How full employment has changed the economy

This may be the first time you’ve watched the managers of the economy using high interest rates and a tighter budget to throttle demand to get inflation down. But if it isn’t your first, have you noticed how much harder they’re finding it to catch the raging bull?

It explains why both the previous and the new Reserve Bank governor have been so twitchy. How, after they seem to have made as many interest rate rises as they thought they needed, they keep coming back for another one.

The economy isn’t working the way it used to. Have you noticed that, although consumer spending stopped dead in the September quarter, and overall growth in the economy slowed to a microscopic 0.2 per cent, there’s been so little weakness in the jobs market?

Although there’s no doubt about how hard most households have been squeezed over the course of this year, how come the rate of unemployment has risen only marginally from 3.5 per cent to a still-far-below-average 3.9 per cent in November?

And if the economy’s been slowing for the whole of this year, how come the budget balance is getting better rather than worse, with Treasurer Jim Chalmers achieving a surplus last financial year and hoping for another in the year to next June?

There are lots of particular things that help explain these surprising results – world commodity prices have stayed high; some parts of the economy change earlier than others – but there’s one, more fundamental factor that towers over all the others: this is the first time in 50 years that we’ve been trying to slow a runaway economy that’s reached anything like full employment.

It turns out that throttling an economy that’s fully employed is much harder to do. Households are more resilient and, after a period when it’s been hard to get hold of all the workers they need, businesses have been far less inclined to add to the slowdown by shedding staff.

Remember that we reached full employment by happy accident. Between the unco-ordinated stimulus of state as well as federal governments, plus the Reserve cutting rates to near-zero, we (like many other rich economies) hit the accelerator far too hard during the pandemic.

This was apparent after the pandemic had eased and before the Morrison government’s final budget in March last year. But there was no way Scott Morrison was going to hit the budget brakes just before an election.

So the econocrats in the Reserve and Treasury resigned themselves to second prize: an unemployment rate much lower than what they were used to and felt comfortable with.

Because the pandemic had also caused us to close our borders and thus block employers’ access to skilled and unskilled immigrant labour, the econocrats got far more than they expected: unemployment so low we hit full employment.

The jobs market is getting less tight, with the number of job vacancies having fallen a long way, but last week’s figures for November showed how strong the labour market remains.

Sure, unemployment rose a fraction to 3.9 per cent, but this is no higher than it was in May last year. And the month saw total employment actually grow, by more than a remarkable 61,000 jobs during the month.

After all this slowing and all this pain, the rate at which people of working age are participating in the labour force by either having a job or actively seeking one has reached a record high.

And almost 65 per cent of the working-age population has a job – a proportion that’s never been higher in Australia’s history.

Employment is still growing strongly, partly because of the rebound in immigration, with foreign students in particular filling part-time job vacancies.

But also, it seems, because more hard-pressed families are trying to make ends meet by taking second jobs. In past downturns, those jobs wouldn’t have been there to be taken.

To force households to spend less, they’re being hit with three sticks. Obviously, by raising mortgage interest rates. Also by employers, taken as a group, raising the wages they pay by less than they’ve raised their prices (have you noticed how Chalmers avoids referring to the cut in real wages by just blaming “inflation”?).

And, third, by the government allowing bracket creep to take a bigger bite out of what pay rises the workers do manage to get.

But there’s another factor that’s been working in the opposite direction, adding to households’ ability to keep spending: over the year to November, the number of people with jobs rose by more than 440,000. That’s a full-employment economy.

All the extra people with jobs pay income tax. All the part-time workers able to get more hours pay more tax. All the people getting second jobs pay more tax. Add the bigger bite out of pay rises, and you see why Chalmers’ budget’s so flush.

But note this: the many benefits of full employment come at a cost – “opportunity cost”. As a coming paper by Matt Saunders and Dr Richard Denniss of the Australia Institute will remind us, “opportunity cost makes it clear that when resources are used for one purpose, they become unavailable for other purposes”.

So when we’re at or close to full employment, any developer, business executive or politician seeking our support for any project because “it will create jobs” should be laughed at. Where will the workers come from to fill the jobs? You’ll have to pinch them from some other employer.

This is especially true when the jobs you want to create are for workers with specialist skills.

According to a federal government report, in October last year there were 83 major resource and energy projects at the committed stage, worth $83 billion. But about two thirds of these were for the development of fossil fuels, including the expansion of nearby ports.

Really? And this at a time when the electricity grid needs urgent reconfiguration as part of our move to a low-carbon economy, but projects are being deferred because you can’t get the workers?

As Saunders and Denniss conclude, “With rapid population growth and the stated need to transform our energy system, the real cost of spending tens of billions of dollars building new gas and coal projects is the lost opportunity to invest in the infrastructure and energy transformation the Australian economy needs.”

I think Jim Chalmers needs to explain the iron law of opportunity cost to his boss. And make sure Climate Change and Energy Minister Chris Bowen’s in the meeting.

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Albanese wants to put full employment back on its throne

Something really important to the management of the economy happened this week: the Albanese government released its white paper on employment. If the government achieves the vision it has laid out, it could be a turning point in how our economy works, one that begins a lasting reduction in the rates of unemployment and underemployment.

This is Labor’s decision to put “full employment” back on its throne as a central objective of macroeconomic policy. Or, as the paper puts it, “placing full employment at the heart of our institutions and policy frameworks”.

For the first 30 years after World War II, the achievement of full employment was the overriding objective for the managers of the economy. This era began in 1945, with the Curtin Labor government issuing a white paper on full employment in Australia. Notice a pattern?

It worked well for 30 years, but fell apart with the arrival of high inflation in the mid-1970s. Since then, the primary concern of macroeconomic management has been to keep inflation low, with the goal of achieving full employment usually given not much more than lip service.

What’s changed has been the way the ups and downs of the pandemic have suddenly returned us to the lowest rate of unemployment in almost 50 years, about 3.5 per cent. But also the lowest rate of underemployment – part-timers who can’t get as many hours of work as they want – in several decades.

At present, we have about the highest proportion of the working-age population participating in the labour market – by having a job or actively seeking one.

This unexpected return to something close to full employment has prompted many people to think we should be trying at lot harder than we have been to keep employment high and unemployment low.

And that’s why the Albanese government has decided to put the goal of full employment back on its throne in the halls of macroeconomic management.

“Macro” means focusing on the economy as a whole. “Micro” means looking at particular bits of the economy, or at particular mechanisms within the economy.

Since World War II, governments have sought to use “fiscal policy” (the budget) and “monetary policy” (interest rates) to “manage” the macroeconomy by smoothing out the ups and downs in demand for (spending on) goods and services – and thus employers’ demand for workers.

If the goal of full employment is now back on centre stage, what does full employment actually mean?

The white paper defines it as where “everyone who wants a job is able to find one without having to search for too long”. But it adds a qualification: the jobs we create should be “decent jobs that are secure and fairly paid”, a requirement many employers won’t like the sound of.

