Jobs growth goes from extraordinary to ordinary

How’s the job market going? Not nearly as well as the Turnbull government would like us to believe, but not as badly as its critics claim.

According to the money market economists, the figures we got this week from the Australian Bureau of Statistics for the labour force in June were “another strong jobs report”.

Total employment rose during the month by a “stronger than expected” 51,000 jobs. More than 80 per cent of the extra jobs were full-time, and the rate of unemployment fell to 5.4 per cent, its lowest in more than five years.

Impressed? Don’t be. What happened in just the past month tells us little about how the labour market is travelling, particularly as the money market economists insist on using the ropy seasonally adjusted figures because this makes their betting games more exciting.

That the increase was “stronger than expected” sounds nice, but it means nothing to anyone but them and anyone foolish enough to lay money based on their prediction. They make predictions every month, but they’re wrong more often than they’re right.

No, for a sensible view of what’s been happening to jobs we need to look over a run of months and focus on the bureau’s “trend” (smoothed) estimates.

Six weeks ago, when we learnt that real gross domestic product grew by a “stronger than expected” 3.1 per cent (seasonally adjusted) over the year to March, Treasurer Scott Morrison was keen to put this together with the fact that total employment grew by more than 400,000 in 2017 – the strongest growth ever for any calendar year, with more than 1000 jobs created on average every day.

It was proof that Australia had “climbed back to the top of the global leaderboard”. Tough times were over and, under his and Malcolm Turnbull’s masterful plan for Jobs and Growth, everything was on the up and up.

Now, all his claims about our extraordinary jobs performance last year were true. But last year was six months ago. How’ve we been travelling since then?

Ah, not quite so swimmingly. Whereas over the course of 2017 total employment grew, as we’ve seen, by more than 400,000, or 3.3 per cent, over the first six months of 2018 it’s grown by 124,000, which is growth of 1 per cent or, annualised, 2 per cent.

So, after its extraordinary performance last year, this year the job market’s been very ordinary. Indeed, 2 per cent is right on the average annual rate of growth over the past 20 years.

And note this: whereas last year 80 per cent of the extra jobs were full-time, over the past six months less than a third of ’em have been.

I don’t take this as a sign the economy is slowing, however. Rather, it’s an indication that a year-long period in which employment grew far faster than the economy’s unspectacular rate of growth would have led you to expect, has ended and things have returned to normal.

And while we’re cutting the hype back to size, note this. You could have expected that the extraordinary period of jobs growth would have produced a big fall in unemployment. It didn’t. The rate of unemployment fell just from 5.8 per cent to 5.5 per cent, which is good to see, but not outstanding.

Why was the improvement in unemployment relatively modest? Why didn’t the extraordinary growth in jobs cause an extraordinary fall in unemployment?

Because while employment was growing by 3.3 per cent, the number of people in the labour force (that is, those with jobs or actively seeking one) grew by an extraordinary 3 per cent.

Why did the labour force grow so strongly? Partly because the population of working age (everyone 15 and older) grew by a strong 1.7 per cent, but mainly because the rate at which those of working age chose to participate in the labour force (either by holding a job or by seeking one) rose by 0.8 percentage points to a (near record) 65.5 per cent.

Why is participation so high when the experts were expecting the ageing of the population (aka the retirement of the baby-boomer bulge) to bring it down? Mainly because so many baby boomers are continuing to work, even if only part-time. (Stop looking at me like that.)

But while we’re deflating the government’s triumphalism, its critics also need taking down a peg. They like to remind us that the official unemployment rate understates the true extent of worklessness. Specifically, it fails to take account of under-employment  – people with part-time jobs who’d like to work more hours.

All that’s true. But when you correct the unemployment rate (for May) of 5.4 per cent by adding the underemployment rate of 8.5 per cent to give a broader measure of labour “underutilisation” of 13.9 per cent (as, admittedly, the bureau encourages you to do), you’ve gone from understating the problem to overstating it.

Why? Because, by using this “head count” method of measurement, you’re adding apples to oranges. The underemployment rate counts every part-timer who’d like more hours (which is only about a quarter of them), whether they’re after a full-time job or just a few more hours a week.

(Similarly, many people don’t realise that, of the 720,000 people who account for the unemployment rate of 5.4 per cent, about 30 per cent of them are seeking only a part-time job. That is, the official unemployment rate also involves adding apples and oranges.)

Knowing this full well, the bureau also measures labour underutilisation (unemployment plus underemployment) on a consistent, “volume” (or hours-wanted) basis, which it buries deep on its website at catalogue no. 6291.0.55.003, table 23b.

