Economists' changing view of the labour market

The newly invigorated Australian Council of Trade Unions is demanding a $45 a week increase in the federal minimum wage, a rise of 6.7 per cent, which has shocked and appalled the employer groups and the Turnbull government.

If I was on the minimum wage, however, I wouldn't start spending the increase yet. It's all a bit ritualistic, with the unions demanding far more than they expect to get, while the employers cry poor and predict huge job losses should anything more than the tiniest increase be imposed on them by the Fair Work Commission.

Not that many years ago, most economists would have shared the employers' doubts about the wisdom of even a modest increase in the minimum wage.

Indeed, conventional economic analysis – using the "neo-classical" model of markets – told them that government intervention in the labour market to set a "binding" minimum wage – that is, one higher than would be set by the unfettered interaction of supply and demand – might benefit those workers who managed to retain their jobs, but must inevitably mean many unskilled workers would be prevented from getting jobs.

Just how many people were unemployed as a consequence of holding the minimum wage above its "market-clearing" level would be determined by the "elasticity" – the degree of sensitivity to price changes – of employers' demand for unskilled labour.

There are probably plenty of economists who still believe all that, particularly those who don't make a study of the economics of the labour market and rely on elementary analysis of any and every market.

After all, such analysis is completely logical, given the assumptions on which the simple model rests.

Trouble is, it's long been obvious to those who cared to look that the conventional model isn't much good at predicting what will happen to employment and unemployment.

For instance, those economists who use the neo-classical model – as opposed to a Keynesian approach – to explain the behaviour of the macro-economy are obliged to argue that the jump in unemployment during recessions is voluntary rather than involuntary.

It's just a lot of workers choosing that moment to take an unpaid holiday.

But the big challenge to economists' conventional wisdom that minimum wages cause unemployment came in 1995, when two American economists, David Card and Alan Krueger, published empirical evidence showing that a 19 per cent rise in New Jersey's minimum wage actually saw a small rise in employment.

Many studies since then have come up with similar findings.

This suggests the conventional model of markets doesn't offer a useful description of how the labour market works. Either the model's many assumptions don't hold, or there are key factors affecting labour markets that the model doesn't capture.

This is no radical idea. A father of neo-classical economics, Alfred Marshall, argued as long ago as 1920 that the market for labour differed from two other "factor markets" – markets for the factors of production - land and capital.

Why? Because, according to Marshall, workers retain ownership of their human capital (skills) – they're free agents – and because workers must be present in the workplace for the delivery of their skills.

The first characteristic means that anything workers learn on the job, or are trained to do, remains their property, not their employer's, thus giving them some control over the use of those skills.

The second characteristic – that every unit of labour an employer purchases comes with a human being attached – means workers can't live very far from the workplace.

Since moving homes involves cost and inconvenience – especially if the worker has a family – this may give employers some ability to exploit their workers.

Remember this and the notion that a model for the buying and selling of land, or machines, or for the borrowing and lending of dollars, would work just as well in explaining the buying and selling of labour, is fanciful.

So what other, better models of the labour market are there? Labour economists are working on many. A favourite of Professor Alison Booth, of the Research School of Economics at the Australian National University, is the "oligopsony" model.

Huh? Monopoly means there's just one seller of a product. Monopsony means one buyer of a product or, in this case, input. Oligopsony means just a few buyers – by no means uncommon in a modern economy where a few big companies dominate many product markets.

The oligopsony model assumes that even if workers have identical skills and abilities, they have differing preferences on which employer they want to work for, influenced by such things as how far the firm is from where they live, the hours they want to work, or whether they like the boss and their fellow workers.

It takes time and effort (that is, cost) for workers to find alternative employers they like at least as much as their present one and, similarly, it's expensive for employers to find a worker they like as much as the one they could lose.

This makes many workers reluctant to change jobs and many bosses reluctant to change workers. And because these preferences are private information – the other side can't be sure how strong they are – there's scope for "economic rents": for workers to be paid less, or more, than the value of their work. Less is more likely (except for me).

Booth says the attraction of the oligopsony model is its ability to show how a minimum wage can actually increase employment, as well as why employers provide general training to workers who could leave and take the training with them.

Trouble is, these alternative models of the labour market may be more realistic, but they're also more complicated and harder to reduce to a set of equations.

Keynes once said it was better to be roughly right than precisely wrong. A lot of economists disagree.

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Why the growth in wages is so slow

Economists may not be much chop at forecasting how fast the economy will grow in the next year or two, but that doesn't mean they haven't learnt a few things about how economies work that the rest of us could benefit from knowing.

It helps us get a better handle on the future if we remember the macro-economists' rule that economies move in cycles, not straight lines.

So something that's been going down will, one of these days, start going back up, and vice versa.

A related rule is that, at any point in time, what's been happening in the economy will be partly the result of "cyclical" (and thus temporary) factors, and partly the result of "structural" (longer-term, lasting) factors.

At any particular time, the bigger, easier-to-see factor is likely to be cyclical influences; the smaller, harder-to-see factor is the underlying, longer-term structural (or "secular") trend.

Let's use this understanding to look at the present weak rate of growth in wages.

As measured by the Bureau of Statistics' wage price index, wages have usually grown by between 3 and 4 per cent a year in nominal terms, though they got up to 4.3 per cent just before the global financial crisis.

Since their subsequent peak of 3.7 per cent over the year to September 2012, however, their rate of growth has slowed continuously to a pathetic 1.9 per cent over the year to December.

Some people have leapt to the conclusion that employers have finally got the upper hand over workers, so that wage slaves will never get another decent pay rise again and, indeed, will probably see their rises get even more microscopic.

Sorry, it ain't that simple.

The question of what's causing wage growth to be so low is examined in an article by James Bishop and Natasha Cassidy in the latest Reserve Bank Bulletin.

Not surprisingly, they account for much of the weakness as caused by cyclical factors – by the relatively weak state of the labour market.

Note that the fall in the rate of wage growth began after the prices we receive for our exports of coal and iron ore stopped shooting up and started falling rapidly.

When our "terms of trade" – export prices relative to import prices – were improving, the nation's real income was rising strongly (because we could now buy more imports with the same quantity of exports) and it wasn't surprising to see our wages growing strongly, more strongly than consumer prices were growing.

But when our terms of trade began deteriorating, it was equally unsurprising to see wages start growing more slowly, especially relative to consumer prices.

Roughly a year after minerals export prices started falling, the amount of mining construction activity began falling sharply as projects were completed and no new ones were begun.

Thus began a period of weakness in the economy. Mining construction activity contracted and we began the slow transition back to an economy led by the other sectors, which had been held back by the expansion of mining.

Economists expect wage growth to be slower when there's "slack" in the labour market – when unemployment is higher than normal, employers have less trouble finding the workers they need and workers and their unions are less inclined to campaign for big pay rises.

