Quarry Australia has no people

Fungibility is a feature of a good where two items of that good are so close in their features that they equal substitutes.  Currency is the ultimate example.  If I lend someone $50 it doesn’t matter to me whether that same $50 note is returned, or another equally good $50 note.  Other fungible goods include standardised commodities like wheat, raw metals, oil.

But is labour the same?

I doubt many businesses would be happy to lend an employee for a few days work elsewhere then receive a different person back when the job is done.  While there are people with very similar skills and experience who may be suitable substitutes, this is not the case in general.  The idea that some workers are subsitutes for some others, but all workers are not substitutable, forms the great divide between the policy prescriptions of the Austrian economists and the Keynesians, and may be one reason for the apparent failure of Keynesian stimulus to ‘create’ jobs in the US.  It also explains why labour costs in some industries can rise even with relatively high unemployment.

For example, this George Mason University survey found that only 42% of the workers hired under the American Recovery and Reinvestment Act (ARRA) where previously unemployed, while the rest either switched from another job (47.3%), came straight from school (6.5%) or came from out of the workforce (4.1%).  They concluded –

This is far from the ideal prescribed by Keynesian macroeconomics. In the Keynesian ideal, spending should be targeted toward the slack sectors, and workers should overwhelmingly be hired away from unemployment lines. Instead, the direct job-to-job shifts for ARRA-receiving organizations were similar to the average job-to-job shift rates in the U.S. during normal economic times.

In short, unemployment remains high because the type of skills the unemployed have are no longer in demand, even if you throw more money around the economy.  However the study received quite a deal of criticism online, with one counterargument neatly summarised below.

Let’s ponder this. Suppose Company A creates a new job, and fills it by hiring a worker away from Company B. What do the authors suppose think happens to the job at Company B? Do they say, well, that’s it, we lost Joyce, nothing we can do about that in an economy with unemployment at only 9%.

So who is right? They both are to some degree.

The best analogy used to describe the labour market is that labour demand is like a puzzle, and the workforce are the pieces.  Each puzzle piece is a particular shape, just like each worker has a particular set of skills.  And each potential job is a space for a particular shaped piece.  While some of the puzzle pieces are so similar they can be used in multiple places, others are so uniqe that there are just a few spots for them in the workforce puzzle.  You can’t just substitute one puzzle piece for another. In addition, as the labour market becomes more specialised fewer puzzle pieces become directly interchangeable.

The importance to of the ‘job market as a puzzle’ idea for governments considering economic stimulus is best explained by the following comment from Tyler Cowen’s blog post on the topic.

It is maddening to hear ‘workers’ talked about as if they are interchangeable – Oh, a whole bunch of home construction workers have been layed off? Don’t worry, we’ll build a road or a bridge and employ them!” The only problem being that the type of construction home builders are trained for has nothing to do with bridges. Perhaps people like those in the Obama administration lack the appreciation for the real complexity of these jobs and assume that any blue collar work is trivial and interchangeable with a little retraining, but it’s not the case.

Not only that, but the people who can start a project are very different than the people needed to bring it to completion, and in general the people needed at the beginning of a project are the least likely to be unemployed. In fact, even in a recession there is a shortage of such people. So it was predictable as rain that new stimulus projects would have to scavenge project leaders, architects, managers, and senior engineers from other existing projects that may have more value. It was absolutely, 100% unavoidable.

Not only that, but it is incredibly destructive: Pulling a manager from an existing project can cause damages far exceeding the salary of that person. If a project manager or architect is enticed away from a project that has a $100,000 per day development cost, and his leaving causes a month of delays while a new manager is found and brought up to speed, that’s a cost that will never show up in the stimulus accounting – but his $150,000 job will be counted as a ‘job created’. No one will know that in addition to the stimulus money used to hire him, the real cost of that job was an additional $3 million dollars. I’ve never seen a single Keynesian model take that kind of destruction of existing projects into account or try to quantify the effect. You’d think this might be important to consider – especially in an era where specialization is so important, where even low-level positions require specialized training.

It was also inevitable that some of the people hired would be pulled out of retirement – when you need top guys, you’re not going to find them in the unemployment line. You’ll find them sitting on their sailboats in the Carribbean.