The paper says it wants “sustained” full employment, which means “minimising volatility in economic cycles and keeping employment as close as possible to current maximum level consistent with low and stable inflation”.

So restoring the priority of full employment doesn’t mean ceasing to care about inflation, but does mean that getting serious about full employment will affect the day-to-day management of the macroeconomy.

The paper also says full employment must be “inclusive”: broadening the opportunities for people to take up paid work and lowering the barriers to work created by various forms of discrimination.

But how will the government go about achieving this more inclusive view full employment? Well, one way to answer this is to take the economists’ standard list of the types or causes of unemployment.

“Frictional” unemployment occurs because, at any time, there’ll always be some people moving between jobs or seeking their first job. So frictional employment is inevitable and nothing to worry about.

It occurs because it takes time for someone wanting a job to find someone wanting to give them one. You’d think that with so much advertising of job vacancies, and so much looking for jobs, occurring online, frictional unemployment ought to be lower than it used to be.

“Cyclical” unemployment is caused by downturns in the economy, which reduce employers’ demand for workers with little reduction in the people seeking work. As the paper says, it can be lessened through “effective macroeconomic policy settings”.

That is, to get the economy moving quickly out of a recession and, better, managing to stop it getting into recession in the first place. It’s when people lose their jobs during a prolonged recession – and education-leavers take months to find their first job – that you get a build-up in “long-term” unemployment.

These are the people who needed special, personalised help from the government because the longer they go unemployed, the less an employer wants to take them on. This role used to be played (not particularly well) by the Commonwealth Employment Service, which was replaced by what’s now called Workforce Australia, using often for-profit providers of “employment services” to people with problems.

If you’ve heard anything about robo-debt, it won’t surprise you that it’s become a travesty of what it was supposed to be, with providers gaming the system and gaining the impression the government wants them to punish people rather than help them.

The Albanese government has instituted an inquiry into the present system of government-funded employment services. How seriously it reforms this shemozzle will be a key test of how committed the government is to achieving sustained full employment.

The final type of unemployment is “structural”, caused by a mismatch between the skills a worker possesses and the skills employers are seeking. Sometimes the mismatch is geographic; often it’s caused by the ever-changing structure of industry, as some industries decline and others expand.

This is the hardest cause of unemployment to reduce. But it involves reforming every level of education and committing to retraining and lifelong learning. Again, this will be a key test of whether the government is committed to achieving sustained full employment, not just dreaming about it.

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Big business should serve us, not enslave us

When my brain was switching to idle on my recent break, I thought of two central questions. First, for whose benefit is the economy being run – a handful of company executives at the top, or all the rest of us? Second, despite all the hand-wringing over our lack of productivity improvement, would it be so terrible if the economy stopped growing?

Then the whole Qantas affair reached boiling point. So we’ll save the economy’s growth for another day.

You’ve probably heard as much as you want to know about Qantas and its departed chief executive Alan Joyce. But Qantas’ domination of our air travel industry makes its performance of great importance to our lives. And Qantas is just the latest and most egregious case of Big Business Behaving Badly.

We’ve seen all the misconduct revealed by the banking royal commission, with the Morrison government accepting all the commission’s recommendations before the 2019 election, then quietly dropping many of them after the election.

We’ve seen consulting firm PwC caught abusing the trust of the Tax Office, with further inquiry revealing the huge sums governments are paying the big four accounting firms for underwhelming advice on myriad routine matters.

We’ve seen Rio Tinto “accidentally” destroying a sacred site that stood in its way and, it seems, almost every big company “accidentally” paying their staff less than their legal entitlement.

Now, let’s be clear. I’m a believer in the capitalist system – the “market economy” as economists prefer to call it. I accept that the “profit motive” is the best way to motivate an economy. And that the exploitation of economies of scale means we benefit from having big companies.

But that doesn’t mean companies can’t get too big, nor that all the jobs and income big businesses bring us mean governments should manage the economy to please the nation’s chief executives.

It should go without argument that governments should manage the economy for the benefit of the many, not the few. The profit motive, big companies and their bosses should be seen as just means to the end of providing satisfying lives for all Australians, including the disabled and disadvantaged.

We allow the pursuit of profit, and the chosen treatment of employees and customers, only to the extent that the benefits to us come without unreasonable cost to us. Business serves us; we don’t serve it.

In other words, we need a fair bit of the benefit to “trickle down” from the bosses and shareholders at the top to the customers and workers at the bottom. That’s the unwritten social contract between us and big business. And for many years, enough of the benefit did trickle down. But in recent years the trickle down has become more trickle-like.

This is partly explained by the way the “micro-economic reform” of the Hawke-Keating government degenerated into “neoliberalism” – the belief that what’s good for BHP is good for Australia. This would have been encouraged by the way election campaigns have become an advertising arms race, with both sides of politics seeking donations from big business.

Another cause was explained by a former Reserve Bank governor, Ian Macfarlane, in his Boyer Lectures of 2006: “The combination of performance-based pay and short job tenure is becoming increasingly common throughout the business sector ... It can have the effect of encouraging managers to chase short-term profits, even if long-term risks are being incurred, because if the risks eventuate, they will show up ‘on someone else’s shift’.”

The upshot of neoliberalism’s assumption that business always knows best is to leave the nation’s chief executives – and their boardroom cheer squads – believing they’re part of a commercial Brahmin caste, fully entitled to be paid many multiples of what their fellow employees get, to retire with more bags of money than they can carry, and to have politicians never do anything that hampers their money-grubbing proclivities.

Their Brahminisation has reached the point where they think they can break the law with impunity. They’re confident that corporate watchdogs and competition and consumer watchdogs won’t come after them – or won’t be able to afford the lawyers they can.

Chief executives for years have used multiple devices – casualisation, pseudo contracting, labour hire companies, franchising and more – to chisel away at workers’ wages. And that’s before you get to the ways they quietly chisel their customers.

The fact is that the error and era of neoliberalism are over, but the Business Council and its members have yet to get the memo. They’re continuing to claim that cutting the rate of company tax would do wonders for the economy (not to mention their bonuses) and that the Albanese government’s latest efforts to protect employees from mistreatment would make their working arrangements impossibly “inflexible”.

But the more Qantases and Alan Joyces we call out while they amass their millions, the more the public wakes up, and the more governments see we want them to get the suits back under control.

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What a future: impossible climate, a life of renting and a crappy job

The older I get, the more I worry about the nightmare we oldies are leaving for our children and grandchildren. The obvious, in-your-face problem is climate change, but other difficulties are everywhere you look.

Now the northern hemisphere has been introduced to the joys of bushfires and heatwaves with, I imagine, a cleanser of flooding to come, global warming has become global boiling. Climate change is now — and will get a lot worse even before we oldies have popped off.

We wasted decades worrying about the economic cost of doing something about climate change, now we’re facing the daunting economic costs of not having done anything about climate change.

We’ve exchanged a government of closet climate-change deniers for a government that knows what it should do, but is dragging its feet under the influence of two powerful unions representing the interests of a relative handful of mine workers who don’t want to look for jobs elsewhere.

