Higher employment our payoff for avoiding recession

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We're still not fully back to normal.

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

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

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

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

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

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

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All the things that aren't causing weak wage growth

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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