One of the most important economic challenges the Albanese Government is confronting is how to repair, and then enhance, the increasingly dislocated labour market.
It is a highly unusual set of circumstances. Many businesses cannot find workers, skilled or unskilled, even with hefty pay increases.
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At 3.5 per cent, the unemployment rate reflects an overheated economy where, for all intents and purposes, everyone who wants a job has a job.
Businesses are under pressure, not because of an economic downturn or the effect of higher interest rates on their overdraft costs, but because they cannot find enough workers to open the doors each morning and then run the business to meet a strong level of demand from customers.
These dynamics in the labour market are something that governments, the Reserve Bank, business and even workers themselves have rarely, if ever, experienced.
Recall the 3.5 per cent unemployment rate is a 48-year low, while the workforce participation rate at 66.8 per cent is an all-time high.
Simply put, there are not many people unemployed or outside the labour force that are ready, willing or able to work to meet the demands of a growing economy.
Jobs and skills summit
The jobs and skills summit in Canberra on September 1-2, will allow groups with an interest in an efficient and highly productive workforce to vocalise their views on current conditions and to outline suggestions for reform of the labour market.
The summit will also highlight the labour market problems to the public at a time when high inflation and rising interest rates are dominating sentiment and perceptions of financial risks for the household sector.
In many ways, the solutions to the jobs problem are well known.
It is unlikely that anyone at the summit, or elsewhere for that matter, comes up with a ‘this will fix everything’ plan for the labour market. Indeed, it won’t happen.
What needs to happen?
There is a smorgasbord of issues that can interplay to fix the labour market problems. Some are short term and of marginal effect, others will take many years before they impact but are nonetheless critical for productivity and locking in full employment for Australia.
In a macro sense, economic policy needs to be tightened to cool demand for labour.
The economy is at over-full employment, which is why the RBA is part way through an interest-rate-hiking cycle to contain inflation. This will help the unemployment rate edge back to what, for now, are sustainable levels around 4 per cent.
And if the unemployment rate rises too much, this policy tightening should be reversed to generate a pick-up in demand for labour.
A very long-run issue to create a dynamic labour market is to ensure the whole population has the skills, training and flexibility to ensure everyone who wants a job has a job, with decent pay, but also to allow for sustained growth in productivity which lifts the whole economy.
This is a huge issue.
It means a world-best education system starting at pre-school and child care, then to primary and high school through to university. It means a comprehensive trade training structure, not only for school leavers, but those middle-aged workers whose jobs are made obsolete from the stunning and wonderful changes in technology and from globalisation.
Included in this is revamping the misguided HECS (HELP) scheme, which is a major disincentive for many to achieve their full academic potential and therefore job opportunities.
Another element is allowing for an optimal amount of immigration. “Optimal” will be a hot point of discussion.
In the pre-COVID era, immigration was rampant and too many people were coming into Australia, even as workers.
This created problems for housing, transport and other infrastructure and congestion in the cities struggling to cope with many hundreds of thousands of people arriving before houses and infrastructure could be built and constructed.
Some immigration is clearly a good thing for the economy. Many job shortages can be filled with immigrants, which is good for business and economic growth.
A sensible approach in the current climate would be to see a softly-softly approach resulting in a slow reopening of the economy to immigration. It would add to the labour force without blowing up housing and infrastructure requirements.
It goes without saying that this is not a discussion on the humanitarian immigration intake, which should be maintained at current levels. It is about addressing the labour market issues at hand.
The jobs summit should also acknowledge that if, or rather when, we have the next meaningful economic slowdown and the unemployment rate rises, immigration should be reduced to prevent a flood of people that will only add to the ranks of the unemployed and limit the options for Australians to get a job.
In other words, immigration can revert to a macroeconomic management policy tool. Ramp it up when the economy is low on workers, scale it back when unemployment registers a material rise. It can be done.
Wages will see some tension at the summit. Unions will suggest wages growth should be higher, while business will say high wages growth undermines business conditions and causes job losses.
The truth is somewhere in between.
With the unemployment rate currently well below the long-run average, wages growth should be above the long-run average.
Increases in public sector wages growth is an easy policy to implement, especially after the freezes put in place during the COVID recession.
Private sector wages growth is more problematic, but market forces should encourage employers to ‘pay up’ to retain their existing staff and attract new workers to meet their expansion plans.
This appears to be happening, with the various surveys on demand for labour and labour costs surging to record highs. In the next few quarters, this will show up in the official wages data.
Other issues that will no doubt be addressed include improving access to affordable child care, measures to close the gender pay gap by boosting wages in female-dominated sectors, and having a more progressive income tax structure, which boosts economic growth and jobs.
All of these issues are critical elements in driving productivity, well-being and the efficiency of the economy.
The jobs summit will be useful if the true reforms discussed are implemented into hard policy changes.
This will be a challenge for the new Labor Government but the signs are encouraging that it will meet its goals for a full-employment economy, with decent wages growth.
Let’s hope it can make progress towards making Australia a better economy for workers.