Then there’s the way the older generation of home owners has allowed the lure of ever-rising house prices to permit successive governments to turn housing into an inheritance lottery.

Australia is dividing into two distant tribes: the owners and the renters. If you have the good fortune to be born to home-owning parents (perhaps with an investment property or two on the side), the Bank of Mum and Dad will ensure you too eventually become a home owner, able to pass your good fortune on to your own kids.

But pick renters as your parents — or have too many siblings — and you, like them, will be a life-long renter. As will your kids.

And, naturally, governments couldn’t possibly oblige landlords to give their tenants more security and better maintenance without the landlords giving up and leaving thousands homeless on the streets. (Yeah, sure.)

HECS HELP debt is adding to the difficulty of making it onto the home ownership merry-go-round. The scheme was designed to have people who benefit from a university education contribute towards its cost without discouraging kids from poor families from seeking to better themselves.

But incessant tinkering by successive governments has turned HECS into a millstone.

And all that’s before you get to the gig economy, better thought of as the rise of insecure employment. The security of having a full-time, permanent job is something the older generation has been able to take for granted. Not so the youngsters.

In the latest surge of inflation, businesses haven’t hesitated to pass on to customers the higher cost of imported inputs, often seeming to add a bit extra for luck.

But in the decade or two before then, price rises were modest, sometimes even falling below 2 per cent a year, despite healthy growth in profits.

One way that businesses kept prices low was to find new ways of holding down labour costs. With the gig economy, people seeking to earn a living from digital sites are treated as contractors rather than employees.

They thus get no guaranteed work, no paid sick or holiday leave, no workers’ compensation cover and no employer contributions to their superannuation. Their work is precarious.

But that’s just the bit that gets the publicity. Less talked about are the various devices businesses have used to minimise labour costs, shift risks onto workers, and weaken the legal link with their workers by using labour-hire companies, setting up franchise arrangements and disposable subsidiaries.

Above all, workers have been hired as casuals. Casual employment is meant for cases where work is intermittent, short-term or unpredictable. But these days many casuals work full-time, most work the same hours from week to week, more than half can’t choose the days on which they work, and most have been with their employer for more than a year.

Casual workers get no sick or holiday pay, meaning if they’re too sick to work they earn no income. If they take a break, they have to live on their savings.

In principle, they get a 25 per cent loading instead. But get this: as best we can tell from official statistics, less than half actually receive it.

And because they’re casuals, they get no job security. Permanent employees can’t be sacked without due cause. If they’re laid off, they get redundancy money. Casuals don’t have to be sacked and don’t get redundancy. They just don’t get rostered on.

Some companies avoid union wage rates and conditions by using workers actually employed by labour-hire companies.

Last week, workplace relations minister Tony Burke announced further details of the government’s plan to make it easier for casual workers to apply to become permanent. Earlier he’d announced plans to require labour-hire workers to be paid the same as the regular employees doing the same work beside them.

Naturally, the employer groups cried that this would “increase business costs and risks” – which I take as a tacit admission that causal workers have been underpaid.

It’s not much, but it’s a step towards giving the younger generation a better future.

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Another rise in interest rates is enough already

Whatever decision the Reserve Bank board makes about interest rates at its meeting tomorrow morning – departing governor Dr Philip Lowe’s second-last – the stronger case is for no increase. Indeed, I agree with those business economists saying we’ve probably had too many increases already.

If so – and I hope I’m wrong – we’ll miss the “narrow path” to the sought-after “soft landing” and hit the ground with a bang. We’ll have the recession we didn’t have to have. (That’s where recession is measured not the lazy, mindless way – two successive quarters of “negative growth” – but the sensible way: a big rise in unemployment over just a year or so.)

For those too young to know why recessions are dreaded, it’s not what happens to gross domestic product that matters (it’s just a sign of the looming disaster) but what happens to people: lots of them lose their jobs, those leaving education can’t find decent jobs, and some businesses collapse.

Market economists usually focus on guessing what the Reserve will do, not saying what it should do. (That’s because they’re paid to advise their bank’s money-market traders, who are paid to lay bets on what the Reserve will do.)

That’s why it’s so notable to see people such as Deloitte Access Economics’ Stephen Smith and AMP’s Dr Shane Oliver saying the Reserve has already increased interest rates too far.

Last week’s consumer price index for the June quarter gave us strong evidence that the rate of inflation is well on the way down. After peaking at 7.8 per cent over the year to December, it’s down to 6 per cent over the year to June.

As we’ve been told repeatedly, this was “less than expected”. Yes, but by whom? Usually, the answer is: by economists in the money markets. Here’s a tip: what money-market economists were forecasting is of little interest to anyone but them.

That almost always proves what we already know: economists are hopeless at forecasting the economy. Even after the fact, and just a week before we all know the truth. No, the only expectation that matters is what the Reserve was expecting. Why? Because it’s the economist with its hand on the interest-rate lever.

So, it does matter that the Reserve was expecting annual inflation of 6.3 per cent. That is, inflation’s coming down faster than it thought. Back to the drawing board.

The Reserve takes much notice of its preferred measure of “underlying” inflation. It’s down to 5.9 per cent. But when the economy’s speeding up or slowing down, the latest annual change contains a lot of historical baggage.

This is why the Americans focus not on the annual rate of change, but the “annualised” (made annual) rate, which you get by compounding the quarterly change (or, if you can’t remember the compounding formula, by multiplying the number by four).

Have you heard all the people saying, “oh, but 6 per cent is still way above the target of 2 to 3 per cent”? Well, if you annualise the most recent information we have, that prices rose by 0.8 per cent in the June quarter, you get 3.3 per cent. Clearly, we’re making big progress.

But the next time someone tells you we’re still way above the target, ask them if they’ve ever heard of “lags”. Central Banking 101 says that monetary policy (fiddling with interest rates) takes a year or more to have its full effect, first on economic activity (growth in gross domestic product and, particularly, consumer spending), then on the rate at which prices are rising. What’s more, the length of the lag (delay) can vary.

This is why central bankers are supposed to remember that, if you keep raising rates until you’re certain you’ve done enough to get inflation down where you want it, you can be certain you’ve done too much. Expect a hard landing, not a soft one.

Since the road to lower inflation runs via slower growth in economic activity, remember this: the national accounts show real GDP slowing to growth of 0.2 per cent in the March quarter, with growth in consumer spending also slowing to 0.2 per cent.

How much slower would you like it to get?

The next weak argument for a further rate rise is: “the labour market’s still tight”. The figures for the month of June showed the rate of unemployment still stuck at a 50-year low of 3.5 per cent, with employment growing by 32,600.

But the nation’s top expert on the jobs figures is Melbourne University’s Professor Jeff Borland. He notes that, in the nine months to August last year, employment grew by an average of 55,000 a month – about double the rate pre-pandemic.

Since August, however, it’s grown by an average of 35,600 a month. Sounds like a less-tight labour market to me.