With the actual unemployment rate fairly steady at 5.8 per cent,  but economists having revised their estimate of full employment (known to economists as the non-accelerating-inflation rate of unemployment) down to 4.75 per cent, plus a relatively recent rise in under-employment, there's plenty of reason to expect wage rises to be small.

And, of course, there's less need for big pay rises because consumer price rises have been below the bottom of the Reserve Bank's 2 to 3 per cent inflation target for the past two years.

There's a circular, chicken-and-egg relationship between prices and wages. Wages don't need to rise as much when prices aren't rising much, but prices don't rise much when wages (the biggest cost most businesses face) aren't rising much.

Don't be a victim of what economists call "money illusion". It shouldn't matter to workers how big their wage rises are in nominal terms. What matters is how wages are rising relative to prices – that is, what's happening to real wages.

The good news is that real wage growth has generally been positive in recent years.

The bad news is that real increases have been minuscule, whereas in a normally functioning economy they should grow by a per cent or two most years, as workers get their share of the continuing improvement in the productivity of their labour.

The first point to make is that there are good cyclical reasons for wage growth to be low, meaning that as the economy completes its transition to more normal sources of growth, we can expect a return to more normal rates of consumer price inflation and wage rises.

But here at last is the point: the Reserve's Bishop and Cassidy admit that all the normal cyclical factors we've discussed simply aren't sufficient to fully explain why wage growth is so weak.

That is, there does seem to be some underlying structural change at work. And it's not peculiar to Oz.

"It has been posited in the international literature that low wage growth may reflect a decline in workers' bargaining power," they say.

With all the globalisation of production, all the technological change and digital disruption – plus, in Australia and elsewhere, all the changes to wage-fixing arrangements to shift bargaining power back to employers – that's not hard to believe.

It's a warning to governments that if they want to see their economies return to normal functioning - and workers return to voting for mainstream parties – they should have another think about whether they've got the balance of industrial relations bargaining power right. Doesn't look like it.

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The future of work won't be as bad as we're told

I can't remember when there's been so much speculation about what the future holds for working life. Or when those who imagine they know what the future holds have worked so hard to scare the dickens out of our kids.

Getting on for 100 years ago – 1930, to be precise – the father of macro-economics, John Maynard Keynes, wrote an essay, Economic Possibilities for our Grandchildren, in which he calculated that if technological progress produced real economic growth per person averaging 2 per cent a year for 100 years, by then people would enjoy a comfortable standard of living while needing to work only 15 hours a week.

He was writing during the Great Depression, so I doubt if many people believed him. He was right, however, to predict the Depression would end and growth would resume, powered by continuing advances in technology.

By the 1960s and early '70s it was common for futurologists to predict that more and more labour-saving technology would allow big reductions in the standard 40-hour working week.

What a laugh. Today's futurologists – amateur and professional – are predicting roughly the opposite to what Keynes and the '60s futurologists were.

Thanks to continuing technological advance and the digital disruption it's producing, working life is getting ever tougher and less secure, we're told.

As we learnt last week, all the extra jobs created in Australia over the year to February – a mere net 100,000 – were part-time, with full-time jobs actually falling by 21,000.

So there's the proof we're going to the dogs – and it'll keep getting worse. All those part-time and casual jobs. The growing army of the "under-employed".

We're moving to the "gig economy", where full-time, permanent jobs become the exception and most workers are employed on short-term contracts, many are self-employed like Uber drivers or need a "portfolio" of jobs on different days.

Frightening, eh? I read someone confidently assuring school kids they'd have 10 different jobs – or was it 10 different occupations? – in their working lives. Then I read someone assuring kids they'd have 17 different jobs. Not 16, or 18, but 17.

This growing job insecurity is why there's a renewed push among progressives – including Greens leader Richard Di Natale – for a "universal basic income". It'll be needed because so many people will be earning little or nothing from employment.

Have you detected my scepticism? This is people during a period of weakness in the jobs market predicting – like Keynes's pessimists – it will stay weak forever – and get worse.

That's part of it. The other part is the futurologists who, unlike us mere mortals, can see with perfect clarity what our technological future holds.

If you think economists aren't good at forecasting, futurologists are much worse. Much of what they predict never comes to pass and most of what they correctly predict takes much longer than they expected. Then there's the things they failed to predict.

The only safe prediction is that the future will be different to the present. Any more specific prediction is mere speculation.

The futurologists generally know – or profess to know – a lot more than the rest of us about all the new tricks the latest technology will soon be able to do. What they almost always underestimate is the human factor: whether we'll want it to do those tricks.

If the futurologists had been right, by now most of us would be working from home. We aren't – because it suits neither bosses nor workers.

It's tempting to predict the digital revolution will eliminate many jobs in the services sector, leading to mass unemployment.

Trouble is, employers have been installing labour-saving equipment since the start of the Industrial Revolution, and so far the unemployment rate is hardly up to double figures.

That's because improving the productivity of a nation's labour increases its real income. When that income is spent, jobs are created somewhere in the economy.

Technological advance doesn't destroy jobs, it "displaces" them from one part of the economy to another.

It's possible the digital revolution is so different to all previous technological revolutions that what's been true for 200 years is no longer true. Possible, not probable.

Those predicting our kids will be tossed out of their jobs many times in their working lives forget that market forces involve the interaction of supply and demand.

Their prediction of almost universal job insecurity in the gig economy assumes this will happen because it's what the demanders of labour – employers – want.

This is naive. It assumes all labour is unskilled – so employers don't care who does it and never have trouble recruiting and training a constantly changing workforce – and that there's no such thing as "firm-specific knowledge".

No employer would treat skilled labour in such a cavalier fashion. Employers know the suppliers of labour – employees – wouldn't want to work for such an appalling outfit.

And such an apocalyptic prediction fails to allow for what economists call the "policy reaction function" – if things get too bad for too many workers, governments will step in and legally require employers to treat their staff fairly – just as they already impose paid public holidays, annual leave, minimum wages, penalty payments and much else on unwilling employers.

Why do they do it? Because, in a democracy, workers have far more votes than bosses.

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Cut in penalty rates another win for 'bizonomics'

When we look at all the crazy behaviour in the United States, we comfort ourselves that it couldn't happen here. Well, last week we took another step in that direction.

Why do blue-collar workers get so alienated and fed up they vote for someone as mad as Donald Trump? It couldn't be because, while America has waxed fat over the past 30 years, their pay has been stagnant in real terms.

How have the top few per cent of US households captured most of the economic growth for three decades?

Three main reasons, which apply in varying degrees to us.

First, because globalisation and "skill-biased" technological change have produced a small number of winners and a large number of losers.