The above quote suggests that Australia’s fiscal stimulus, particularly the school halls program, was well targeted to create space for the appropriate housing construction labour puzzle pieces. But for me, the nature of the labour market as an intricate puzzle leads to questions about education and training.  How do redundant puzzle pieces reshape to fit the new puzzle spaces? Is on-the-job training going to help people reskill more quickly than the alternative of spending years undertaking costly skills training and education?

The appeal from business to increase the skilled migrant intake shows that many industries appear unwilling to train the workforce they require. There appears to be an expectation that appropriately skilled workers can be plucked off the shelf and placed perfectly in their puzzle.  Indeed it was not uncommon to hear that a skills shortage would undermine an Australian economic recovery.

The great irony here is that in growing areas of the economy, particularly mining and gas, experienced workers can only be found from within the industry.  Unless someone is offering the necessary training, businesses in the expanding industry will find themselves outbidding each other for the same pool of workers.  Any company aware that the industry is expanding rapidly would be wise to have succession plans and internal training programs in place to plan for this highly predictable competition for workers.  While internal training can be costly, industry cooperation in training can lead to genuine long-term benefits by providing a ready supply of appropriate puzzle pieces.

As Australia adjusts away from the retail, tourism, housing and education led economy of the early 2000s these considerations are important.  Where the new economy is heading I don’t know, but it is likely to be one with a much larger mining and gas sector, and much smaller housing construction (incl. real estate services) and retail sector.  These adjustments will require many people to change industries and reskill, and if the boom industries of the next decade don’t get in early to train the key workers of their expanding industry, they may find the strange situation where high unemployment does not contain salaries in their industry. At the same time the hard-core Keynesian economists will endeavour to stifle these adjustments and will remain confused as they inadvertently preach the fungibility of labour.

Comments

  1. Deus Forex Machina

    Nice post Rumple

    Ultimately the non-fungability of labour means a slower growth rate for Australila for some time until the skilling or re-skilling of workers happens.

    If the high Australian dollar and household retrenchment are stripping out some of the sectors you mentioned but you can only get miners from the current stock of miners in the economy (ex-offshore workers we drag in) then we are faced with rising unemployment across the economy but very low unemployment in mining and associated industries.

    Which is what we are seeing now as Bully Boy Evans pointed out over the weekend.

  2. The aging of the population of those that need to be re-trained is likely to prove difficult, both practically (it’s harder to learn the more one ages) and socially (give the jobs to the younger applicant). We are therefore looking at an increase in the numbers of older, stale-qualified and un-retrainable people.

  3. Yes, this is where the whole “making room” for mining investment and “freeing up” labour arguments fall down. What’s happening now is the room is being made, and the labour is being freed, but the slack isn’t being taken up by the mining sector, because the skills aren’t there.

    Motivation is also an issue. Frankly, I’d rather live in poverty for a decade than get a FIFO job to some God-forsaken hell hole in the Pilbara. Lifestyle, family, friends, and especially kids, are a huge impediment for many people.

    Man I’d love to see old farts like Gittins! put out to pasture and told they should get a job in the Pilbara. I bet what they preach doesn’t apply to them!

    • Do you think Gittins! would make a useful drill-operator? He’s far more useful to the Pilbara pumping out the propaganda. I mean, how is this:

      “The trick to using economic indicators to understand what’s happening in the economy is not to overreact to the latest reading from one indicator. The new figure has to be put into the context of the particular indicator’s trajectory and the general message coming from all the indicators.”

      He’s just done this very thing with GDP versus the whole trend of other indicators in the services economy.

      • Precisely.

        The bullhawks have been scrambling to discredit the unemployment number, while completely ignoring the fact the GDP number contradicted pretty much every data point in recent months.

        Check out Peter Martin today and my comments below.

        Meanwhile Chris Joye is hilarious.

      • Heh, that’s like saying “Hey the oil warning light on my car is lit, but in the context of no other warning lights it must be OK”.

      • And the ABS, EBD, ETC, ESP (mining, variable interest rates, godlike prowess of RBA) will naturally stabilise the car (economy), even though the fuel tank (credit) is getting smaller and clogged up….

        Or did I mix my metaphors too much?

