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A Matter of ChoiceRestoring Full EmploymentLyndon G. Rowe
I would like to thank The H. R. Nicholls Society for the opportunity to participate. The theme of the conference is a "Matter of Choice", which comes from the words uttered by the Secretary of the Commonwealth Treasury, Ted Evans, in November last year, when he spoke about unemployment being a matter of choice. I have adapted the theme and, as a starting point, have rephrased it to "A Matter of Rational Choices". As I have often said, I am one who is happy to wear the title of a Rational Economist. I am very firmly in agreement with the views of the United States economist Allan Blinder1, who emphasises the need to bring both a hard head and a warm heart to social problems. If we are to deal with Australia's number one social problem, unemployment, then we must start to address it from an understanding of where we are currently. And on the basis of a rational discussion of the economic implications of policy changes. This is not to underplay the social consequences; quite the contrary, it is because of the concerns about the social effects of unemployment that we must look rationally at the economic consequences of policy changes. The alternative, to base policy decisions on what we hope might be the case or on the basis of what we wish to achieve as a desired outcome, or on the basis of feelings rather than facts, has the potential to be counter-productive. There are many examples of this and I will deal with some of them later, but I must admit that in looking at many suggestions to deal with unemployment, I am constantly reminded of Al Capp's description of abstract art which, if I substitute the words 'employment policy' for 'abstract art' seems to be very appropriate. Rephrased it reads:
It is to be hoped that there is not too much of this abstract policy art form in the soon-to-be-released employment white paper. Given my prejudices then, the title I have chosen for my address is : "Restoring Full Employment ¾ A Matter of Rational Economic Choices to Address More Serious Social Concerns". I hope all will appreciate that the emphasis on rational economic choices is a means to an end, not an end in itself. Rational economists must have hard heads but they can and must also have warm hearts. As the first speaker in the first session of this conference, I thought it might be appropriate if I try to put the issue in an overall economic context. I shall start by looking at some recent economic trends, then I will look at some of the issues that arise out of those trends and finally, recognising that the real solution to unemployment lies in economic growth, deal with some of the issues that need to be addressed in order to achieve that economic growth. Finally, I will try to draw some concluding comments. I should add that my address draws very heavily on the Chamber of Commerce and Industry of Western Australia's submission to the Prime Minister's Task Force on Employment Opportunities2. That submission, in turn, draws heavily on the work of the Chamber's Chief Economist, Nicky Cusworth.
Recent Economic Trends
Let me turn firstly to trends in unemployment. The recent recession has generated the worst unemployment in Australia since the 1930s. This unemployment burden has hit some sections of the community much harder than others : the relatively young and relatively old in the labour force, the unskilled and those needing full-time employment who have tended to suffer the greatest unemployment. The underlying trend in Australia's unemployment rate has been on the increase for almost three decades. This is shown in Graph 1 which shows the cyclical unemployment rate against its longer term trend. In the 1960s Australia's unemployment rate fluctuated around the long term norm of under 2 per cent. But since then, underlying unemployment has been on a virtually continuous upward climb. Successive peaks and troughs in unemployment have occurred at ever higher unemployment rates. Australia's tentative economic recovery has at last started to generate some employment growth, which may ease Australia's aggregate unemployment problem a little. But while total unemployment may start to fall, there is a real danger that recovery will leave behind a substantial remnant of long term unemployed and marginally employed people who will remain severely disadvantaged over the course of the economic recovery and form the core of a still greater pool of unemployed when the next recession hits. It is important to understand that Australia's unemployment problem is far more complex than simply an abnormally bad example of a normal business cycle. This concern is emphasised when one looks at Graph 2 (attached) showing the percentage of unemployed people who have been unemployed for a year or more.