On this other basis, the rate of unemployment falls from 5.4 per cent to 4.2 per cent, and the rate of underemployment from 8.5 per cent to 3.1 per cent, giving an overall rate of underutilisation of not 13.9 per cent, but 7.4 per cent.

This measure of the rate of underemployment hasn’t changed in three years, but the rate of unemployment has fallen slowly, meaning underutilisation has fallen from 7.9 per cent in May 2015. Slow progress.

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Corporate crime is far too common

If we’re to believe what we see in the media, we’re being engulfed by a corporate crime wave. An outbreak of business lawlessness that engages in “wage theft”, mistreatment of franchisees, abuse of workers on temporary visas, and much else.

But should we believe it? Regrettably, my years as a journalist have taught me not to believe everything I read in the paper (this august organ excepted, naturally).

News gathering is a process of what when I was an accountant I would have called “exception reporting”. That’s because people find the exceptions more interesting than the ordinary, everyday occurrences.

When the exceptions pile up, however, the risk is that they’re taken by readers to be representative of the wider reality.

So, in the case of businesses behaving badly, how exceptional are the exceptions? The answer from Rod Sims, chairman of the Australian Competition and Consumer Commission, in a speech he gave last Friday night, is not as exceptional as you’d hope.

To prove his point, Sims offered an extraordinary list of the commission’s enforcement activity, just in the month of April this year.

Ford was ordered to pay $10 million in penalties after it admitted that it had engaged in unconscionable conduct in the way it dealt with complaints about PowerShift transmission cars, sometimes telling customers that shuddering was the result of the customer’s driving style despite knowing the problems with these cars.

Telstra was ordered to pay penalties of $10 million in relation to its third-party billing service known as “premium direct billing” under which it exposed thousands of its own mobile phone customers to unauthorised charges.

Thermomix paid penalties of more than $4.5 million for making false or misleading representations to certain customers through its silence about a safety issue affecting one of its products which the company knew about from a point in time.

Flight Centre was ordered to pay $12.5 million in penalties for attempting to induce three international airlines to enter into price-fixing agreements.

K-Line, a Japanese shipping company, pleaded guilty to criminal cartel conduct concerning the international shipping of cars, trucks and busses to Australia.

Woolworths had proceedings instituted against it alleging that the environmental representations made about some of its Homebrand picnic products were false, misleading and deceptive.

Phew. Surely that was an exceptional month. But Sims has more cases to list.

Earlier this year, the Federal Court found that the food manufacturer Heinz had made misleading claims that its Little Kids Shredz products were beneficial for young children, when they contained about two-thirds sugar.

Who could forget the case of four Nurofen specific pain products? Their packaging claimed that each was specifically formulated to treat a particular type of pain when, in fact, each product contained the same active ingredient and was no more effective at treating that type of pain than any of the others. “The key difference was that the specific pain products were near double the price of the standard Nurofen product,” Sims says.

Hotel giant Meriton was caught taking deliberate steps to prevent guests it suspected would give an unfavourable review from receiving TripAdvisor’s “review express” prompt email, including by inserting additional letters into guests’ email addresses.

The court found this to be a deliberate strategy by Meriton to minimise the number of negative reviews its guests posted on TripAdvisor.

Optus Internet recently admitted to making misleading representations to about 14,000 customers about their transition to the national broadband network, including stating that their services would be disconnected if they didn’t move to the NBN, when under its contracts it could not force disconnection within the timeframe claimed.

Pental has admitted that it made misleading claims about its White King “flushable” cleaning wipes, saying they would disintegrate in the sewerage system when flushed, just like toilet paper, when our wastewater authorities are having big problems because the wipes can cause blockages in their systems.

Shocking. But, you may object, isn’t this just more anecdotes? How representative are they? Sims acknowledges that not all companies behave poorly.

He says that “poor behaviour usually occurs on a spectrum, with few companies behaving badly often, but rather many engaging in occasional significant instances of bad behaviour” – which, he insists, remains unacceptable.

So what can the commission and the government do to reduce the incidence of unacceptable behaviour?

Since businesses commit these excesses in their completely legitimate pursuit of higher profits, the key is to increase the cost to them of bad behaviour.

Many firms invest heavily in their brand reputation, which is a signal that they can be trusted. “The greater the likelihood that bad behaviour will be exposed and made public [see above], the more companies will do to guard against such behaviours.”

In their amoral, dollar-obsessed way, economists assess the attractions of law breaking by weighing the benefit to be gained against the cost of being caught multiplied by the probability of being caught.