And Borland makes a further point. Whereas the employment figures measure filled jobs, the actual number of jobs can be thought of as filled jobs plus vacant jobs – which tells us how much work employers want done.

This is a better indicator of how “tight” the labour market is. And, because vacancies are falling, the growth in total jobs has slowed much faster. Since the middle of last year, part of the growth in employment has come from reducing the stock of vacancies.

Another thing the Reserve (and its money-market urgers) need to remember is that, when it comes to slowing economic activity to slow the rise in prices, interest rates (aka monetary policy) aren’t the only game in town.

Professor Ross Garnaut, also of Melbourne University, wants to remind us that “fiscal policy” (alias the budget) is doing more to help than we thought. The now-expected budget surplus of at least $20 billion means that, over the year to June 30, the federal budget pulled $20 billion more out of the economy than it put back in.

Garnaut says he likes the $20 billion surplus because, among other reasons, “we can run lower interest rates”.

One last thing the Reserve board needs to remember. Usually, when it’s jamming on the interest-rate brakes to get inflation down, the problem’s been caused by excessive growth in wages. Not this time.

Since prices took off late in 2021, wages have fallen well behind those prices. Indeed, wages haven’t got much ahead of prices for about the past decade. And while consumer prices rose by 7 per cent over the year to March, the wage price index rose by only 3.7 per cent.

This has really put the squeeze on household incomes and households’ ability to keep increasing their spending. And that’s before you get to what rising interest rates are doing.

Dear Reserve Bank board members, please remember all this tomorrow morning.

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Enjoy the wonderful land of full employment - while you can

I hope that while you’re complaining about the cost of living, you’re also wallowing in the joys of living in an economy that’s reached the sacred land of “full employment” – being able to provide a job for almost everyone who wants one. This is the first time we’ve seen it in 50 years.

You have to say we’ve achieved it not by design, but as an unexpected consequence of our bumbling attempts to cope with the vicissitudes of the pandemic.

We used interest rates and, more particularly, the budget, to stimulate demand (encourage business and consumer spending) and ended up doing a lot more than we needed to. To the economy managers’ surprise, the rate of unemployment fell rapidly to 3.5 per cent – a level most of them had never seen before and never expected to see.

The sad truth is that, during the half century that the high priests of economics were wandering in the wilderness of joblessness, they lost their faith, and started worshiping the false god Nairu, who whispered in their ears alluring lies about the location they were seeking.

But now the wanderers have stumbled upon the promised land of Full Employment, a land flowing with milk and honey.

So now’s the time for us all to sing hymns of praise to one true god of mammon, Full Employment, in all its beneficence and beauty. And here to be our worship leader is Michele Bullock, deputy governor of the Reserve Bank, who published some new soul music this week.

Bullock says it’s “hard to overstate the importance of achieving full employment. When someone cannot find work, or the hours of work they want, they suffer financially. However, the costs of unemployment and underemployment extend well beyond financial impacts.

“Work provides people with a sense of dignity and purpose. Unemployment – particularly long-term unemployment – can be detrimental to a person’s mental and physical health,” she says.

“The costs of not achieving full employment tend to be borne disproportionately by some groups in the community – the young, those who are less educated, and people on lower incomes and with less wealth.

“In fact, for these groups, improved employment outcomes and opportunities to work more hours are much more important for their living standards than wage increases.”

Early in the pandemic and the imposition of lockdowns, we thought we were in for a regular recession. And “the sobering experience from previous recessions had taught us that these episodes leave long-lasting marks on individuals [called “scarring” by economists], communities and the economy.

“For example, if people stay unemployed for too long, their skills may deteriorate or become obsolete and their prospects for re-engaging in meaningful work may decline. This can result in more people in long-term unemployment or, alternatively, people withdrawing from the workforce,” Bullock says.

But, thanks to all the up-front stimulus, there was no recession and, hence, no scarring. Instead, outcomes in the labour market over the past three years “have consistently exceeded the expectations of the Reserve Bank and other forecasters”.

In fact, the share of the Australian population in employment has never been higher – higher even than in the decades between the end of World War II and the mid-1970s, when full employment became the norm.

Today, the number of Australians in a job has increased by more than 1.1 million since late 2021, and the level of employment is now almost 8 per cent above its pre-pandemic level. Get that.

Almost all the gains in employment since the start of the pandemic have been full-time jobs. Strong demand for labour has enabled many previously part-time employees to move into full-time work. This has pushed the underemployment rate – the proportion of people with jobs, but seeking more hours – down to its lowest since 2008.

Bullock says the people who’ve benefited most from all this are those on lower incomes and with less education. Unemployment has tended to decline more in local areas that had weaker employment to begin with.

Young people – those aged 15 to 24 years – who usually suffer most when recessions occur, have seen their rate of unemployment decline by more than twice the decline in the overall unemployment rate.

Long-term unemployment is defined as being without work for more than a year. Last year, a record number of the long-term unemployed found a job, and fewer gave up looking for one.

What’s more, the risk of not being able to find a job within a year declined significantly. So the rate of long-term unemployment is close to its lowest in decades.

Wow. Now, Bullock’s not exaggerating when she says it’s hard to overstate the many benefits – economic and social – of achieving full employment.

But she’s harder to believe when she assures us that, just because the Reserve has hardly spoken about anything other than the need to reduce inflation for the past year and more: “it does not mean that the other part of our mandate – maintaining full employment – has become any less important.

“Full employment is, and has always been, one of our two objectives.”

Well, I’d love to believe that was true, but both the Reserve’s present rhetoric and behaviour, and its record, make it hard to believe.

The Reserve has had independent control over the day-to-day management of the economy for more than 35 years. For almost all of that time we’ve had low inflation, but only now have we achieved full employment – and only by happy accident.

For most of that time it, like most macroeconomists the world over, has been listening to the siren call of the false god Nairu – aka the “non-accelerating-inflation rate of unemployment” – telling it that “full employment” really means an unemployment rate of 5 per cent or 6 per cent.

If you dispute that, answer me this: how many times in the past 35 years has a Reserve Bank boss been able to make a similar speech to the one Bullock gave this week?

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It's not the wolf at the door that's driving women to work harder

Why do mothers go out to work? Why are more women doing paid work than ever before? And why are more of those women working full-time? At a time when so many are struggling with the cost of living, it’s easy to conclude that more women are having to work more hours just to keep up. But I think that sells women short.

Worse, it’s a fundamental misreading of perhaps the greatest social change of our age: the economic emancipation of women.

I don’t doubt that women are just as concerned about the cost of living as men, maybe more so if they’re in charge of the family budget. Nor do I doubt that, if you ask a woman why she’s been doing more paid work lately, the cost of living’s likely to be mentioned.

But things are not always as they seem. For instance, when people complain about the cost of living, their focus is on rising prices. But prices rise almost continuously. What matters more is whether wages are rising as fast as prices are – or, preferably, a little faster.