    • Great Post to read. I experienced this phenomenon during the IT boom. People and skills are not easily substituted. It is not impossible but comes at a significant cost. However, the stimulus-cure-all policies create costs far greater than the unemployment + retraining cost. Churning of project managers can put the entire project at risk, causing great waste and lost productivity. More importantly, such policies also have the very nasty effect of not curing the imbalances causing the slump but extending them further.

      But we will most likely remain resigned to the stimulus policies until everything falls apart. This Great Recession will continue for as long as the existing policy framework stays in place. Japan has done it for 20 years and no end is yet in sight. With US and German 10 year yields down to 2%, the message from the bond market is loud and clear: there will be no economic growth for the next 10 years.

      — Economics is not a dismal science. It is just dismal.

  4. The housing renovation industry could be flown to the north west to do some upgrading of the donga demountable townships.

    Some quality cesear stone would make all the difference

    • Your wishes are granted. I hear Gerry Harvey is thinking about investing in mining accommodation.
      Can’t wait till every great hole in the ground has a Harvey Norman next to it, where you can go in and select from a lovely range of cheap Chinese made Dongas.

  5. Great article Rumple – explains it better than the “they will just have to adjust” meme from the bullhawks etc.

    And explains why the “out of control wage inflation” is largely a myth – true in the skilled areas which comprise 9% of the economy, but a falsehood for the remaining 91%

    I can see a greater and greater push by the bullhawks to open the floodgates on skilled migration. Expect to see a renewed media campaign in this direction as “wages go out of control”.

    Of course higher wages in a deflationary spending environment is very unlikely to result in inflation, as the structural shift to paying off debt is now in like Flynn, but that would be too non-linear for the Gittins! et al to understand….

  6. Modern computerised employment agency practice can’t be helping much here.

    I interviewed many short listed candidates claiming “expert” status in Cad software they had barely seen. Seen adverts for junior positions whose “minimum” requirement wouldn’t be met by half the existing staff.

    So when a company says they cant find the right person for the role, I take that literally. The person who could do the job well with minimum investment does exist but is lost amongst the 400 idiots who have also applied and know the key word gaming rules better.

  7. +1. Nice Post.
    Skilled migration is currently a necessity as the people needed on the start up phase of the large infrastructure projects associated with mining and the O&G industries are simply not available in Australia. In my company we have already pillaged the stocks of competent, experienced people in government and academia and we still need people. Fortunately, for us, the downturn in the UK and continental Europe has meant we have now become much more attractive for highly skilled and experienced people, and we have recently secured people who would not have been interested 3-4 years ago.

  8. Spot on, and what you describe is something the government don’t get.

    Specific training for the high skill jobs takes a long time, and the pipeline is slow; hence the miners want foreign skilled staff now.

    Also, displaced non mining skilled people struggle to get mining jobs period.

    Another point is the number of students doing non mining degrees, and trade/TAFE is high, and those people struggle when they complete their courses to get relevant employment. Why do we still train for non existent jobs? My uni professor told me this has been going on for a few years now.

    Great post thanks.

  9. +1 Rumple. This is something I have pointed out here before – eg unemployed retail workers are not going to be absorbed into the resources sector, not without specific skills and training. Despite what some think (pick wielding boofheads comes to mind HnH!) many jobs require technical proficiency and ideally some years of experience. Russell above is spot on – getting the right people for projects at the moment is difficult.

    And remember, the really big employer is the infrastructure investment phase. When the projects are complete there are going to be a lot of consultants, contractors, engineers and tradespeople looking for the next big build – timing could be perfect – Australia adjusted to new normal (whatever that may be) and more developments afoot.

    As a point of interest Shell are going to set up a sort of ‘LNG Gas Uni’ in Perth specifically to educate and train for the skills required for the massive FLNG project, recognising that these skills are largely absent in the workforce.

    • Very interesting article Cameron.

      Quick diversion: hey 3d1k, I was at the pub the other night talking to the bar staff. They confirmed that – as you and dirt digger argued – that they are significantly busier with drinks and meals. But guess what? They can’t find any new staff to fill positions – and it has nothing to do with fungibility. I submit that pubs, clubs and eateries don’t pay high enough wages to allow new people to be able to afford to move to the area to fill these jobs. So there is some increased demand (the camp near the township where pub in question is, is apparently dry) – but they can’t expand to take advantage of it because the basic costs of living are so distorted that they cannot source employees. How’s the irony?