Leaving aside the cost of reputational damage (just ask AMP if it knows about that), if you can’t do as much as you should to increase the chance of being caught, you should at least wack up the fines.

Sims says that “the penalties for misconduct, given the likelihood of detection, are comparatively weak”. He believes he’s had some success in persuading the Turnbull government to increase them.

“Just imagine if the penalties I mentioned [see above] were 10 to 20 times higher,” he concludes.

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Digging up a lot more coal won't bring more jobs

One thing I admire about greenies is their soft hearts. Whereas big business pushes its self-interest to the exclusion of all else, environmentalists worry that, in their efforts to save the planet, some workers may lose their jobs.

What worries me, however, is the greenies’ soft heads. Many of them profess to a soul above such sordid (and boring) matters as economics, but the less you know about economics the more easily you’re taken in by developers’ and politicians’ promises of Jobs and Growth.

Greenies know that the “green economy” creates jobs and growth, but worry that their opposition to the building of new thermal coal mines would cost jobs and growth.

So does the miners’ union. Hence the advent of “just transition” – the notion that the transition from fossil fuels to renewables needs to be “just” in that people who lose their jobs in the fossil fuel industries get treated fairly.

Fair enough. Trouble is, if you think the goal is to eliminate the need for workers and regions to change, rather than to help workers adjust to the reshaped economy – you end up doing crazy things like insisting new solar and wind farms are built near the old coal mines, rather than where there’s most sun and wind.

A particular sore point at present is the greenies’ implacable opposition to the establishment of Adani’s Carmichael coal mine in the Galilee Basin of Queensland. What about all the potential jobs and growth that wouldn’t happen?

Well, perhaps it’s not as big a problem as it seems. The thing about the economy that non-economists keep forgetting is that “everything’s connected to everything else”. And as the economists at the Australia Institute remind us in a new paper, when you trace through the linkages you realise that development of the Galilee Basin could be expected to displace a lot of mining jobs – maybe even more than it created.

First point, the Adani mine would be huge. It aims to produce 60 million tonnes of coal a year, making it three times the size of the highest producing mine in NSW.

And if some government subsidises a railway linking Adani’s mine to the nearest port, this would clear the way to building other mines in the Galilee Basin, which could take the basin’s total production to 150 million tonnes a year by 2035.

Australia is already the world’s largest coal exporter. Modelling by commodity analysts Wood Mackenzie, commissioned last year by the world’s largest coal export port, Port of Newcastle, estimates that such increased production would raise the world supply of internationally traded coal by about 15 per cent.

Wood Mackenzie estimates that, assuming the Paris agreement has little effect and world demand for traded thermal coal rises by 10 per cent out to 2035, the excess of supply over demand would cause coal prices to be $3 a tonne lower than otherwise in 2026, rising to $25 lower in 2030.

(Such an assumption about world demand is optimistic for coal producers and pessimistic for the planet. Coal use has been falling in Europe, the US and China, with global coal demand falling by 2 per cent in 2016, for the second year in a row. The International Energy Agency sees the traded thermal coal market as having contracted by 60 per cent in 2040 if countries keep their Paris commitments. If so, coal prices would fall by a lot more than Wood Mackenzie suggests.)

The lower world prices caused by the development of the Galilee Basin would discourage development of new mines – and thus the maintenance of production levels, as existing mines are worked out - in other coal producing regions.

Wood Mackenzie estimates that, by 2035, production in NSW’s Hunter Valley would be 86 million tonnes a year lower than would have been the case had the Galilee development not gone ahead.

For Queensland, this relative reduction would be 17 million tonnes a year for the Bowen Basin and 13 million for the Surat Basin. So, plus 150 million from the Galilee versus minus 116 million from the rest.

The Australia Institute economists’ study seeks to translate these relative reductions in production into relative reductions in employment. Based on Adani’s estimates of labour productivity in its mines, the whole Galilee Basin would employ between 7,800 and 9,800 people to produce 150 million tonnes per year by 2035.

By contrast, their most optimistic estimate is relative reductions of 9100 jobs in the Hunter Valley, 2000 in the Bowen Basin and 1400 in the Surat Basin, a total of 12,500.

How could a net increase in production yield a net decline in jobs? Much greater scope for economies of scale in the Galilee Basin. And that's before you take account of rapid advances in automation, such as driverless trucks controlled remotely from head office in Brisbane.

If we want Jobs and Growth in the future, mining ain’t the place to look.