It’s true that the prices for goods and services have risen at a much faster rate than normal over the past two years or so. But the real problem is that wages – which usually do keep up – have been falling behind since the start of the pandemic. Yet people are far more conscious of the rising prices than of the weak wage growth.

Another distinction that’s clearer to economists than to normal people is between the cost of living and the standard of living. When people have trouble maintaining the same standard of living as their friends – a comparable car, comparable house, comparable private school – they would often rather blame the cost of living than their need to keep up with the Joneses.

No, what’s driving the change in women’s lives – causing them to behave very differently from their grandmothers – isn’t the cost of living, it’s education. And with education has come aspiration. Aspiration to put their learning to work, to have a career as well as a family, and to be treated equally with men.

I think it all started sometime in the 1960s when, for some unknown reason, the parents of the rich world accepted that their daughters were just as entitled to a good education as their sons. Everything flows from that fateful change in social attitudes and behaviour. What father today would dream of telling his daughter that, being a girl, she didn’t need an education?

The trouble for boys is that girls do education better. It’s now several decades since the number of girls going to university first exceeded the number of boys.

That being so, the figures for two-income families should come as little surprise. The latest report from the federal government’s Australian Institute of Family Studies, Employment patterns and trends for families with children, finds that in 2022, both parents were employed in 71 per cent of couple families with children under 15. This is up from 56 per cent in 2000, and 40 per cent in 1979.

Within those couple families, the proportion with both parents working full-time was 31 per cent in 2021, up from 22 per cent 12 years earlier. The proportion with one parent working full-time and the other part-time is unchanged at 36 per cent.

Only 4 per cent of these families involved fathers who weren’t working and mothers who were. (Which leaves the young men in my immediate family looking good.)

But there’s something else you need to understand. In the days when there weren’t many two-income families, this gave them a distinct advantage in the housing market. They could afford a better house than their peers.

Once most young home-buying couples have two incomes, however, their greater purchasing power gets built into the prices of the kind of houses they buy, so that what began as an advantage turns into a requirement.

Now it’s the couples who choose not to have both partners working who’ll have trouble affording a home comparable to those of other couples. They’ll have to accept a lower standard of living.

Similarly, it’s a misconception to say, as some do, that you need to have both parents working to afford a family. No, you just have to accept a lower standard of living.

I’ve long suspected that the rise of the two-income family helps explain the growing practice of sending kids to private schools. Two incomes make this easier to afford – though this, too, gets built into the size of the fees the schools can get away with charging.

There’s no reason a mother – or a father – who chooses to have a career should feel guilty about it. But I suspect some double-income couples find it easier to justify if they can say that the extra money is buying their kids a better education.

Sorry, a mountain of evidence says that, once you allow for the parents’ socio-economic status, private schools don’t add to students’ academic performance. Buyer beware.

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Our big risk: fix inflation, but kiss goodbye to full employment

If you think getting inflation down is our one big economic worry, you have a cockeyed view of economic success. Unless we can get it under control without returning to the 5 to 6 per cent unemployment rate we lived with in recent decades, we’ll have lost our one great gain from the travails of pandemic: our return to full employment.

And if we do lose it, it will demonstrate the great price Australia paid for its decision in the 1980s to join the international fashion and hand the management of its economy over to the central bankers.

There has always been a tricky trade-off between the twin objectives of low inflation and low unemployment. If our return to full employment proves transitory, it will show what we should have known: that handing the economy over to the central bankers and their urgers in the financial markets was asking for inflation to be given priority at the expense of unemployment.

In his customary post-budget speech to economists last Thursday, Treasury secretary Dr Steven Kennedy began by explaining to academic economists why their claim that the budget was inflationary lacked understanding of the intricacies of economics in the real world.

But his strongest message was to remind economists why full employment is a prize not to be lost.

Whereas early in the pandemic it was feared the rate of unemployment would shoot up to 15 per cent and be difficult to get back down, the massive fiscal (budgetary) stimulus let loose saw it rise only to half that, and the remarkable economic rebound saw it fall to its lowest level in almost 50 years.

“This experience is altering our views on full employment,” Kennedy says. “One of the stories of this budget – one that risks being lost – is the virtue of full employment.”

For one thing, near-record low unemployment and a near-record rate of participation in the labour force are adding to demand and to our capacity to supply goods and services.

This time last year, Treasury was expecting a budget deficit of $78 billion in the financial year ending next month. Now it’s expecting a surplus of $4 billion. Various factors explain that improvement, but the greatest is the continuing strength of the labour market.

As I explained last week, this revision has significantly reduced the projected further increase in the public debt and, in consequence, our projected annual interest bill on the debt every year forever. It has thereby significantly reduced our projected "structural" budget deficit although, Kennedy insists, has not eliminated it.

And getting a higher proportion of the working-age population into jobs – and having more of the jobs full-time – improves our prospects for economic growth and prosperity.

There’s no source of economic inefficiency greater than having many people who want to work sitting around doing nothing. And adding to the supply of labour is not, of itself, inflationary.

But let’s not confuse means with ends. The most important benefit of full employment goes not to the budget or even The Economy, but to those people who find the jobs, or increased hours of work, they’ve long been seeking.

Kennedy reminds us that the greatest benefit goes to those who find it hardest to get jobs. While the nationwide unemployment rate has fallen by 1.6 percentage point since before the pandemic, it has fallen by 3.2 percentage points for youth, and by 2.3 percentage points for those with no post-school education.

This is where we get to Kennedy’s observation that recent experience is altering Treasury’s views on full employment.

The obvious question this experience raises is: why have we been willing to settle for unemployment rates of 5 to 6 per cent for so long when, as he acknowledges, “the low rate of unemployment and high levels of participation [in the labour force] have been sustained without generating significant wage pressures”?

Short answer: because economists have allowed themselves to be bamboozled by modelling results. Specifically, by their calculations of the “non-accelerating-inflation rate of unemployment” – the NAIRU.

As Kennedy says, the unemployment rate consistent with both full employment and low and stable inflation isn’t something that can be seen and directly measured. So, as with so many other economic concepts, economists run decades of inflation and unemployment data through a mathematical model which estimates a figure.

Economists have redefined full employment to be the 5 or 6 per cent unemployment rate their models of the NAIRU spit out. They think using such modelling results makes decisions about interest rates more rigorous.

But that’s not true if you let using a model tempt you to turn off your brain and stop thinking about whether the many assumptions the model relies on are realistic, and whether more recent changes in the structure of the economy make results based on averaging the past 30 years misleading.

It’s now pretty clear that, at least in recent years, NAIRU models have been setting the rate too high, thus leading the managers of the economy to accept higher unemployment than they should have.

There are at least three things likely to make those modelling results questionable. One is that, as a Reserve Bank official has revealed, the models assume inflation is caused by excessive demand, whereas much of the latest inflation surge has been caused by disruptions to supply.

Professor Jeff Borland, of Melbourne University, points out that the increasing prevalence of under-employment in recent decades makes the models’ focus on unemployment potentially misleading, as does the increasing rate of participation in the labour force.