Demand, Savings, Investment and Overseas Debt
Let me now turn to the crucial issue of demand and savings. It is sometimes argued that the appropriate response to Australia's unemployment problem is higher Government spending to stimulate higher demand. Whatever the general merits of this Keynesian analysis, it is not relevant to Australia's current circumstances. Lack of demand and especially under-consumption or over-saving are clearly not features of Australia's economy. This is shown in Graph 3 which shows total consumption as a percentage of national income. Public consumption has risen steadily as a percentage of national income since the early 1960s from 13 per cent in 1959-60 to over 23 per cent by 1992-93. In the early 1990s, private consumption, as a percentage of national income, was significantly above its previous peaks in the 1960s and had reached over 75 per cent of national income. Taken in combination, these rising trends in private and public consumption meant that, by 1992-93, 99 per cent of national income was absorbed by consumption. This rising trend in consumption is, of course, the flip side of Australia's falling investment and especially its falling savings. As consumption has risen as a percentage of national income, savings have fallen. As consumption reached 99 per cent of national income, this left just 1 per cent of national income as savings in 1992-93. That is private sector savings of under $20 billion was virtually wiped out by the public deficit (dissaving) of $16 billion leaving net national savings of under $4 billion. Virtually all net new investment was financed by overseas borrowings. As a result of this Australia has run a yearly current account deficit since 1972-73. This has generated a steady accumulation of net foreign liabilities which is now well in excess of 50 per cent of GDP. These issues have been described in the FitzGerald Report3 and need not be further explored here. However, suffice to say that whatever the cause of Australia's high unemployment, it is patently not excessive savings. Rather, lack of domestic savings threatens to undermine Australia's ability to sustain investment. Investment is crucial to sustaining the strong economic growth which is the only way of increasing employment in the medium and longer terms. Further increases in Government or private consumption relative to GDP or national income will squeeze domestic savings available for investment further resulting either in still lower investment or even faster accumulation of foreign debt. Far from easing unemployment, higher Government spending is more likely to make it worse, at least in the medium term.
Slow Earnings Growth
A further manifestation of Australia's economic performance, especially in the labour market, is the stagnation of living standards. I do not accept the arguments of some academics that high unemployment in Australia has been caused by excessive real wage growth, either recently or over the longer term. By international standards, real wage growth in Australia has been low for at least twenty years. The key reason for Australia's historically weak earnings growth is its poor productivity growth. Over the longer term, OECD and other data, point to a consistent picture of Australia under-performing relative to other industrial countries for at least twenty years with Australia falling to the bottom position of all OECD members in terms of productivity growth from 1983 (when the Accord was introduced) to 1991, before it experienced a modest upturn, recently, which is largely cyclical as output was growing very weakly while employment was still falling. This is shown on Graph 4. Over a long time period, the relationship between productivity and earnings growth is clear. Graph 5 shows growth in productivity and growth in real total consumption per employee over the twenty years from 1970 to 1990 for twenty two of the twenty four OECD countries. Two things stand out in the graph. Firstly, there is a very close correlation between the level of productivity growth and real earnings growth within countries. Secondly, and largely as a result, there is also a close correlation between the relative performance of OECD countries on productivity and earnings. Those countries which enjoyed the fastest productivity growth relative to other OECD members also tended to experience the fastest growth in real total consumption per employee, and vice versa. The data suggests strongly that there is a close relationship between the productivity increases a country can achieve and the real wage growth of its employees. This would imply that the underlying cause of Australia's slow real earnings growth, both in recent years and over the longer term, is its poor productivity growth.
Why then has productivity growth been so poor?
