employers, dividing the workers between those on awards and a control group of those on enterprise agreements (and so not directly affected).

The economists’ standard, “neo-classical” model of the way demand and supply interact to determine the market price, with movements in the price feeding back to influence the quantity that buyers demand and the quantity sellers want to supply, does predict that a fall in the price of Sunday labour will lead employers to demand more of it.

So what did the survey find? It could find no effect on employment in the retail and hospitality sectors. This is consistent with a growing body of mainly American empirical evidence that, contrary to neo-classical theory, increases in minimum wages have little effect on employment.

But here’s an interesting twist: a majority of employers reported not making the reduction in penalty rates and a majority of employees reported not receiving any reduction.

One explanation for this is that employers didn’t pass on the cuts because they valued staff loyalty and commitment. If so, this fits with the judgment of many labour economists that the relationship between a firm and its workers is far more nuanced than can be captured by the neo-classical assumption that price is the only motivator.

An alternative explanation, however, is that those employers didn’t cut the Sunday penalty rate because they weren’t paying it in the first place.

Turning to the laboratory experiment, it tests the much more theoretical assumption that the behaviour of people engaged in economic activities is guided by their “rational expectations” about what will happen in the future.

Economists have come to care about what people expect to happen because this affects the way people behave, and so affects the future we get. In recent decades, many mathematical models of the macro economy have used the assumption that people form their beliefs about the future in a “rational” way to make the maths more rigorous.

By “rational” they mean that people respond to new information by immediately and fully adjusting their expectations – beliefs – about what will happen to prices, the economy’s growth or whatever. Which is a lovely idea, but how realistic is it?

Dr Timo Henckel, of the Research School of Economics at the Australian National University, Dr Gordon Menzies, of the University of Technology Sydney, and Professor Daniel Zizzo, of the University of Queensland, analysed the results of an experiment conducted by Professor Peter Moffatt, of the University of East Anglia, involving 245 students answering questions.

On receiving each piece of new information, the subjects had first to decide whether to adjust their beliefs and then, if so, by how much. The experimenters found that the subjects reacted very differently.

They found that, in general, people don’t update their beliefs with each new piece of information. And when they do, they tend not to adjust their beliefs by as much as they probably should. In other words, people display a kind of belief conservatism, holding on to a belief for longer than they should.

They found that this conservatism is explained to some extent by people’s inattention – they were distracted by other issues – and to some extent by the complexity of the issue: it was “cognitively taxing”.

It turns out that very few people – just 3 per cent of the subjects – display the rational expectations economists assume in their model-building. Most people’s behaviour, the authors say, is better described as “inferential expectations”.

Now, you may not be wildly surprised by these findings. But, in the academic world, common sense doesn’t get you far. You must be able to demonstrate things the academic way.

Even so, Henckel says that the responses of the experiment’s subjects extend to many parts of life, from the behaviour of investors in the share and other financial markets – this is how bubbles develop – to people’s political convictions, where they hold on to beliefs for far too long, ignoring much contrary evidence.

Indeed, inferential expectations apply even to scientists, who form a view of the world which they will revise or overturn only if there is overwhelming evidence to the contrary. So don’t expect economic modellers to abandon their convenient assumption of rational expectations any time soon.

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