Second, because far from using the tax-and-transfers system to require the winners to compensate the losers, we've gone the other way, making the income-tax scale less progressive and tightening up on payment of benefits to people of working age.

Third, because although the economy has changed in ways that weaken organised labour, we've doubled down, weakening legislative arrangements designed to reduce the imbalance in bargaining power between bosses and workers.

The unions have been weakened by the greater ease with which employers can move their operations overseas and by the technology-driven shift from goods to services.

The legislative attack has focused on removing union privileges, weakening workers' rights and weakening workers' bargaining power by discouraging collective bargaining and favouring individual contracts.

In the US there's been a failure to raise minimum wage rates. Here, there's been a decades-long campaign to eliminate penalty rates for people working "unsociable" hours which, supposedly, are anachronistic.

The mentality that produced these developments is "bizonomics" – something that sounds like economics because it repeats buzzwords such as "growth" and "jobs", but isn't.

In Australia, micro-economic reform has degenerated into a form of rent-seeking that's saying the way to a prosperous economy is to keep business – the people who create the jobs – as happy as possible.

This bizonomics isn't new, of course, as attested by its slogan: What's good for General Motors is good for America.

As it relates to the labour market, the proposition is that the way to make things better for everyone is to make life tougher for the workers.

Pay them less, give them less job security in the name of greater "flexibility", acquiesce to business's ambition of making working life a 24-hour, seven-days-a-week affair, and we'll all be better off.

The flaws in that argument – and the price to be paid for playing this game for decades – are now more apparent.

For a start, the number of workers and their dependents far outnumbers the bosses and owners and their dependents. So if all you end up doing is transferring income from the workers to the bosses, far more people lose than gain.

Of course, that's never what we're promised. The promise is always that the loss to existing workers is justified by the gain to all the would-be workers who'll now get a job.

Trouble is, too often you end up with a lot of workers making a sacrifice with only a handful of would-be workers finding jobs.

The Fair Work Commission's decision to cut Sunday and public holiday penalty rates for workers in hospitality and retail is an experiment in trickle-down economics, based on faith rather than evidence.

That makes it like everything else on big business's "reform" agenda: the immediate benefits come directly to business – in the form of cheaper labour – but, not to worry, those benefits will trickle down to the rest of us, so in the end it will all be much better for everyone.

Do you wonder why the punters don't believe it and conclude simply that "the government" has cut wage rates to benefit its big business mates, thus adding to their disillusionment and willingness to vote for populist fringe parties?

As I've explained before, the claim that lower penalty rates in retailing will lead to growth and jobs is – like the argument for protection – based on a fallacy of composition and the absence of "economy-wide" thinking.

The most likely effect is that total consumer spending remains little changed, but more of it's done on Sundays and goes on recreation and retail.

Plus an apartheid weekend, where the high-paid still get it, but the poor have to work.

A fearless prediction: now business has got some of the "reform" it's seeking, no one will ever bother to come back in a few years' time and do a proper study to check whether all the promises we were given came to pass.

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If the economy’s acting dumb, don’t blame the econocrats

Has it occurred to you that, with the Reserve Bank now run by Dr Philip Lowe and his deputy Dr Guy Debelle, Glenn Stevens may have been the last governor we'll see without a PhD?

All Stevens and his predecessor, Ian Macfarlane, could manage was a master's degree.

Of course, nothing is certain. After Dr Ken Henry was succeeded as Treasury secretary by Dr Martin Parkinson, I convinced myself the era of PhD-only secretaries had arrived at Treasury.

Wrong. It didn't occur to me that Tony Abbott would intervene, sacking Parkinson and replacing him with John Fraser (honours degree), a throwback to Treasury's (John) Stone Age.

My point is to remind you that the nation's top econocrats get ever-better educated. And take my word for it – they're not just highly qualified, they're whip smart.

When you spend as much time talking to them as I do – mainly before they make it to their top slots – you have to keep reminding yourself how exceptionally bright they are to stop you underrating your own brainpower.

They're the kind of people who – while you were at uni chasing the opposite sex, playing at politics or just goofing off – were swatting flat out, preparing for every lecture and starting early on every essay. You skimmed the texts; they read every word.

While chatting about other people's academic qualifications I suppose I should disclose my own: scraped through a bachelor of commerce, pass level.

Had to repeat several subjects, and the last pass I got, for international economics, was conceded. I couldn't see the point of economics until long after I left uni.

If by now I do know a bit about the topic, it's thanks mainly to long telephone tutorials from the aforementioned and their predecessors.

As citizens we should find it reassuring that our politicians are being advised by such smart people.

For the most part they're more intelligent (and better qualified) than their political masters – and than the politically ambitious young punks in the minister's office who stand between them and the boss.

We'd be better governed if more of the people in ministers' offices came from the department, if there was a less adversarial relationship between the office and the department, and if ministers and their private advisers were more conscious of their need for policy advice from the more expert.

After Scott Morrison's major speech about "the taxed and the taxed-not" I stopped myself saying it was clear Treasury hadn't written it because of all the bad grammar in it.

The broader point is that, although the nation may not be doing as well as we should be in increasing the human capital of the workforce, there's no doubt our workforce is getting better qualified.

Over just the 10 years to 2015, the proportion of our population aged 20 to 64 with a bachelor degree or above rose by 7.5 percentage points to 29.3 per cent.

This would include a lot of our brighter young people getting double degrees – the benefits of which I'm yet to be persuaded of. (Whether too many of our workers have actually become overqualified is a worry for another day.)

So rest assured, the economic bureaucracy is at least keeping up with the trend to better qualified workers, and probably exceeding it. Of course, people with doctorates are popping up throughout the workforce, not just the bureaucracy.

Most of the Reserve's PhDs are home grown. As you may remember from Peter Martin's fascinating biography of its new leadership, Lowe joined straight from school, meaning the Reserve funded his education all the way from undergrad university medal to doctorate from MIT in Cambridge, Massachusetts.

Since the Reserve earns a fortune each year by printing bank notes for less than 10¢ a pop and selling them to the banks at face value (only most of which it eventually passes on to the government), it's well able to afford to ensure its troops are well educated.

It's harder for Treasury, whose bright young things compete against the rest of the public service for a limited number of scholarships (one of which was endowed by the will of a former Treasury secretary).

You could be forgiven for wondering whether having our top econocrats so well-qualified academically is such a wonderful idea. Fortunately, there's a big difference between an econocrat with a PhD and a university lecturer with one.

Too many trainee academic economists are just learning to do mathematical tricks that will impress their peers. A post-grad from the bureaucracy knows they're learning how to prescribe better economic policy.

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Economy steams on for another quarter

Just about everyone who doesn't look at the numbers - which is most people - is convinced the economy is "slowing", suggesting disaster may be just around the corner.