There is a common perception that Australia's productivity performance is poor because we don't work as hard as other nations. This is unfortunate in two respects. First, it equates productivity with exertion whether in terms of hours worked or effort but the key to improving productivity is usually not to work harder or longer but to work more effectively. Second, it is not true. Recent research by the Institute for Research into International Competitiveness4 shows that Australian's weekly hours are relatively high by OECD standards and paid leave entitlement is relatively low. Furthermore, Australians are working longer than ever; for example, average hours per---full time male employee are at their highest level since the 1960s. In the past fifteen years the proportion of full timers working over forty five hours a week has risen by over 50 per cent, although standard hours have fallen, and it is not paid overtime, which is at historically low levels. If some sections of the community mistakenly blame employees' idleness for Australia's poor labour productivity record, others are inclined to blame the lack of investment. This is understandable. Economic theory (and a solid body of evidence) suggests that the single key determinant of employees' productivity is the volume and quality of the capital stock they have to work with. Yet by international standards Australia's historical investment record was not bad. From 1970 to 1990 Australia ranked tenth out of the twenty four OECD countries in gross investment as a percentage of GDP. This is shown on Graph 6. If an average level of investment has caused below average productivity growth over the past two decades, then Australia's current investment levels are extremely worrying. This is shown in Graph 7. Investment as a percentage of GDP is at its lowest level in over forty years. If Australia's productivity performance was weak when it invested over 24 per cent of GDP, prospects are even bleaker now that investment is less than 20 per cent of GDP. Neither a lack of effort nor lack of investment seem to provide a fully satisfactory explanation for Australia's poor productivity growth. Rigid industrial relations structures and the award system are almost certainly to blame for much of Australia's poor productivity record but other factors may also be at work. Poor productivity may be linked to wider changes in the workforce. The stagnation of productivity growth may have at least partly been caused by the switch in composition of employment from middle paid/middle productivity jobs and industries (and more recently high paid/high productivity ones) to low paid/low productivity jobs and industries. This change in composition of the workforce has been described by R. G. Gregory5 as "the disappearing middle"; job growth has concentrated in either high paid or low paid occupations, and is shown in Graph 8. Employment in middle paid occupations, notably of skilled trades people, has fallen. This effect has been especially pronounced for full-time and male employment. More recently this imbalance has skewed more heavily in favour of low paid jobs which are now the fastest growing employment areas. Gregory has observed that as the disappearing middle was displaced from its traditional occupations it competed for lower paid jobs that were previously the preserve of the unskilled and semi---skilled, and these are the real victims of labour market change (a higher proportion of low skilled people are unemployed) but many of their problems arise from competition in their traditional labour markets where employment numbers have actually grown. These changes, in turn, reflect the relative fortunes of industry sectors. With the exception of construction, which is recovering quite quickly from a very severe downturn, employment has fallen over the past six years in all of the production industries. In contrast, all of the broad service industries have sustained employment growth in medium and longer terms, with the fastest growth in the past few years recorded in recreational, personal and other services (also the sector with the lowest labour productivity and the lowest average earnings). Of significance then, is the concentration of employment growth in industries where the level of productivity is below the all industries average. This is shown in the following Graph 9. Sectors which experienced above average employment growth are almost universally those in which productivity is low. Our weak productivity performance may be at least partly caused by the growing concentration of employment in relatively low paid, low productivity industries and occupations. This structural change and "disappearing middle" may be at least part of the explanation for:
This analysis indicates that changes in the labour market have caused wider social and economic effects than the level of unemployment alone suggests. Australia is not only failing to fully employ up to 1.8 million of its citizens ¾ counting discouraged job-seekers and part-timers wanting longer hours as well as the unemployed, it is also failing to make the most effective use of the human resources it does employ, as some of the "disappearing middle" moves to less productive and therefore less financially rewarding jobs than they are capable of, and presumably want. Changes in employment patterns have met neither the needs of the economy nor the legitimate aspirations and potential of the labour force. They have created a mis-match between demand and supply in the labour market which probably accounts for some, and possibly most, of the increase in underlying, rather than cyclical, unemployment over the last fifteen years.
Issues
Let me now turn to deal with three quite prominent issues in the debates that arise out of these recent economic trends.