Third, unduly low unemployment and job shortages are supposed to lead, in the first instance, to wage inflation, not price inflation. But this turns to a great extent on the bargaining power of unionised labour, which many structural factors – globalisation, technological advance, labour market deregulation and the decline in union membership – have weakened.

If the NAIRU models adequately reflect these structural shifts I’d be amazed.

What is clear is that the Reserve Bank’s understanding of contemporary wage-fixing is abysmal. As yet, it has no one on its board with wage-fixing expertise, its extensive consultations with business leaders exclude union leaders, and Reserve Bank governor Dr Philip Lowe says little or nothing about wage-fixing arrangements.

And this is despite Lowe’s unceasing worry about the risk of a price-wage spiral and an upward shift in inflation expectations. So far, there’s little evidence of either.

Some increase in unemployment is inevitable as we use the squeeze on households’ disposable income to slow demand and thus the rate at which prices are rising.

But if the Reserve’s undue anxiety about wages and expectations leads it to hit the brakes so hard we drop into recession, and full employment disappears over the horizon, it will be because we handed our economy over to the institution least likely to worry about making sure everyone who wants to work gets a job.

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Both sides exaggerate significance of wage bargaining changes

Do you realise, in just the six months it’s been in office, the Albanese government has passed 61 bills, covering most of what it promised to do at the May election?

Just last week it passed the National Anti-Corruption Commission Bill and the controversial Secure Jobs, Better Pay bill. According to Anthony Albanese, the latter involved “the biggest workplace reforms since the 1970s” and its passing made last Friday “a huge day for working Australians”.

Sorry, this government’s degree of effort and expedition far exceeds anything achieved by its predecessor and some of its measures are truly memorable, but its industrial relations changes are nothing like that monumental.

For one thing, Albanese has yet to act on his promises to regulate the gig economy, act decisively to reduce wage theft and reduce the use of casuals and labour-hire companies.

But it’s not just Albanese who’s been laying it on too thick. Indeed, the prize for the biggest storm-in-a-teacup of the year must surely go to the Secure Jobs, Better Pay bill. Its passing was certainly “controversial” – the enormous fuss made by the various employer groups made sure of that – but the degree of controversy generated is an unreliable guide to the likely threat – or promise – from the changes made.

Two fearless predictions. First, the changes won’t be nearly as bad as the lobbyists’ scaremongering claimed. But equally, they won’t have nearly as much effect on the jobs and pay of “working Australians” as the government wants us to believe.

The employer groups’ repeated claims that the government’s efforts to increase the scope for “multi-employer bargaining” would lead to widespread strikes and job losses seems intended to bamboozle those not old enough to remember industrial relations when they really were red in tooth and claw.

Strike action peaked in the 1970s, when the number of strikes averaged 2370 a year, with total days of work lost averaging 3.1 million a year, and days lost per 1000 workers averaging 540. As in all the rich countries, strike action has declined markedly since then, with the 2010s seeing only 200 strikes per year, costing 145,000 days lost, or 14 days per 1000 workers.

The notion that Albanese’s modest changes will return us to anything remotely approaching the 1970s is risible.

In those days, when inflation was far higher than it is now, our long-gone system of compulsory arbitration had the perverse effect of encouraging many quite short strikes. These days, old IR hands know that if a strike lasts more than a day or two it’s a sign the union has lost. It will then take years for whatever small pay rise the workers end up getting to make up for the many days’ pay they lost.

Ask yourself this: how are widespread strikes supposed to lead directly to widespread job losses? They don’t. They lead to some workers losing their jobs only because the majority who don’t lose their jobs are getting wage rises so big that employers genuinely can’t afford them. It’s not a reasoned argument, it’s an attempt to frighten the unthinking.

What employers really fear is a move from bargaining at the level of the individual business or enterprise to bargaining at an industry-wide level, which would make it easier for the unions to achieve pay rises in businesses with few union members.

Although industry-wide bargaining remains outlawed by the Fair Work Act, the employer groups have chosen to pretend that the government’s cautious extension of access to multi-enterprise bargaining is pretty much the same thing.

Nonsense. As Adelaide University’s Professor Andrew Stewart explains, the new provision for “single- (or common-) interest” multi-employer bargaining is hedged about with limitations and protections. Unions will not be able to rope in small businesses employing fewer than 20 workers. Larger employers can only be included without their consent if a majority of their workers wants to bargain.

Access to this form of bargaining must be approved by the Fair Work Commission, which will permit employers to participate only if they are sufficiently “comparable” to the other employers. An employer with an existing single-enterprise agreement won’t be able to switch to a multi-employer agreement.

But those employers included in such bargaining will be required to bargain in “good faith” – be genuinely committed to reaching an agreement, and unions will be permitted to strike – provided this is approved by a secret ballot of employees.

A significant change is that, when either single- or multi-enterprise bargaining becomes intractable, the commission will resolve the dispute by arbitration.

The other new provision for “supported bargaining” of multi-employer agreements is aimed at helping low-paid workers in strongly female industries such as childcare and aged care. This is likely to produce some significant pay rises. Why? Because the “support” will come from the third party that will end up covering the cost of the pay rise – the federal government.

Apart from that, the low union membership in most of the relevant enterprises says there’ll be few strikes and few big pay rises.

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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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Summit consensus: everyone wins some, loses some

In the consensus spirit of dear departed Bob Hawke, Anthony Albanese is hoping it will be all sweetness and light at this week’s jobs and skills summit. And, to give them their due, the industrial parties have been doing their best, looking to realise John Howard’s maxim: “the things that unite us are greater than the things that divide us”.

The ACTU has issued a joint statement with the peak small business organisation expressing their agreement to “come together to explore ways to simplify and reduce complexity within the industrial relations system”.

The ACTU has also issued a joint statement with the Business Council – representing the nation’s biggest companies – and the two biggest employer groups. They all agree that federal and state governments should try harder and spend a lot more money fixing the almighty mess they’ve made of what they call “vocational education and training” but is actually what’s left of TAFE.

And the ACTU and the Business Council have issued a joint statement with the peak community welfare organisation, the Australian Council of Social Service, agreeing that the guiding framework of the summit should be “achieving and sustaining full employment”.

The Hawke government’s consensus summit succeeded because it sought a comprehensive, grand bargain in which each side gained something it wanted, while giving up things the others wanted.

Of course, no one knew more about hammering out a deal between warring parties than Hawke. I hope Albanese can rise to the occasion because, underneath all the smiling goodwill, the parties’ objectives in attending the summit seem diametrically opposed.

The main thing the unions want is a return to industry-wide, or at least multi-employer, wage bargaining because, under enterprise-level bargaining, they’ve lacked the industrial muscle to achieve decent pay rises. In contrast, the Business Council is desperate for a surge in migration to fill the present record number of job vacancies. Why? So big business doesn’t have to pay higher wages to attract the workers they need.

The council agrees that enterprise bargaining is broken, but what it means is that its members are finding it too hard to use the bargaining system to get their workers to agree to changes in the work they do in return for a pay rise.