How do they know it's slowing? Because almost all the economic news is bad. They don't notice that most of the bad news comes from somewhere else - Britain, Europe, Japan, China, even the US.

And people who warn that the economy is slowing always sound wiser and more knowing than people who say it seems to be going OK and will probably stay OK.

Of course, if you do look at the figures you find little sign the economy is slowing. Indeed, the national accounts we got from the Bureau of Statistics this week show that real gross domestic product grew by 3.3 per cent over the year to June.

Three months earlier, the figures tell us, real GDP grew by 3 per cent over the year to March. Before that we had growth of 2.8 per cent over the year to December and 2.6 per cent over the year to September 2015.

During all that time we've had people confidently telling us the economy is "slowing". What's more, within a week they'll have forgotten this week's good news from the national accounts - as they did all the other times - and be back telling us the economy is "slowing".

The good thing about the national accounts is you can always find something that's not looking too hot - provided you ignore all the things that are going OK.

This time you can say that, since the economy grew by 1 per cent in the March quarter, but by only 0.5 per cent in the June quarter, it must be "slowing".

But you have to be an amateur to believe the accounts can be taken so literally.

They're too subject to lumpiness (big transactions, such as the purchase of jumbo jets, which happen irregularly rather than smoothly from quarter to quarter), to error (such as a big transaction getting into the wrong quarter) and to frequent revision (there's a lot more statistical guesswork in the first estimate of growth during a quarter than people imagine, mainly because a lot of the figures needed are collected only yearly) for them to be treated as God's truth.

You could also say that growth in consumer spending of just 0.4 per cent in the quarter was surprisingly weak but, again, we shouldn't be too literal. Growth of 2.9 per cent over the year is pretty healthy.

Actually, if you're looking for something that really is "slowing" you'll find it not in the national accounts, but in the monthly job figures. They show that employment hasn't grown as strongly this year as it did in the last half of last year, meaning the rate of unemployment seems to have stopped falling and plateaued at 5.7 per cent.

This tells us there's been some instability in the normally fairly stable relationship between growth in the economy and growth in employment.

It would be more worrying if growth in the driver of that relationship - the economy - weren't holding up so well, and possibly increasing. This being so, employment should start behaving more normally in time.

The real growth in GDP over the year to June of 3.3 per cent was generated by, in descending order of contribution, growth in: the volume of exports of 9.6 per cent (with extra help from a 0.5 per cent fall in the volume of imports), consumer spending of 2.9 per cent, public consumption spending of 4.4 per cent, public infrastructure spending of 13.9 per cent, and home building of 8.3 per cent.

All of which was reduced by a negative contribution to growth of 2.2 percentage points from the 13.8 per cent fall in business investment spending, as the continuing fall in mining construction activity swamped still fairly flat growth in non-mining business investment.

If those figures make you think the public sector - federal, state and local - has been spending like crazy, don't be misled. Public sector spending is lumpy, and June quarter spending was overstated (and business investment spending correspondingly understated) by state governments buying prisons and other facilities previously built by the private sector.

Here's some indisputably good news: the productivity of labour in the market sector improved by 1.5 per cent during the quarter and by 2.9 per cent over the year.

There's an old rule that one quarter's figure doesn't equal the start of a new trend. Remembering this, there are some encouraging figures in the accounts we can hope will turn out to be improving trends.

The most significant is that, after deteriorating for nine quarters in a row, our terms of trade - export prices relative to import prices - improved by 2.3 per cent in the quarter.

This means stronger growth in real gross domestic income (real GDP adjusted for the terms of trade) of 1.9 per cent over the year. That is, the international purchasing power of the goods and services we produce wasn't cut back this quarter the way it has been.

When export prices fall far enough, nominal GDP grows more slowly than real GDP. This is a problem for the Treasurer because the taxes we pay are levied on our nominal income and spending.

But the improvement in the terms of trade helped nominal GDP to rise by 1.3 per cent in the quarter and 3.4 per cent over the year. This is the strongest result in more than two years.

The final good news is proof the economy is now well advanced in making the much ballyhooed transition from mining- to non-mining-led growth.

Over the year to June, the mining sector contributed about a quarter of the overall growth of 3.3 per cent, whereas the (much larger) non-mining sector contributed about three-quarters.

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Why wage growth is so weak

Are we waiting with ever-growing impatience for the economy to get back to normal, or has the economy shifted to a "new normal"?

I think that's the central question in macro-economics today – not just in Oz but throughout the developed world.

To put that question in econospeak, are the changes we see before us "cyclical" – just part of the normal ups and downs of the business cycle – or are they "structural", a lasting change in the way the economy works.

Trouble is, neither I nor anyone else can say with confidence what the answer is.

But further evidence that things in our economy are looking far from normal came this week with the news that wage growth over the year to March – as measured by the  Bureau of Statistics' wage price index – decelerated to 2.1 per cent, the slowest since this series began in 1997.

Why is wage growth so weak? Because the rise in consumer prices is so weak. Why are prices growing so slowly? Because the rise in wages is so weak.

Yes, there is a circular, chicken-and-egg relationship between wages and prices. When prices rise, workers need a pay rise of at least that much just to preserve the purchasing power of their wages.

But when they have to pay higher wages, firms pass their higher costs on to customers. That's why – in normal times, at least – we always have some degree of inflation.

So don't bother wishing prices were rising faster so wage growth would be higher – that wouldn't get you anywhere.

No, what matters to wage-earners is the difference between the rise in their wages and the rise in consumer prices – that is, the change in their "real" wages. In normal times, wages should be rising comfortably faster than consumer prices.

Why? Because increased business investment in more and better machines increases the productivity of workers' labour (output per hour of labour input), and competition for the services of workers should ensure they receive a share of the improved value of their labour.

Here the news is better, though not great. Although wage growth over the year to March slowed to 2.1 per cent, the rise in consumer prices over the same period slowed to 1.3 per cent, implying real wages grew by about 0.8 per cent.

This is better than for most of the past two years, but the "normal" rate of productivity improvement should be nearer 1.5 per cent a year, even 2 per cent.

So what's going on with wages? This is what Professor Jeff Borland, of the University of Melbourne, tried to discover in a recent paper. He used a different measure of wage growth – average weekly earnings for adult male full-time employees – because the series goes back much further to the early 1980s (when the stats were more sexist than they are today).

He found that the rate of growth in "nominal" wages – that is, before adjusting for the effect of price inflation – is lower than at any time in the past 30 years.

Real wage growth – after allowing for inflation – is also low, but real wage growth has been negative in several periods over the past 30 years.

Borland tests to see how much of the weaker growth in nominal wages over the two years to the end of 2015 can be explained by lower growth in consumer prices and labour productivity, which he does by comparing them with the figures for the five years to 2013.