      • The bars and restaurants in Perth regularly complain they can’t get staff (apparently all going up North! No.). I don’t think that’s the problem. The problem is a lot of these places like to employee younger people, pay the minimum and required unsocial hours. Not something overly appealing to the young – I have heard younger relatives say flat out they would not work in a bar or similar for just those reasons. Gladstone has a well established population, must have a lot of younger people (or be prepared to hire slightly older), probably has a similar unemployment rate – surely there are staff available. Perhaps supply and demand requires that as these businesses are doing boom business, they pay their staff more(just as the resource companies do), that might attract a few takers .

      • Well I do know of local people who’ve moved back in with their parents, kids and all. Bit squeezy, an older couple plus their kids and grandkids all squashed into one place, younger family living in the carport or lounge room but hey, I guess that’s how we all lived in the days of yore.
        But you seem to have missed the part where the existing population has been booted to make room for FIFO’s.

  10. The appeal from business to increase the skilled migrant intake shows that many industries appear unwilling to train the workforce they require
    .
    Funny how the same businesses that want less government interference (aka more liberal labor regulations) ALSO look longingly towards the government for help when it comes to training the workforce and importing them outright.
    .
    Well, who is going to take care of the workforce once the mining capex dry up? Do we ask these miners to leave the country when their skills are no longer needed? NO – The government aka rest of the taxpayers, of course, are supposed to take care of them!!

    • Sorry but that’s BS.
      Many of the skilled people assembled to work on these major infrastructure projects will leave Oz of their own accord…..many of us have either migrated here recently, or come home, specifically to work on the big projects and when those finish many of us will depart again, following the next big development opportunities globally.
      I grew up in Perth, but did not live here for 26 years as there was no work for someone with my skill set and qualifications. I’m back here now and comfortable enough while this boom lasts, but as always will follow the work. So far I have worked in 12 different countries, and see no reason why my future prospects would now be tied to Australia’s future. Many of my current colleagues are similar, and some of them are people I already knew from other projects in other countries. The younger people around us (Aussies) who we are currently upskilling will be able to join us in that global marketplace as they are building reputations with global companies under our tutelage. For those who will leave their families here and send their remittances back home, that’s all foreign income earnings.

      • Russell, it may be true for your case. But you cannot generalise and say it is the case for the majority of those working in the mines.

      • Mav, the capex stage requires most project/construction expertise in vast numbers – this sector is generally highly mobile and always has been. You cannot sit around waiting for a project to come to you!!!

        ps “The government aka rest of the taxpayers, of course, are supposed to take care of them!!” laughed a little when I read that comment of yours as it appears to be exactly what you are advocating the resources sector do for the rest of the nation right now. You know – resources to pay even more taxes, rescue manufacturing, provide the basis for a SWF and so on…

      • Dont discount it though Mav.
        People are V. attached to the current lifestyle and mining workforces are the most mobile.

      • +1. Most involved in resources projects are highly mobile and whilst I can’t claim 12 different countries, can claim 3 or 4. Have commented before that when the work dries up here, I’ll just move on – could be elsewhere in Australia, South America or Africa. Follow the work. This is little understood by a workforce that sometimes objects to a one hour commute or is horrified at the suggestion of moving for employment (explains why FIFO is so popular in WA, workers can maintain a ‘homebase’ and remain flexible for work).

    • Well, mining workforce are not the only ones to move around. I have moved around all over the world too (I am a recent immigrant, FFS).
      .
      But that is not the point of my post. My point is that the government is ultimately responsible for the welfare of the resident workforce. Some of you may up sticks and leave along with the mining companies. But for the vast majority of the workforce, that may not be an option.
      .
      If what you say is true, once the mining boom is over, you would expect half of Australia to empty out, given there won’t be any other industries left standing by then.

      • Post mining boom “…you would expect half of Australia to empty out…”. Didn’t say anything like that. Bit of hyperbowl there Mav, so still waiting for the clarity… 🙂

      • Lefty – Hyperbowl – as in Julia’s pronunciation. I cannot see the word hyperbole without hearing her voice ‘Hyperbowl’!