Almost to a person, the nation’s economists are strong supporters of high levels of immigration. But the Economic Society of Australia’s recent survey of 50 top economists suggests their support has become more qualified.

Asked which of the policies likely to be discussed at the summit they considered to be of most benefit to Australians, only about a third picked “migration”, whereas almost two-thirds picked “education and skills”.

Independent economist Saul Eslake said he was “absolutely not an advocate of reducing our immigration intake” but he “didn’t think we should revert to being as reliant on it as a substitute for doing a better job of equipping those who are already here with the skills which will be required to obtain secure employment and decent wages in the years ahead”.

“Australia’s education system – at all levels – is increasingly failing to equip Australians with the skills required for the jobs of both today and the future,” he said. “As a result of the shortcomings in our education and training systems, we have become increasingly reliant on immigration to deliver skilled workers.”

Well, that’s one way to look at it. I think businesses have tolerated governments’ dismantling of higher education because, as part of their mania for lowering labour costs, they’ve found it easier and cheaper to import the already-trained labour they need.

Professor Sue Richardson, of Flinders University, said she thought that “judicious migration is very beneficial to the economic and social life of Australia”.

But we’ve “relied much too heavily on migration as a solution to any labour supply problem”. This “enables employers and our skills-development system to avoid a close examination of why we do not generate the skills that we need, and what needs to be done to ensure that we do”.

It seems the government is working towards increasing our immigration targets to please business and ease labour shortages, but in return for greater business support for technical training. And for higher wage rates for skilled workers on temporary visas, to limit the scope for undercutting the wages of local workers.

But Eslake suspects immigration may not return to pre-pandemic levels, at least not as quickly as widely assumed. I do too.

As for the wage-fixing arrangements, I think that’s what the ACTU will take away from the summit. Something has to be done to reduce the power imbalance between employers and employees, if the economy is to thrive.

It turns out enterprise bargaining suits big business, but not small business. The unions and the small business peak body have already agreed to explore a move to multi-employer bargaining.

With industry bargaining, firms don’t have to worry about agreeing to higher wages than their competitors are paying. You’d think that, in time, the nation’s big businesses would also see this advantage.

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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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Who's in government matters, but pollies have far from total control

According to Scott Morrison’s last-minute appeal, in deciding our vote we should have considered nothing but the economy and stuck with the Coalition, the only team to be trusted with financial matters. But we spurned his advice and put Labor in charge. Now what happens?

Will the economy be better or worse under Anthony Albanese and a new treasurer, Jim Chalmers?

Short answer: whether economic conditions get better or worse in the next three years will be changed only to an extent by a new government. Things will be different, but not hugely so.

That’s for four reasons. First, because, in our more globalised world, much of what happens is beyond the ability of any government to control. Second, because economies are like ocean liners: they take a long time to answer the helm.

Third, because in this small-target election, Labor’s stated policies weren’t greatly different from the Liberals’. And finally, the elected government shares the management of the economy with the independent Reserve Bank, which made its intention to continue raising interest rates crystal clear earlier this month.

In their response to the pandemic, Morrison and his erstwhile treasurer, Josh Frydenberg, stuck pretty closely to Treasury advice about the budget’s role. And I’ll be surprised to see Labor doing much freelancing.

But aren’t the Libs much better at economic management than Labor? That’s the stereotype deeply ingrained in the thinking of many voters – which Morrison was seeking to evoke in his last-minute appeal.

Trouble is, hard evidence to support this pre-judgment is hard to find. In a recent extensive review of the figures by the independent economist Saul Eslake, he could find no strong support for the idea that one side was clearly better than the other.

Why not? For the four reasons I’ve just listed.

So how is Labor likely to do? Not as well as the new government’s supporters hope, but not as badly as its opponents predicted. At this early stage, however, when we’re so fully conscious of the failings of the last lot, we’re entitled to hope for some improvement.

One we can hope for is that the new government won’t be playing favourites and enemies like Morrison did.

Whatever does happen to the economy in the next few years, one thing we can be sure of is that the Libs will claim to have handed over an economy in tip-top condition. Morrison and Frydenberg spent the entire campaign telling us how “strong” the economy is.

It is in some respects, but not in others. It’s certainly true that the jobs market is in better shape than it’s been in decades. At 3.9 per cent, the unemployment rate is at its lowest in 48 years and underemployment is its lowest in 14 years. The proportion of working-age people with jobs has never been higher.

You’d expect this to mean wages are also growing strongly, but not a bit of it. Wages have struggled to keep up with prices for the past decade and, with the recent surge in prices, have fallen well behind.

Part of the reason is that, thanks to weak business investment in better equipment, there’s been little improvement in the productivity of labour. Living standards have hardly improved in since before the Coalition took the reins in 2013.

It’s weak wage growth that does most to explain why the high cost of living seemed the biggest issue in this election. And it’s the cost of living that helps explain why voters turned on the self-proclaimed great economic managers.

Business profits are doing fine, but the Liberals have failed to deliver ordinary working families their fair share of the lolly – and allowed many of their jobs to become less secure. And that’s before you get to the huge budget deficits the government itself foresaw extending further than the eye could see.

There’s one issue it’s reasonable to expect Labor to care more about and do more to fix: making wages grow faster. Can any government do much about wages? Of course. They can start by urging the Fair Work Commission to lift award wages in line with prices. And give their own employees a decent pay rise after years of wages being held back.

A staunch Liberal mate thinks this was a good election for his side to lose. He thinks the world economy’s likely to weaken and this, combined with our problem using higher interest rates to control inflation, might see us fall back into recession.

I’m not so pessimistic.

There may be some rocky times ahead as the world copes with its various problems. But the Reserve Bank knows if it raises interest rates so high they capsize the economy, all fingers will be pointing to it, not to Albanese and Chalmers.

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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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If you care about our future, care about declining home ownership

The most thought-provoking contribution I’ve heard so far in this utterly dumbed-down election campaign is from barrister Gray Connolly, saying the big issue we should be debating is housing and intergenerational wealth.

Connolly was speaking as a self-proclaimed Red Tory, on ABC Radio National’s Religion and Ethics Report. Red Tories, he says, are people on the political Right who have a more traditional view of what we’re trying to achieve. They are true conservatives, trying to conserve the institutions and practices that have given us the way of life we value.

Red Tories believe in communitarianism – much more about “we” than “me”. They highlight the virtues of home and family. They emphasise the boring virtues, like duty, perseverance and loyalty, not just people’s rights.

That so few Australians under 40 have any form of home ownership or wealth of any kind is a ticking timebomb socially, Connolly says. It’s this that could split the country demographically.

“I cannot believe how little work either side of politics has done on the housing issue. It’s an absolute disgrace that the Coalition, on the Right of politics, for whom home ownership is usually something very important, has done so little to promote home ownership among young people.

“You cannot have a stable country where so many people do not have security in their homes, do not have security in their work, don’t feel they’re getting ahead, and do not feel they have a stake in society that causes them to want to preserve it.