He finds that weaker prices and productivity growth explain about 70 per cent of the weaker wages growth but, obviously, that leaves 30 per cent of it unexplained.

Next among the usual suspects is weaker growth in employers' demand for labour. It's well established that the strength of wages growth varies to some extent with the business cycle.

Wages should grow faster when demand for goods and services is strong and firms need to attract more workers, but grow more slowly when demand is weak. Indeed, it's common for employers to skip wage rises during recessions, when workers are more worried about hanging on to their jobs.

Economists use the "Phillips curve" (named after the Kiwi economist Bill Phillips) to study the relationship between wage inflation and the demand for labour, using the rate of unemployment as an inverted "proxy" (stand-in) for labour demand. Borland uses a broad definition of unemployment by adding to the official rate the rate of under-employment.

He finds, as expected, that wage growth is lower when unemployment is higher. But he also finds that a structural shift in the relationship between wage growth and broad unemployment occurred in the mid-1990s.

His figuring suggests that any level of demand for labour is now associated with a lower rate of wage growth than it used to be, and that an increase in labour demand now leads to a smaller increase in wages.

He lists various potential explanations for this structural shift, of which I think the most plausible is our move in the early 1990s from centralised wage-fixing to enterprise bargaining.

But a change so long ago can't explain why wage growth has been abnormally low in just the past two years or so – more than can be accounted for by lower inflation and productivity improvement.

Borland's best explanation for this is the weak growth in "output prices" – the prices charged to customers by employers, including the prices of exports. Slower growth in output prices will have constrained employers' capacity to pay higher wages.

So maybe wage growth will return to the post-1990s norm once coal and iron ore prices have stopped falling.

But my suspicion is that other global developments – including digitisation and the greater ability to move businesses to cheap-labour countries – has permanently weakened workers' bargaining power.

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How signalling helps make the economy work

Why do so many people go on to university after finishing school? Why do some uni graduates get a job, but then go back to uni for further qualifications?

Why do sensible people dress up for a job interview – or wear a suit and tie if they're in court charged with an offence?

For that matter, why do people engage in conspicuous consumption – buy flash clothes or cars or houses, or send their kids to flash private schools?

Why do so many businesses put so much money and effort into protecting and projecting their brands?

Short answer to all those questions: because they're trying to signal something. What? Usually, their superior quality – although in the case of conspicuous consumption they're signalling their superior social status.

Signalling is something you don't read about in economics 101 textbooks, even though it occurs in all real-world markets.

That's because the simple neo-classical model makes the unrealistic assumption of "perfect knowledge" – buyers and sellers know all they need to know about all goods and services – not just the range of prices on offer but also the characteristics of the goods offered by various sellers, including their quality.

For many years, progress in economic theory has involved relaxing the various assumptions of "perfect competition" to see what we can learn from more realistic assumptions – which, by the very nature of theory and models, will still be a fairly simplified version of reality. (If a model was as complex as the real world, it would tell us nothing about what causes what in that world.)

Since the early 1970s, economic theorists have been studying "imperfect knowledge" (which in econospeak means "far from perfect", not "almost perfect"), recognising that there's much relevant information people don't know and that information is often costly to collect (in money or time).

As well, information is often "asymmetric", in that the people selling something, usually being professionals, know a lot more about it than buyers, usually amateurs, do.

In 2001 three American academic economists – Michael Spence, George Akerlof and Joseph Stiglitz – shared the Nobel prize in economics for their seminal contributions to the relatively new field of "information economics".

Akerlof (who's married to a certain central bank chairwoman) got his gong for a paper he wrote in 1970 called The Market for Lemons, aka used cars. Spence got the gong for a paper he wrote in 1973 about signalling in the job market.

So let's start again: why do people delay their income earning to get educational qualifications?

If you say it's because they want to gain knowledge and expertise in some field to make their labour more valuable – to increase their "human capital" – and help them get a better-paid job, you're not wrong and Spence wouldn't disagree with you.

But he focuses on a different, less obvious motivation. Employers are looking for intelligent workers and are willing to pay more for their services. But when you're hiring workers, it's hard to know how smart they really are. As economists say, it's an "unobservable characteristic".

So how do workers who know they're smart demonstrate that to potential employers? By using their educational qualifications to signal the fact. Employers are impressed by qualifications because they know they're not easy to obtain – they're costly, in a sense.

Of course, people who aren't so smart can gain qualifications if they try hard enough. But genuinely smart people don't have to try as hard, so they can gain higher, better qualifications than the less-smart can, and employers know this.

You're in line for a Nobel prize when you open up a new field and then other, more junior academics come along behind you to elaborate and expand on your discovery, eventually making it look pretty primitive.

By now thousands of academic papers have been written about signalling in various markets. It's become part of the study of "industrial organisation" (industry economics, as we used to say) but is also a branch of game theory.

Theorists have looked at cases of people sending signals implying they possess qualities that they don't and cases where signals are distorted by "noise" (say, you struck it lucky in the exams). And whereas in simple theory markets only ever have one equilibrium point – where everything is in balance – with signalling there are multiple equilibria.

One signalling theorist is Dr Sander Heinsalu, a bright young Estonian now in the Research School of Economics at the Australian National University.

In a recent paper he develops a "repeated noisy signalling model", quoting examples such as a politician giving speeches intended to make him appear competent, a firm buying positive product reviews, and a male deer growing antlers every mating season.

He finds that, if the cost and the benefit of signalling are constant across periods, the degree of signalling effort falls over time. This fits with the way conspicuous consumption falls with age.

In another paper Heinsalu says the conclusion of most signalling papers is that people for whom gaining more of the valued characteristic would be costly don't exert as much signalling effort as those for whom it is less costly.

But in his own paper he demonstrates that in some circumstances it can be the other way round.

With corruption, politicians face minor temptations and big ones. A pollie who is "too clean" may be avoiding minor misdeeds so he can survive long enough to engage in major graft when the opportunity arises, whereas another planning to avoid graft may not worry about small misdemeanours.

The guilty may deny accusations more strenuously than the innocent do because the innocent know they'll have less trouble proving it later.

As Shakespeare said, "the lady doth protest too much, methinks".

But if you want more proof than a quote from the bard, read the paper on his website. Hope your maths is up to it.

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How the economy helped change marriage

I've never been impressed by those economists who think they can use their little pocket model of the economy to explain every aspect of life. Who want to understand the search for a partner by thinking of marriage as a market. Who think the only motivation – the only emotion – is the desire to make a buck.

On the other hand, if economics is, as one great economist said, the study of the daily business of life, if none of us could exist without the wherewithal to pay for food, clothing, shelter and much else, if most of us have to work to earn that wherewithal, and if most of our time is devoted to producing and consuming, then it's hardly likely that big changes in the economy and education and technology have no effect on such things as marriage.