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How economic reformers and politicians blew out power prices

The privatisation of the electricity industry may not be the worst of the many stuff-ups perpetrated in the name of “micro-economic reform”, but it’s certainly the one that’s cost the greatest number of Australian households and businesses the greatest amount of money.

Like most of the other stuff-ups, this one is explained by the naivety of the nation’s “economic rationalists”. They underestimated the willingness of governments to sabotage the privatisation process and the susceptibility of econocrats to being “captured” by the business interests they were regulating.

They underestimated the industry’s willingness to search out and exploit any weaknesses it found in the regulations. And they overestimated the willingness of consumers to devote their leisure time to penetrating the thicket of electricity retailers’ deliberately confusing pricing plans.

All this naivety arose from their failure to allow for the many oversimplifications of the neoclassical model of markets, which so permeates their thinking. Their plan was perfect on the pages of a textbook, but utterly other-worldly in the real world of politicians and business people on the make.

According to this week’s final report of the Australian Competition and Consumer Commission’s inquiry into retail electricity pricing, over the 10 years to 2017-18, the average price per kilowatt hour paid by residential customers rose by about 56 per cent above the rise in other consumer prices.

(The real increase in average residential customers’ bills was a mere 35 per cent, partly because households economised in their use of electricity, but mainly because 12 per cent of households invested in solar panels.)

The electricity industry divides into three parts: the mainly privatised power stations generating power and feeding into the national electricity market’s grid (the “wholesale” sector), the privatised natural monopoly companies transmitting power over long distances and distributing it through poles and wires in local areas (the “network”), and the mainly privatised companies selling power at the “retail” level.

As the commission’s report makes clear, stuff-ups in all three sectors have contributed to the price blowout.

The wholesale electricity market, via which individual power stations sell their energy to retailers in a real-time auction market, is a completely new, highly sophisticated, government-created market controlled by no less than three government agencies.

For many years it worked well, using the oversupply of generation capacity and the lack of growth in demand to keep the wholesale price low. By now, however, higher wholesale prices account for more than a quarter of the overall retail price increase during the decade.

Competition has been weakened by increased market concentration. Rather than selling each power station to a separate owner, the Queenslanders have just two (still government-owned) businesses running all their stations while, in NSW, two generators were sold to AGL – which, along with Origin and Energy Australia, has been allowed to dominate the national market at both the wholesale and retail levels.

Our big, clapped-out coal-fired power stations are now being closed, but in a way that enhances the oligopolists’ pricing power. Uncertainty over the Coalition’s intentions on reducing carbon emissions, and a separate stuff-up which has hugely increased the costs of gas-fired power stations, have mismanaged the shift from coal to renewable energy sources.

The oligopolists have found ways to game the auction pricing system, which the bureaucratic regulators have been too slow fixing, placing the interests of producers ahead of consumers.

Turning to the network, the micro-economic reformers originally were happy to see this government-owned natural monopoly distribution system privatised, provided prices were tightly regulated.

Except they weren’t. The new private owners fought whatever legal and political battles were needed to get the price regulation loosened, leaving the regulator with little ability to stop them exploiting a loophole which let them pad their profits by spending more on their infrastructure, whether needed or not.

State governments that still owned networks – mainly NSW and Queensland – fattened their profits by imposing excessively high standards of reliability on their networks, thus requiring them to spend big on upgrading.

This was “gold-plating”. When the regulator tried to discount the unnecessary spending, the NSW government took it to court and got the cuts curtailed. Why? Because it was planning to sell its network businesses and wanted to get top dollar at its electricity users’ expense.

The commission estimates that over-investment in NSW and Queensland now costs households in those states an extra $100 to $200 a year. All told, higher network costs across the national market explain 38 per cent of the increase in the average price per kilowatt hour.

At retail level, retail prices used to be regulated by state governments, until the micro-reformers persuaded them this was no longer needed because prices would be restrained by competition between the private companies.

Whoops. In reality, the reverse. The reformers should have known that oligopolists invariably try to avoid competing on price.

The problem was compounded by the way state governments maximised the sale price of their big retail businesses by selling them intact rather than breaking them up. The significant economies of scale this gave the newly purchased incumbents left them well placed to fend off new entrants to the market.

The electricity market’s bureaucratic regulators moved at a snail’s pace to correct this failure, anxious not to impinge on private firms’ freedom to overcharge their customers.

The commission estimates that mishaps at the retail level account for more than a fifth of the rise in average power prices over the decade. About a third of that is explained by spending on the selling costs (marketing, commissions, etc) of persuading people to buy a necessity, with the rest going straight to the bottom line.