“I cannot believe that so many people on the Right of politics do not get this,” he says.

How do the economic policies of recent decades adversely affect traditional conservative values?

“For the better part of 20 years, nothing has been done other than pour fuel on the housing-price fire,” he says. This has continued even to the point of not looking after renters, not looking after people with insecure work.

It has delayed coupling and family formation for most people. “If you don’t have secure work, chances are you’re not going to form a family because chances are you cannot afford a home.”

If you have housing that is so expensive, then you have young people moving away from where their parents are. You have the family bond dissolve, he says.

“If you are a conservative, you want to conserve [that bond].” You want adult children to be able to look after their ageing parents. You want grown-up children to be able to turn to their parents for childcare. This, he says, is the natural order of society.

But because “the market” and government policy mean we don’t “prioritise residential housing for actual residence, but for investment, you have the absolute social disaster where these bonds are being split apart.”

Does it surprise you to hear anyone on the Right accepting that insecure work is a major social problem? Though the Red Tory label is a recent British invention, Connolly traces its origins back to the mid-19th century and Benjamin Disraeli.

Then, then the Conservatives saw the trade union movement as a necessary counterbalance to the “viciousness and brutality of Manchester liberalism,” Connolly says. (Manchester would have been seen as centre of the dark satanic mills.)

Connolly says Red Tories accept the role of the state as protector of the nation, but also of the family and the family structure. They see the state as being useful for achieving bigger projects for the national good.

Phillip Bond, instigator of Britain’s Red Tory revival, says the market has a tendency to devour its host society. Connolly says this is a very dangerous tendency and that’s where the state comes in.

Corporations are creatures of statute, and what statutes make they can unmake and can regulate, he says. So rather than fearing the state is too powerful, “I am much more scared of the state that’s too reluctant to bring corporations to heel”.

A corporation has no special rights in society any more than any other group does. The state is meant to protect the rights that people need to be protected. We should be conserving society and the community and serving the weakest and the hurt, he concludes.

I think there’s much sense in what Connolly says, and not just about the high social price we’ll pay for making too many jobs insecure and homes too hard for too many young people to afford. We’ll damage the Australian way of life.

The economy is all of us. It belongs to all of us, not just a few big corporations. It must be the servant of our society. Governments’ job is to ensure the economy improves our way of life and doesn’t diminish it.

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Job insecurity: close your eyes and you can't see it

Well, that’s a relief. Labor and the unions are claiming we have a problem with increasing casualisation and job insecurity, but The Australian Financial Review has looked up the official figures and discovered that, if anything, the proportion of casual workers has been falling. So, the problem’s a furphy? Sorry, ain’t that simple.

Strictly speaking, the Australian Bureau of Statistics’ labour force survey doesn’t measure “casual” employment, and certainly makes no attempt to measure whether jobs are secure or insecure, precarious or solid as a rock.

What it does do is ask the workers it surveys whether their job entitles them to annual and sick leave. We’re left free to assume that those who say no must be “casuals”, whereas those who say yes must be “permanents”.

It is true that, by this measure, the proportion of all workers who are casuals grew strongly in the decades before 2000, but then was little changed until the onset of the pandemic in 2020.

But it’s also true that the absolute number of casuals continued to rise until the pandemic.

In the two years since February 2020, the number has fallen – by 61,000, or 2.3 per cent – and so have casuals as proportion of total employment.

I very much doubt the pandemic has cured us of insecure employment.

With some people unable to work because they had the virus or were in isolation, and with our borders closed to the usual supply of temporary workers from overseas, employers became acutely short of labour. But I wouldn’t assume that what employers do during a pandemic is what they’ll keep doing when conditions improve.

So whether the labour movement is wrong to say casualisation is increasing is open to debate. And even if the proportion of casuals continues to decline in the years ahead, does that mean insecure employment isn’t worth worrying about?

In any case, casualisation isn’t really what Laborites are on about. It’s job insecurity that’s the issue. And a casual look at the statistics won’t tell you much about that either.

One man who has taken a very careful look is David Peetz, a professor of employment relations at Griffith University. He summarised his findings in two articles for The Conversation.

He started by taking a closer look at what the figures say about the nature of casual jobs. Why do some jobs need to be casual, and why do some employers need casual jobs?

Surely the answer is that employers want flexibility because they need some people to work at varying times for short periods.

But Peetz found that about a third of casuals worked full-time hours. About half had the same working hours from week to week, and were not on standby. More than half could not choose the days on which they worked.

Almost 60 per cent had been with their employer for more than a year. And about 80 per cent expected to be with the same employer in a year’s time.

What this suggests is that many workers classed as casuals don’t need to be casual in the traditional sense. Peetz found that only 27 per cent of casuals worked varying hours and had no minimum guarantee of hours.

This means a huge proportion of the workers classed as casual because they’re not eligible for paid leave could be classed as permanent, but aren’t.

Why not? One possibility is that the employer simply wants to save on the cost of leave. But defenders of the status quo assure us casual workers receive a special 25 per cent loading in lieu of paid leave. What’s more, many casuals prefer the loading to the entitlement, we’re assured.

The statistics bureau no longer asks workers who say they have no leave entitlement whether they receive a loading – or whether it’s as high as 25 per cent. But back when it did ask, less than half of casuals said they got it.

I wonder how many cases of “wage theft” involve the non-payment or under-payment of leave loading. As for people wanting cash now not paid leave in the future, that’s a sign they’re living hand-to-mouth on a wage too low to give them financial security.

Peetz argues the reason so many people working regular full-time jobs are classed as casuals is because employers have the bargaining power to impose insecurity on some of their less-skilled or less senior workers.

Even if the employer isn’t also saving on how much they have to pay the worker, they get the “flexibility” of being able to get rid of workers without notice or redundancy payout. The worker may not even be formally terminated, just not be given any more hours.

Did someone mention job insecurity?

Looking more broadly, Peetz found that the real causes of insecurity aren’t the type of contract workers are on – casual or permanent, full-time or part-time – but rather the way organisations are being structured these days.

“This is designed to minimise costs, transfer risk from corporations to employees, and centralise power away from employees,” he argued.

This motivation helps explain the dramatic increase in franchised businesses. It’s the franchisee that bears responsibility for scandals such as underpaying workers.

Other corporations call in labour-hire companies to take on responsibility for their workers. This cuts costs and transfers risk down the chain – thus making jobs more insecure. Labour-hire workers are usually casual full-time workers, he argues.

Some companies set up spin-offs or subsidiaries. Some just outsource to contracting firms.

“On the other hand, some organisations have found relying on part-time casuals counterproductive, as workers had no commitment and became unreliable. Some large retailers now use ‘permanent’ part-timers rather than casuals,” he wrote.

Between 2009 and 2016, “casual” part-timers grew by just 13 per cent, whereas “permanent” part-timers grew by 36 per cent.

Businesses have used their power to cut their labour costs. Many workers’ jobs have become less secure in the process.

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