(While I'm on the topic, I'm never impressed by people who profess to have a soul above such a venal and boring subject as economics. Just threaten to cut their income and see if they're still so uninterested.)

So I thought it worth explaining the theories of two academic economists, Betsey Stevenson and Justin Wolfers. Wolfers is the young Sydney economist, long resident in America, who's most likely to make a name for himself in international economics circles. Already has, really.

Wolfers has taken time off from his job as a professor at the University of Michigan while his partner, Stevenson, is working in Washington as an adviser to President Obama.

Their theory is that economic and social changes have caused the basic rationale for marriage to change from "productive" to "hedonic".

Historically, marriage has been the product of the economic environment of the time. People have used marriage and family to overcome the limitations of the formal economy at the time. Social institutions such as marriage have evolved as economic opportunities have changed and the economy's degree of development has risen.

There was a time – I can remember it – when a number of goods and services, such as freshly cooked meals and childcare, weren't sold in the marketplace. And when keeping house involved long hours of labour.

In such circumstances, it made sense for the family to become the firm producing these household services. It also made sense for the partners to a marriage to increase the efficiency of the "firm" by specialisation.

It was usually the case that husbands, being better educated, were better suited to going out and earning income in the marketplace, while wives had prepared themselves for a life of child-rearing and housekeeping.

Largely unconsciously, young women and men sought out partners they believed would be capable opposite numbers in such a production team.

Then followed, in the lifespan of the Baby Boomers, much technological and social change, all of it with economic implications.

With the invention of a host of "mod cons", housekeeping became a lot less time-consuming and onerous. Cheap imported clothing became available, so people stopped making and repairing their own. More processed foods and takeaways became available.

"While the political emancipation of women is surely a key factor in their movement from the home to the market, deeper economic forces are also at play," Stevenson and Wolfers say.

What came first? The rise of feminism, advances in technology or changes in the economy? Easiest to say they all happened at about the same time and interacted with each other.

Once girls started staying on to the end of school, then going on to uni, things really started to change, in the way partners were selected for marriage and in the things going on in the economy.

With more women wanting to take paid work, the market began supplying things to make that possible: more pre-prepared food, childcare, after-school care, people who mow your lawn, cleaners who can whip through your house in an hour before moving on to the next one.

"While the benefits of one member of a family specialising in the home have fallen, the costs of being such a specialist have risen. Improvements in the technology of birth control have made investing in a wife's human capital a better bet ...

"These greater opportunities also connote a greater opportunity cost for a couple contemplating a stay-at-home spouse," the authors say.

Advances in medicine have yielded rising life expectancy, and the average woman will now spend less than a quarter of her adult life with young children in the household.

By increasing the number of potential years in the labour force, the opportunity cost of women staying out of the labour market to be home with children is higher.

"Rising life expectancy also reduces the centrality of children to married life, as couples now expect to live together for decades after children have left the nest," they say.

With women now better educated than men, we've seen the rise of a human version of "assortative mating": the tendency for people to marry those of the same level of education, even the same occupation.

So what drives modern marriage? "We believe the answer lies in a shift from the family as a forum for shared production, to shared consumption . . .

Modern marriage is about love and companionship. Most things in life are simply better [when] shared with another person.

"We call this new model of sharing our lives 'hedonic marriage'."

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How digital disruption affects jobs and wages

A lot of people worry about the bad economic consequences of the digital revolution. Among the worriers is Dr Andrew Leigh, the shadow assistant treasurer and a former economics professor at the Australian National University.

Leigh made his concern clear in the "distinguished public policy lecture" he delivered this week at Northwestern University in Chicago.

But whereas most people worry that the digital revolution will lead to mass unemployment, Leigh's concern is that it will make our incomes a lot more unequal.

It's not surprising that people observe all the workers whose jobs are taken by computers and worry about widespread joblessness. As Leigh observes, this concern has been around at least since 1811, when disgruntled Nottingham textile workers wrote to factory owners under the pen-name of Ned Ludd, threatening to smash machines if they continued to be used.

But economists soon learnt not to worry. Why not? Speaking to an audience of economists, Leigh regarded it as too obvious to need explaining.

But let me fill you in. New technology leads to increased productivity – more goods and services produced per worker.

This constitutes an increase in the community's real income. When that increased income is spent, more jobs are created.

So whereas non-economists see only all the jobs that have been lost as industries X and Y digitise, economists understand this is just the most visible part of a more complex process in which jobs aren't so much destroyed as "displaced" – taken from some industries and moved to others.

This is why, after 200 years of labour-saving technological advance, we're still only up to having 6 per cent of the labour force unemployed (or about twice that if you add in underemployment).

Of course, this is the economy-wide outcome. The new jobs being created elsewhere in the economy may be very different to the jobs being lost. So this still leaves a problem for those individuals whose skills fitted the old jobs but not the new ones.

This is where Leigh comes in with his concerns about the effects of a newer idea – "skill-biased technological change" – on the unequal distribution of income between workers and, hence, families.

This is the idea that digitally driven technological change tends to disadvantage workers with less skill, and advantage those with more skill. It tends to lower wages for those with less education and raise wages for those with more education.

But the story's a bit trickier than that sounds. Research by David Autor, of the Massachusetts Institute of Technology, suggests jobs can be divided into three categories: manual, routine and abstract.

Abstract jobs – which typically involve problem-solving, creativity and teamwork – tend to be paid a lot more than manual jobs, with routine jobs – occupations such as bookkeeping, administrative support and repetitive manufacturing tasks – in between.

Autor has found that, over the past 30 years in America and the past 20 in Europe, it's routine jobs that have shrunk most. Why? Because they're the jobs that can be done most easily by a computer.

It's turned out that manual jobs – such as cooking, cleaning, being a security guard or providing personal care – are much harder for computers to do. For instance, the problem of shape recognition means that, a best, it takes a robot 90 seconds to fold a towel.

Robot hairdressers do a job similar to what you'd do if you drank a bottle of tequila and tried cut your own hair without a mirror, Leigh says.

He says the job characteristics that are hardest for computers to mimic include those involving communicating clearly with co-workers, showing empathy to clients and adapting to new situations. A lot of manual jobs require these skills.

Many studies – including some Australian ones – show that recent decades have seen a polarising or "hollowing out" of employment. There are a lot more abstract jobs (particularly managers and professionals) and modest growth in the number of manual jobs, but many fewer routine jobs in the middle.

But Leigh says this loss of mid-skill jobs doesn't mean the pain has been greatest for mid-skill workers and middle-income families.

Why not? Because what happens to wages is a product not just of the (declining) demand for mid-skill workers, but also of the supply of workers willing to do low-skilled manual jobs. And as job opportunities have declined for mid-skill workers, more of them have become willing to do manual work rather than be jobless.