Equity and the Unemployed
The current frameworks for social security and unemployment benefits, labour and wages regulation evolved in the 1960s and early 1970s although their foundations were often made far earlier. This was a period in which the unemployment rate was typically around 2 per cent and much of that unemployment could be characterised as either transitional (that is people who are temporarily unemployed between jobs) or voluntary (that is a small minority of unemployed who are better off on benefits than working or who are simply prepared not to work). When much unemployment is either temporary or voluntary the interests of the unemployed can legitimately be treated as those of a small and changing minority of society and the labour force, albeit one in need of special short term consideration and assistance. However, unemployment is no longer a temporary or voluntary phenomenon and it is no longer affecting just a small minority of the population. There is a strong case (based on both social and economic reasons) for re-evaluating the weight given to the unemployed in the determination of wider economic, labour market and social policies. In particular, the extent to which the industrial relations, wage determination and social security systems are designed around the interests of the employed rather than the unemployed, needs to be re-thought. It may have once been legitimate for the employed to protect themselves from competition from the unemployed when those unemployed constituted a tiny minority who could reasonably expect to join the employed in the near future, but that is no longer the case. Now, a much larger number of people are substantially alienated from employment. For example, minimum wages represents a means by which the employed protect themselves from competition from the unemployed. Current award (and often State) minimum wages are still often determined around the "norm" of an employee supporting two children and a non-working spouse. Whether such a family unit was ever the "norm" is debatable. It isn't now. Denying people access to employment at a wage which would support them adequately, but could not support an entire family, is likely to cause poverty and inequality rather than prevent them. As a society we have a responsibility to ensure that basic living standards do not fall below a minimum acceptable level. The question is whether the most effective way to achieve that is through the labour market or through the social security system; for example, through means-tested family allowances or even the carers' allowance proposed in the Green Paper on Employment Opportunities6. Where wages are not adequate to sustain an acceptable standard of living, then meeting the short-fall should be a social responsibility, not an industrial relations one. I would argue that labour market regulation is a very blunt instrument with which to administer social policy. The evidence of labour market dysfunction in Australia is now so persuasive that it justifies a re-evaluation of the extent to which industrial relations policies, however well intentioned, have failed to deliver their objectives. Even more importantly, they may be having precisely the opposite effect to those intended.
Employment and Poverty
Perhaps not surprisingly the absence of full-time employees is one of the most striking characteristics of Australia's poorest households. There is a clear relationship between household income levels and the percentage of household income which derives from wages and salaries. This is shown in the two charts in Graphs 10 and 11. If we look at the top chart we can see that while there is a clear positive correlation between employment income and total income, this relationship is not smooth. Households in the lowest 30 per cent of the income range derive much less of their total income from wages and salaries than those in higher income ranges. Indeed, the dividing line between the third and fourth decile is sharp. Households in the lowest three income deciles averaged less than 20 per cent of earnings from wages and salaries. In the top seven deciles of average household income each decile group averages over 60 per cent of total income from wages and salaries. The effect in dollar terms is shown in the bottom chart. Households in the third income decile averaged around $45 a week in income from wages and salaries in 1988-89. Households in the next (fourth) decile averaged $228 a week from wages and salaries. Graph 12 looks at the relationship between levels of household income and the number of people in the household employed. Again, there is a sharp division between the first three deciles, the three lowest income levels and the remainder. In the bottom three deciles an average of fewer than 20 per cent of household members are employed. In the remaining 70 per cent of households, 38 per cent or more of residents are employed with, again, a direct correlation (perhaps not surprisingly) between household income and the percentage of residents employed. This relationship between employment and earnings is predictable; however, the extent of the correlation is perhaps somewhat surprising. The published household expenditure data do not generally differentiate between full-time and part-time employees. Nonetheless, one can reasonably assume that the great majority of the poorest Australian households contain no full-time employees because:
In short, low income households in Australia are almost exclusively those which, for a variety of reasons, there is no full time employee. There are many reasons for not working full time which are beyond the influence of labour market policies. Nevertheless, there are also almost a million unemployed people in Australia, an estimated 300,000 discouraged job-seekers, and half---a---million working part---time who would prefer longer hours. These 1.8 million people are heavily over-represented among the lowest income households, and they are directly affected by issues of labour market policy and practice. I noted earlier in this address that the growing polarisation of Australian employees into low and high earnings groups is not caused by changes in relative earnings but rather by change in the relative numbers of employees in high or low paid jobs caused by the "disappearing middle". This observation is even more true of Australian society as a whole. The poorest members of society do not have access to permanent full time employment although a significant proportion would clearly like to. Compressing wage differentials or increasing minimum award wages will not affect the sharp income divide between the bottom 30 per cent of households and the rest of society because that bottom 30 per cent is almost exclusively not in full-time employment. Most importantly, if compressing differentials and increasing award or state minimum wages reduces the number of low paid jobs available, then the effect is likely to increase poverty and the polarisation of society into the rich and poor, rather than promoting equality. It will contradict received wisdom and convention for the past thirty years to suggest that cutting minimum award wages and allowing wage differentials to expand would be the best solution to growing poverty and inequality in Australia but the data present a strong prima facie argument suggesting that this may be the case.