      • The word is “hyperbole”.
        .
        The businesses (naturally) are not in the business of looking after its employees welfare – they are for-profit organizations. The government, on the other hand, is expected to look after the welfare of all the residents.
        .
        I was just saying if the businesses want labor market flexibility, to the extent that they want to bring skills from overseas instead of training people thrown out of jobs in other industries, then there should be a bit of give and take involved between businesses and the government. This give and take involves additional windfall taxes etc.

      • The word is “hyperbole”.

        It knows. It’s a very clever Mining PR Bot. I’m almost convinced it’s human.

        Gina must have spent a mint on it.

      • I actually thought you were being genuinely amusing here with a cheeky mining reference / pun. “Hyperbowl” = “Huge pit” 🙂

        hehehe.

      • Darkly – that is a stroke of brilliance, I shall use it in that light in the future!

        (Previously used it in Julia fashion).

      • I take it that mining PR bot agrees with me that there should be a give and take between mining companies and government then? 🙂

      • The MiningBot thinks what its programmed to think.

        Imagine Mitch Hooke in giant room full of computers stroking a cat.

      • On here, MiningBot can be as noisy as a room full of crickets – all noise and very little substance though – mostly attempts at re-directing commentators ire towards the housing bubble.
        .
        I notice that It suddenly goes quiet on threads where mining overlords cannot be defended 🙂

  11. Employers do not train people any more. That is the whole cause.

    I had a young fellow see me recently who was doing an apprenticeship for the mines and he was laid off without a reason and now that exact mine is looking for workers again.

    This is the common put the workers off and try to higher them for a lower wage.

    • “This is the common put the workers off and try to higher them for a lower wage.”

      Not at all common from my perspective. However, there is a real lack of apprenticeships on offer and competition for positions is fierce. Perhaps that young fellow was not suited.

      • Ever seen a flock of seagulls fight over one chip?

        Here’s some more. Quess which one’s the Canberra clique

        A parliament of owls.

        A congress of baboons- the most violent and dumbest of primates.

  12. If the major reason for the awful unemployment situation in say, the US at present was the lack of fungibility of labour, then shouldn’t we expect this to manifest in an observable, measurable way? If the demand exists to employ most of the unemployed and we assume most of them are only unemployed because they don’t have the skills that millions of new employers are looking for, shouldn’t we be able to measure this strong demand? Shouldn’t there be almost as many positions vacant as there are unemployed, albeit in areas where most of these particular unemployed have not previously worked? (assuming we can net out the effect of a single position being advertised multiple times).

    Also, if we assume the limited fungibility of labour – which I think is obviously the case ie, rentrenched retail workers can’t just fly to WA or QLD and jump straight behind the controls of mining machines – doesn’t that make an argument for government intervention in the economy stronger? If full employment is in fact not the natural state of affairs, then by implication, aren’t democratic governments who are elected to advance the general welfare obliged to bring it about?

    • Good points Lefty.

      “If full employment is in fact not the natural state of affairs, then by implication, aren’t democratic governments who are elected to advance the general welfare obliged to bring it about?”

      I am not sure about this. There is an assumption that governments could actually bring about full employment.

      This also appear to be a very MMT/Chartalist viewpoint. The article itself was trying to make the case that full employment cannot be created simply by using monetary and fiscal tools.

      If it really was so simple, why wouldn’t the US government be doing these things right now?

      Government can have a role in education and training, and in welfare support, but they can’t be expected to be able to predict the future demand profile for labour. Businesses themselves also need to be vigilant about training people to suit their unique requirements.

      Do you have any suggestions about what tools are available for governments to ensure full employment?

      • Hi Cameron.
        As Senexx has pointed out, full employment was once a policy goal in Australia, accepted by both sides of politics. It was achieved and maintained successfully for around 30 years following WW2. The unemployment rate over that period generally fluctuated between 2% and 3%, averaging around 2.5% over the three decades. Mitchell argues that true full employment is equivalent to around 2% unemployment and no underemployment, the 2% mostly representing workers moving between jobs on the day the survey was taken. So full employment as a result of deliberate policy certainly appears to be achievable and sustainable for significant periods, based on our history. My understanding is that the policy was abandoned as Keynesianism was replaced by Neo-liberalism as the dominant approach to economic governance.