So it's been wages at the bottom that have grown most slowly, not wages in the middle. (Because our wage-fixing system is more regulated, this is probably truer in the US than it is in Oz.)

At the top, Leigh says, it's altogether a different tale, with technology actually adding to the skills of the most skilful, making them more productive and so adding to their pay. A top surgeon, for instance, can use technology to do a better job and do more operations per day, thus adding to the demand for his (rarely her) services.

This may partly explain why chief executives' pay is rising, according to Leigh. The biggest firms have got bigger in recent years, and this is partly explained by better technology making it easier to manage larger and more far-flung businesses. As companies get bigger, the boss's pay gets bigger.

This is skill-biased technological change. Technology also helps explain the rise of "winner-takes-all" job markets for such people as actors, pop stars and top sportspeople.

People want to see the very best, much more than the almost-as-good, they'll pay more to do so and technology makes it possible.

At a time when technology is working to make the rich a lot richer and the poor only a little less poor, should we be "reforming" the tax system in ways that add to this income inequality or reduce it?

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Nitty-gritty of unemployment shows small improvement

Why does unemployment increase? For a lot more reasons than you probably imagine.

It's a good question to ask this week when the media informed us that, last month, the number of people in employment fell by 5000, the number unemployed fell by 8000 and the proportion of people participating in the labour force fell from 65 per cent to 64.9 per cent, but the rate of unemployment was unchanged at 6.2 per cent.

I could devote the rest of this column to trying to explain that puzzle. Or I could say that the media and the markets make the jobs figures more puzzling than they need to be by focusing on the version of them that jumps about from month to month for no apparent reason, rather than looking at the smoothed, "trend" figures the Bureau of Statistics calculates for the express purpose of helping us see what's going on.

Those figures show the rate of participation rising by a fraction in September, as employment rose by more than 12,000 and unemployment rose by 4000, which wasn't sufficient to change the rate of unemployment from 6.2 per cent – pretty much where it's been sitting for a year.

So back to the question: why does unemployment increase? You can answer that at the macro-economic level or the strictly mechanical level.

From an economy-wide perspective it's obvious: unemployment increases when the economy turns down. But that's not the full story. Unemployment can increase even when the economy's growing steadily and employment's increasing.

Why? Because the labour force is always growing, thanks to "natural increase" (more young people entering than retired people leaving) and immigration. This means the economy and employment have to be growing at a certain rate just to stop unemployment rising.

With that sorted, let's look at the mechanics. Why does unemployment increase? Because people lose their jobs?

Yes, but that's just the biggest reason. As well as those workers who are sacked or laid off are those leaving their jobs voluntarily, hoping to find a better one.

Then there are former workers re-entering the labour force to look for work and, finally, the new entrants to the job market, including young people leaving school or university.

Set beside that, the oppose question – why does unemployment decrease? – is easier: either because people find a job, or because they give up looking and so get reclassified as NILF – not in the labour force.

I raise all this because, Kieran Davies, chief economist of Barclays Bank, has been delving deep into the official figures to get a better idea of what components have been driving unemployment in recent years.

In very round figures, he found that "job losers" account for about 40 per cent of all the unemployed, with "job leavers", "re-entrants" and "new entrants" accounting for about 20 per cent each. Bet you didn't know that.

Next Davies looked more finely at how each of the four categories has been contributing to the rate of unemployment since its most recent low point of about 5 per cent in 2010-11.

He found that most of the increase in unemployment since then is explained by an increase in job losers, caused by "job shedding" by employers.

Unemployment resulting from job shedding rose from a low of 1.7 per cent of the labour force in 2010 to reach 2.4 per cent in late 2014. This was just under the peak of 2.6 per cent reached during the global financial crisis.

Most of these job losses were in mining, manufacturing, professional services and education, Davies finds.

Since late last year job shedding has eased a little, so the stock of job losers has fallen a fraction to 2.3 per cent of the labour force. A good sign, even if a small one.

The stock of (voluntary) job leavers reached a multi-decade low of 1 per cent just before the global financial crisis, when it was easier to line up a new job before jumping.

It then moved up to 1.4 per cent in 2014, its highest level since 2002. This is a sign of increasing confidence – don't worry, I'll soon find one – though it's recently eased back a little to 1.3 per cent.

Former workers seeking to re-enter the workforce accounted for just 0.9 percentage points of the overall rate of unemployment during the global financial crisis, another multi-decade low.

Clearly, not many married women and others thought it a good time to be actively seeking a job.

But with returning confidence since then the rate has steadily increased to 1.4 per cent, its highest since 2003.

That leaves new entrants to the jobs market. The proportion of these people who'd failed to find work fell to a multi-decade low of 0.9 per cent just before the financial crisis, before rising to just over 1 per cent following the crisis.

The proportion rose to 1.3 per cent in 2013, according to Davies' calculations, a sign that education leavers have borne much of the brunt of the relatively weak economic and employment growth in recent years.

Fortunately, the proportion has since eased to 1.1 per cent, which may suggest education leavers are having less trouble finding a berth, though it may mean we've had fewer overseas people – including students and backpackers – coming to Oz and looking for work.

Putting all this together, it's reasonably good news. We already know – and this week's jobs figures confirm – that unemployment has been steady for a year or more, even though the economy hasn't been growing all that strongly.

Davies' delving tells us the worst contributor to unemployment – businesses shedding jobs – has stopped getting worse and fallen back a little, to have its place taken by more hopeful contributors, former workers re-entering the market.

Davies' prediction is that the unemployment rate will remain steady, though there's a chance it may fall a little.

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Job insecurity isn't as great as you imagine

As everyone knows, the world of work just gets tougher. For a start there's the ever-growing incidence of "precarious employment" – people in casual jobs, or on short-term contracts, or working for labour-hire companies or temping agencies, or being cast adrift by their employer without benefits as supposedly self-employed.

If you do have one of the ever-scarcer full-time, permanent jobs, you're probably working a lot longer hours than you used to. Unpaid, I'll be bound.

These days, no one stays in the same job – even the same occupation – for very long. More and more people are being made redundant. A young person leaving education can expect to have many different jobs before finally they retire at 70.

It won't be long before many people don't so much have a job as a portfolio of jobs – different things they do for different outfits in any week or month, hoping that when they add it all together it amounts to a reasonable living.

All pretty terrible, eh? There's just one problem – it might be what everyone knows, but none of it's true.

Two profs at the University of Melbourne's Melbourne Institute, Roger Wilkins and Mark Wooden, have looked at the figures and they question all we think we know. Their findings were published in the Australian Economic Review.

It is true we have a lot of part-time and casual employment in Australia – more than in most other rich countries – much of it done by mothers with young families and students who aren't wanting a full-time job. And, these days, by people in semi-retirement.