Labour Market Policy
Achieving a high and rising standard of living over the longer term should be a central plank of a government's economic policies. As we have already seen, this will depend on achieving high productivity growth. Both major political groups in Australia now advocate at least some form of enterprise bargaining, although the extent of changes they propose, and even their definitions of enterprise bargaining, differ considerably. Indeed, as later speakers I'm sure will discuss, the current Labor Government's commitment to enterprise bargaining is under question, particularly when one considers the most recent changes to the Federal legislation in light of the promises that were made in the first half of 1993. It is not my intention to go into detail in this paper on the case for enterprise bargaining. That has been done by many people over a long period of time and hopefully does not need repeating. However, let me refer at least briefly to the recent OECD Economic Survey of Australia,7 particularly in light of the comments I have already made. One should also bear in mind that drafts of the OECD survey are shown to the Government of the country concerned prior to their release and the language is usually very polite. Nevertheless, in this case, with respect of Labour Market Reform, the message is clear. My first reference comes from page 90 of the report and I quote:
The second reference comes from pages 101 and 102 and is against a background of a very polite discussion of the reasons for the current Government's slow pace of reform. Again, however, the message is clear.
The Prime Minister's Employment Task Force, through their discussion paper, praises the Accord process for delivering restraint in earnings growth. While I don't necessarily accept their view of economic history, there is a real danger that the discussion paper's emphasis on nominal wage restraint and their favourable view of the Accord, will be used as arguments in favour of retaining central wage fixing and limiting the devolution of bargaining to the enterprise. I believe the OECD Report implicitly was also referring to this issue. The argument may look like this : nominal wage restraint is the key to creating employment, only central wage determination will deliver nominal wage restraint, therefore Australia should proceed cautiously, if at all, towards enterprise bargaining. But this really misses the point. Real wage growth is not inconsistent with rising employment so long as productivity grows faster still, although wage moderation and high productivity growth would yield even higher employment growth. Nominal wage restraint at the cost of lower productivity growth is a far inferior option. Introducing greater rigidities and internal stresses in the labour market may actually have made unemployment worse under the Accord. The objective of Enterprise Bargaining is to create an industrial relations framework through which productivity and therefore real earnings can rise within industries and enterprises. It should also remove a competitive disadvantage from companies operating in the traded goods sector, slowing or, at best, even reversing the growing concentration of employment in low productivity industries, allowing aggregate productivity and the diversity of employment opportunities to improve. Enterprise bargaining could fail. If management or unions abuse their power to extract unsupportable concessions or if they are simply not competent to cope with the responsibility which greater freedom of operation necessarily entails then there will certainly be casualties of the reform process. But it is evident that the Accord process and rigid wage fixing have failed to satisfy the interests of employers, employees, the unemployed, or the economy as a whole. Enterprise bargaining may entail risk; however, maintaining the status quo guarantees continued failure. Some may view these comments as inconsistent with earlier comments about minimum wages. While cutting wages across the board is neither desirable nor feasible, allowing greater wage flexibility at the margins, where earnings may have the greatest effect on employment decisions, may be. Indeed, this is tacitly recognised in many of the measures proposed in the current public debate. For example, entry and training wages below award minimums. Such proposals only work if people are not being employed or trained because the wage which they would receive is too high to make employing them economically viable. If minimum wages are to be deregulated, then it may also be necessary to ensure that social security and other income support measures meet the requirements of the families of the low paid. This was a matter which I discussed earlier.
Economic Growth
Hopefully, it is by now generally accepted that the number of people employed can only be increased through strong, sustained economic growth. Government's key responsibility to the unemployment is to create an economic environment in which high rates of growth are sustained and sustainable. That is not going to be easy, but it is possible; it is "a matter of choice". Let me just very briefly deal with what I think are the two crucial issues in achieving that sustainable growth.