        What may be possible from a point of economic functionality must inevitably pass the through the filter of the dominant political ideology before it has any chance of becoming (for the first time or again) actual policy. Thus, I see an idea which appeals to me – government directly addressing unemployment with an MMT-type job guarantee http://e1.newcastle.edu.au/coffee/job_guarantee/JobGuarantee.cfm – as unfortunately, unlikely to be politically possible at this point in time. In the US, the chances of any such direct intervention are approximately 0% . Such an approach is too far removed from what is ideologically acceptable and the dysfunctional US political process makes any major changes to the status quo nearly impossible.

        It’s more politically acceptable for governments to support training programmes and the like, though as one who participated in an endless stream of such programmes (I walked out of high school and straight into the 1990 recession) my recollection is that they achieve little when demand for labour is weak. It was less to do with skill-mismatches IMO, and more to do with the fact that employers in general, didn’t want more workers until they saw a sustained rise in paying customers demanding the goods and services they were trying to sell. I remember people being payed by the government to hold seminars in which we were told in one breath that “yes, these are economically hard times” and then in the next, insinuate that our situation was largely our own fault because our attitudes weren’t right. A mass-helicopter drop of Norman Vincent Peale books wasn’t going to make a whit of difference – we were being prepped for jobs that simply didn’t exist at the time. This isn’t to suggest that training programmes are completely worthless, rather that they probably don’t create many actual jobs.

        Anyway, those are my thoughts on the matter. I think it’s quite possible for governments to use deliberate policy to create and maintain full employment – I’m just not sure it’s politically possible at this point in time.

  13. Skillsets are one component. Mindset is another component.

    Mindset is why there is often large churn. If you do not have the appropiate mindset you will burnout, regardless of skillsets.

    Commodities are very highly global macro sensitive. Risk on, risk off. Throw in the same dynamic in the global economic, monetary and finance spheres and you have a witches brew.

    I see that 3d1k, mentions a gas uni by Shell.

    Years ago, before MIM was taken over by Xtrata, MIM employed a great many of the mining discipline graduates from QLD and elsewhere. They would gain the practical industry experience there, before moving into other projects Australia wide. This nexus died with the takeover.

    Many people in the mining industry acknowledge the aging demographics of their professionals. This dynamic is also happening at the university mining and related disciplines.

    An excellent article, and excellent replies.

    If you never never go, you’ll never ever know!

    Carpe diem-seize the day.

    • MIM- yep, my little sis did a summer work exp with them some years ago. UQ at the time REQUIRED its mining discipline students to do summer experience in order to gain the degree- there was a required minimum amount of hours. This was paid too- good deal for everyone- the mining companies got labour and the chance to scope out future employees, the students got experience and the chance to scope out future careet paths. If they are cutting this, to a certain extent cutting off their own future.

      It chimes with something my science researcher friends were saying about their degrees though- when they were doing their undergrad degree they were expected do 2 or 3 “talks” (present research findings?)in their uni career- prep them for an industry where presentation at conferences is vital to future success. Now uni students are lucky to do one in their entire degree. Cutbacks in uni expectations (through lack of funding?lack of participation by industry participants?) is creating graduates with less ability to compete for jobs, because they never learned the skills for that industry.
      Not all of it is the uni’s fault- some lies with other areas. For all that the pensioner block whinge about the tiny state of their pension it is DOUBLE that of a new start or Austudy allowance. And a pension doesn’t cover costs of living. So students are working full time to survive, no time to actually learn anything.

      • k, my experience is that the University sector, whilst getting absolutely crunched by federal funding, is doing itself no favours. The number of ‘strategic management’ type appointments I’ve seen is completely ridiculous – they earn no external money, do no research, teach nothing, yet command $100K+ p.a. indefinitely for effectively doing nothing. No academic worth their salt listens to them anyway (and they’ll admit it!).

        There is no such thing as a flat Uni structure anymore. Ten years ago the Engineering Faculty office at one of the nation’s top research Uni’s had a staff of three – the Dean and two admin assistants. Now it’s up past 20, complete with marketing officers and a manager of strategic planning. VC’s offices employing speech writers, the list goes on. And the young dynamic types walk out the door…

  14. All industries will train the people they need when it becomes the cheaper option. It happened in IT several years ago before offshoring became the cheaper option. Skilled migration in Oz is a far more effective method of indenture than any training agreements.