It's also true that the number of part-time and casual jobs grew rapidly for several decades. It's still growing, but much more slowly.

According to the authors' reading of the figures, over the 10 years to 2013 the proportion of men working part-time has increased by 2 percentage points to just under 18 per cent, while the portion of women has been steady at almost 48 per cent.

While most part-timers are also casuals, the two groups don't overlap completely. The Bureau of Statistics defines casual employment as not receiving paid annual leave and sick leave. Its figures show that, for men, the proportion of casuals has been relatively steady since the late 1990s, fluctuating about 20 per cent. Among women the share has fallen from about 31 per cent to less than 27 per cent.

The annual household, income and labour dynamics in Australia – HILDA – survey shows that more than two-thirds of workers were in permanent or ongoing employment in 2012, an increase of 1.5 percentage points since 2001, when the survey began.

HILDA suggests the share of labour-hire and temporary-employment agency jobs has fallen over that time from 3.7 per cent to 2.7 per cent. (It would be much higher than that in particular industries, of course.)

Nor can Wilkins and Wooden find any evidence that there's been a shift away from employment to greater use of self-employment. Indeed, the stats bureau's figures show the proportion of self-employed in the workforce has been steadily declining over the past 20 years, from 14 per cent to 10 per cent in 2013.

Turning to overwork, there was a time when it was increasing (which got a lot of media publicity), but since then it's been declining (which has got little).

Among men working full-time, the proportion working no more than 40 hours a week increased from 52 per cent to 58 per cent over the 10 years to 2013. The proportion working more than 50 hours fell from 31 per cent to 27 per cent.

That's still a lot, of course. But remember that the people you'd most expect to be working long hours are managers and highly skilled professionals, and these have long been the two fastest-growing occupations. Such people rarely get paid overtime. Rather, the long hours they work are reflected in their hefty annual salaries.

Then there's the widespread perception that these days people are always losing their jobs and having to move on. When employers announce mass layoffs it invariably gets much attention from the media. When there's nothing to announce it gets no attention.

The stats bureau's figures for average job duration and rates of job mobility show little sign that jobs have become less stable, the authors say. In February 2013, just 18 per cent of the employed had been in their job for less than a year, down from 22 per cent in 1994.

In the latest figures, just over one worker in four had been in their job for at least 10 years, up from 23.6 per cent in 1994.

Of course, how long people stay in the same jobs is determined by both dismissals and quits. If jobs are becoming less secure you'd expect dismissals to be up and voluntary departures down.

Both of these vary with the ups and downs of the business cycle but, even so, they've tended to decline. In February 2013, fewer than 3 per cent of all the people who'd had a job in the previous 12 months had been retrenched.

The proportion losing their jobs for any reason was 6 per cent. About 10 per cent of people had quit their jobs.

There are a lot of problems in the world, including the world of work, but let's not imagine more than actually exist.

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Jobs matter more than balancing the budget

With the budget due next Tuesday, the media are about to revert to another period of obsession with government spending, taxation, deficits and debt. I'll probably be more obsessed than most. But before the circus starts, let me offer a little pre-match pep talk.

Don't take it all too literally. Try to put it in a wider context. The budget is worthy of the attention the media give it, but not for the reason many people imagine.

The budget matters most because its changes in taxes and spending programs have so much effect on our lives. How would those changes work? Are they sensible? Who benefits from them and who loses? Are they fair or unfair?

But the budget is not the economy. It's just the federal government's incomings and outgoings. The economy, by contrast, covers the federal and state government budgets, plus the whole of business, plus the market activities of Australia's 8.2 million households, making the economy just a bit bigger and more important.

Our problems with the budget don't necessarily mean we have a problem with the economy. And fixing the budget problem would go only a small way towards fixing any problems with the economy.

It's true the budget has an effect on the economy, making it grow faster or slower, but that effect isn't as important as the effect the Reserve Bank has with its manipulation of interest rates.

What's more, though we mustn't let the budget stay in deficit forever, racking up more debt, the debt isn't huge at present and it's best to wait until the economy's returned to an adequate rate of growth before any plans to get the deficit down start having big effects.

Something the sacked former secretary of the Treasury, Dr Martin Parkinson, said last week put the budget deficit into its right context.

"Australia has fantastic opportunities in front of it. The shift of economic weight toward our region, the technological changes. If we grasp it, it's an incredibly exciting time for us," he said.

"How do we go about grasping it? Well, first we've got to get our house in order. That means we've got to get our fiscal [budgetary] situation sorted out. Once you start to do that, you can focus on the real issues."

One of the real issues is jobs. We need the number of jobs to be growing in line with the number of people wanting to work. Everyone knows that, which is why Tony Abbott is already claiming the budget will be about creating more of them.

But the jobs question isn't that simple. We tend to think it's a terrible thing when someone loses their job, and that any politician or businessperson claiming to be able to create jobs must be a good guy.

I've never been sacked or made redundant, but I'm sure it's a terrible experience. However, I also know this: we didn't get to be among the richest countries in the world without a lot of people losing their jobs.

The point is, to stay prosperous we've had to keep changing, responding to the changes occurring in the rest of the world and, even more so, to advances in technology. There's nothing like new technology to destroy jobs in some industries while creating them in others.

That's what's happening with the "disruptive change" being unleashed on us by the digital revolution. The disruption is already well advanced in my industry, but it seems clear it will be just among the first of many industries to be turned upside down.

And though this will be unprecedented in one sense, in another it's nothing new. As a big report on Australian industry reminded us last year, "Australia's short economic history has been a story of constant change".

In the 19th century, agriculture contributed more than 30 per cent of gross domestic product; today it's just 3 per cent. In the 1960s, one in four jobs was in manufacturing; today the ratio is about one in 12.

"Like other developed countries, the majority of Australia's economic activity today occurs in services industries. These industries account for more than two-thirds of GDP and about 10 million jobs," the report says.

Far more change occurs than we realise. Every year, around a million Australian workers change jobs and a quarter of a million businesses enter and exit the market.

Over the decade to 2013-14, total employment grew by 2 million. This involved 52,000 jobs lost in agriculture and 92,000 jobs lost in manufacturing, but 462,000 jobs gained in healthcare alone. Apart from mining, all the other jobs gained were in the services sector. And note this: on the whole, the additional jobs were better paid than those lost.

"Employment growth has been stronger in higher skilled occupations, and for individuals with higher levels of education. As the transition towards a knowledge-based service economy continues, it is reasonable to expect that these trends will continue," the report says.

Government spending on healthcare and education in all its forms will be a big part of all the fuss about the budget. But both areas are far too important to our future for them to be viewed purely in terms of their costs to the budget.

Stuff up education, for instance, and our transition to a knowledge-based economy and continued prosperity will be off the rails.

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