Investment
Sustained economic growth is not going to be possible unless Australia raises its levels of investment. As we have already seen in 1992-93, investment as a percentage of GDP was at its lowest level in over forty years. Higher investment is also crucial to raising productivity. Graph 13 shows the results of an ACCI survey on constraints on business investment conducted in June last year. Taxes and charges are now regarded as the single most important impediment to investment, ahead even of insufficient demand. Non-wage labour costs and Government regulations at both State and Federal levels also rank in the top five impediments to investment. Retained earnings ranked 10th and interest costs no longer even make the top ten. The survey indicates that as demand picks up the most constructive direct contribution which Governments can make to the investment climate is reforming the direct impediments to investment : the level of taxes and charges, the burden of regulation, and labour on-costs. But perhaps even more important is the overall context of fiscal policy. It is not enough for businesses to want to invest more. If higher investment is to be achieved then Australia must also increase its national savings effort. This issue was covered comprehensively in the FitzGerald Report. As FitzGerald points out, at least as important as raising private savings is the level of public saving. As already discussed, at current savings levels any increase in nett private investment seems virtually certain to generate a deterioration in the current account deficit. The balance of payments is already a major constraint on sustainable growth in Australia. The effect of any further deterioration is likely to put significant pressure on interest rates and return Australia to the boom-bust cycle of the past. The number one priority for the Federal Government must be to reduce the Federal deficit; indeed, not just to reduce it but to turn it into a surplus.
Reform of Government
Because of the key role of the public sector in the economy ¾ around one quarter of all activity ¾ efficiency and effectiveness in Government are essential if productivity is to improve across the economy. Government monopolies control some of the key economic goods consumed by the private sector. Energy, water, rail transport, ports and shipping services are all provided by Government. These in turn account for a crucial component of the costs and therefore the competitiveness of businesses. No matter how successful the private sector is in achieving World's Best Practice, they will be handicapped unless at the same time government trading enterprises make similar gains. However, the focus should not just be on the crucial objective of improving the efficiency and prices of government trading enterprises. Wider reforms from both efficiency and accountability would also yield benefits across the public sector. Processes such as --- corporatisation, privatisation and contracting out, regulatory review, (including very importantly taxation reform) and independent assessment of efficiency and accountability, are as important as the restructuring of government trading enterprises. At the Federal level, it appears to me that since the election there has been a lack of commitment to the micro-economic reform agenda. It must be revitalised and revitalised quickly. At the Western Australian State level the Government has had a very detailed report on the issues that need to be addressed by the Independent Commission into Public Sector Finances (the McCarrey Report).8 It is vital that the recommendations of that Committee be pursued and pursued with vigour. The test for the Western Australian Government will be the degree to which they adopt the reform agenda in this current calendar year.
Conclusion:
I suspect that a lot of what I have dealt with today is not new to large sections of this audience. Certainly, there is widespread agreement, at least among rational economists, about the steps that need to be taken to seriously address the unemployment problem. The challenge is to have those arguments accepted in the wider community. In this regard, I return where I started with the comments I made about the need to bring both hard heads and warm hearts to these issues. I am reminded of the warning provided to us by Paul Kelly in a recent address to a conference organised by the Institute of Public Affairs.9 Kelly said:
Kelly's warning applies equally to all supporters of economic reform including organisations such as The H.R. Nicholls Society. If we are to win the debate, then it needs to be done with an emphasis on compassion and perhaps with a sense of humour. At the risk of offending my hosts, I think this is one area where it is possible to be slightly critical of the approach taken by The H. R. Nicholls Society. It is not enough to be right, we must also convince the wider community so that the politicians will follow. We must not allow the debate to be won by those with soft heads who wear their hearts on their sleeves, but if the reform arguments are to be accepted then the arguments must be attractive, not humourless, promoted as a means to an end and not an end in itself, and may be people---friendly. There may be people in the audience who are familiar with the American humorist, P. J. O'Rourke. I look forward to the day when people such as P. J. O'Rourke are invited to address The H. R. Nicholls Society. After all, it was O'Rourke who brought to my attention the basic rule of business and life, a rule which is particularly relevant to current discussions about labour market regulation or deregulation. O'Rourke's basic rule reads:10
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