That leaves “environmental” costs – hugely excessive incentives for people installing solar systems, the incentives associated with the renewable energy target (the RET) and some state government schemes – accounting for just 15 per cent of the real rise in average power prices, because the cost of these incentives has been shifted to other electricity users.

Little wonder the report concludes the national electricity market needs to be “reset”.

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There's a smarter way to encourage better staff performance

I’ve tried reading a lot of books about management in my time, but the only one that made sense was called The Witch Doctors, by two whip-smart journos on The Economist magazine.

They argued that, for almost a century, management experts hadn’t been able to make up their minds between two polar opposite theories. That’s why there were so many fads in management practice. Managers kept flip-flopping from one extreme to the other.

The first theory was Frederick Taylor’s scientific management, which boiled down to a belief that workers were dumb and lazy. They needed to be closely supervised at all times and motivated to work by being paid piece rates.

The other theory came from Elton Mayo’s Hawthorne experiments, which amounted to a belief that the better you treated your workers the harder they’d work.

It’s the central question in management theory and practice: how do you get your staff to do a good job and keep getting better?

For big organisations – business and government – the latest management super fad, “metrics”, where everything the outfit does is measured and workers are urged on by means of “key performance indicators”, is clearly a flip in the direction of Taylorism.

You’ve seen me fulminating against the folly of KPIs, which are often used as a substitute for management mental effort, and are far too easily – and frequently – fudged.

Only last month it was reported that Victoria Police is investigating suggestions that thousands of random breath tests have been faked, with police complaining of being pressured to conduct unreasonable numbers of breath tests on a shift, along with all their other duties.

Now a University of Sydney study commissioned by the NSW Teachers Federation, based on survey responses from about 18,000 teachers, has found they are drowning under increasing amounts of paperwork. I dare say a few Victorian teachers know the problem.

While it’s the age of computers that’s powering the metrics craze, in practice people with real jobs to do are being required to spend a lot more time – often their own time – on data entry, as part of the demand for them to be more “accountable”.

This is a significant cost along with the assumed benefits of improved information, a cost often underestimated by the metrics enthusiasts because the time it takes is “outsourced” to lesser mortals.

But let’s be positive. If the obsession with KPIs is a folly that will be abandoned soon enough, what better ways are there to encourage staff to do a better job?

After all, there aren’t many outfits whose performance couldn’t be improved, certainly not our schools. The teachers’ unions hate admitting it, but international tests show our student performance is declining, too many students are leaving school ill-prepared for adult life, and the gap between our top and bottom students needs closing.

The move to needs-based funding is just a first step. If the additional funds aren’t directed towards the cost of helping teachers teach better, not much will change.

But if the schools’ version of KPIs – standardised testing via NAPLAN and “accountability and transparency” via the MySchool website – has been a failure, what’s a better way?

The key is that we’ve veered too far towards Taylorism and too far from the Mayo mentality. The metrics approach is too top-down.

Bosses decide what the problems are and how they can be fixed, then impose their solutions on underlings, using KPIs to keep it simple, stupid.

Fortunately, teaching – but not other parts of the public sector – has avoided business’s error of trying to motivate people with pay-for-performance. “Extrinsic” motivation – doing things for the money – is a poor substitute for “intrinsic” motivation: doing things well because it gives you a greater sense of achievement. Because it’s satisfying to know you’re giving customers a good deal.

The growing administrative burden being unthinkingly imposed on professional staff is symptomatic of the top-down mentality. “We need this information for our use; whether you know why we need it and what we use it for is of little consequence – as is the time it takes you to comply.”

Smart bosses keep administrative demands to a minimum, make sure people know why particular information is needed and share it with the data providers so they can use it to improve their own performance. They should even be consulted about which performance information would be most useful.

A chalkie complains that “we are not being trusted as teachers to make judgments”. True. The key to improving the performance of organisations is for bosses (and politicians) to stop thinking they know better than the professionals and telling them how to do their jobs, but to respect, enhance and exploit the professionalism of their people.

It’s about asking people at the coalface what needs to be done to improve performance and what extra help they need to do so, including information about that performance. More consultation and a two-way flow of information.

But professionalism is itself two-sided. With greater freedom in decision-making goes greater acceptance of individual responsibility for improved performance and when something goes wrong.

And greater consultation with teachers at the coalface doesn’t equal putting union leaders on departmental committees making decisions about “protocols for data collection” or anything else.

Professionalism is supposed to mean putting your client’s interests – the interests of students, in this case - ahead of your own. It doesn’t sit easily with militant unionism.

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