Monash University’s David McCloskey has released a new report for The Australian Population Research Institute (TAPRI) examining the impact of open market policies and reforms on the structure of Australia’s jobs and industries over the Census periods from 2006-2016.
Calls for more reform and more labour market deregulation are based on the idea that they will promote improvements in productivity, better allocation of resources to productive sectors of the economy, and will lay the foundation for future economic prosperity.
However, these ideas are mistaken according to McCloskey. While nominal economic growth has been achieved the policies have had perverse outcomes. High productivity sectors, such as manufacturing have experienced a structural decline of 60%, while there has been a boom in low productivity jobs (both high and low wage) in people servicing industries.
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These structural changes have left Australia increasingly vulnerable to economic shocks with a huge reliance on high commodity prices and high immigration. Accordingly, Australia urgently needs smarter, evidence based economic policies that will allow us to compete in the high productivity knowledge jobs of the future.
Below is the report’s Executive Summary, alongside key charts:
This research paper reveals and analyses the massive structural economic changes that occurred in Australia between 2006-2016. These changes have weakened growth in productivity, hollowed out middle-income jobs, increased income inequality, reduced competition in wholesale and retail sectors, and prompted a shift of jobs offshore. Post COVID-19 economic planning needs to avoid repeating the failures of past policy settings.
There is unanimous agreement among economists and commentators on the need to lift labour productivity to ensure a more prosperous Australia in the future. But how is this to be done? There is a consensus across many academics, think tanks and industry bodies that lifting labour productivity will require further reforms, continuing the approach adopted by the Hawke/Keating Governments in floating the dollar, winding back industry assistance, increasing labour flexibility and other macroeconomic measures.
This study shows that pressing on with yet more of the Hawke/Keating agenda cannot be the answer. It sets out the outcomes of this old agenda by identifying the structural changes that occurred in Australia’s economy from 2006-2016 at both an industry and occupational level.
Structural change from 2006-2016 affected one in six jobs in Australia. By analysing census data, we can identify net changes of around 210,000 jobs lost to offshoring, 223,000 jobs lost to automation and 150,000 jobs lost through digital transformation.
Structural change has resulted in around 412,000 fewer jobs in manufacturing and 148,500 fewer jobs in wholesale trade, while at the same time it was associated with growth of around 321,000 jobs in health, social assistance and education. The release of the next Census (2021) will allow the analysis to be extended to a more current period.
Growth in labour productivity is essential for any increase in economic wellbeing, but this growth has been made more difficult by a structural shift from manufacturing to people-servicing jobs.
Manufacturing is typically the area of the economy associated with the greatest productivity growth while people servicing typically suffers from low gains in productivity.
Competition has also suffered. Regulatory failure appears to have contributed to structural changes that have reduced competition, with entrenched incumbents increasing vertical integration and squeezing out smaller independent businesses. This lack of competitive pressure further reduces incentives to increase productivity.
With structural change creating impediments for productivity growth, it is harder to achieve real wage growth. The jobs created through structural change have been in both low-wage and very high-wage occupations while middle-income jobs have shrunk. The hollowing out of middle-income jobs has increased income inequality in Australia.
Besides the shift away from manufacturing, reduced competition and the loss of middle-income jobs, structural change can be driven by a range of other factors. These include changes in the demand for goods and services, technological changes that make jobs redundant through automation, digital transformation, and by increased productivity. They can also be driven by policy decisions that can result in the off-shoring of jobs.
Most of these structural changes have involved a shift from industries with a record of high growth in labour productivity to industries with inherently low potential for growth in labour productivity. The recently released 2021 Intergenerational Report (Treasury, 2021) and various proposals from industry bodies to increase productivity do not consider the impact of most, or indeed any, of these structural changes. This makes it unlikely that their policy approaches will be able to deliver real growth in labour productivity.
In addition to the structural decline in manufacturing, the analysis has highlighted a collapse in wholesale trade, with a structural loss of around 148,500 jobs. The collapse in wholesale trade with a shift to direct sourcing is likely to be associated with a reduction in competition in food retailing, and can explain the firm markups (the ratio of the prices charged compared to the marginal cost of production) observed in the Treasury paper on Product Market Power published in June 2021.
To summarise, the current study provides evidence of these structural changes from 2006 to 2016 and of their consequences. The data show that:
The economy has suffered a narrowing of its economic base. This is manifested in the collapse in manufacturing and the shift of resources to low productivity, high-wage sectors (such as specialist health care). Moreover jobs of this latter type are typically funded by government and are likely to create problems for future governments in funding these services.
Opportunities to increase the productivity of the Australian workforce have been restricted by the structural changes that have occurred. Moreover, from 2006 to 2016 there appears to have been relatively little growth in employment in knowledge industries or in other tradeable sectors of the economy.
The narrowing of the economic base has led to an increased reliance on commodities such as: wheat, iron ore and other primary produce. This has intensified the sensitivity of the Australian economy to the commodity boom and bust cycle.
The Government’s focus on nominal growth in GDP has led to shifts of resources into construction and people servicing. This has led to the risk of continued slow growth in GDP per capita. It also puts Australia on the path of having to attract ever more migrants to keep the city building and people servicing industries growing, with all their associated deleterious effects on productivity. This means that while growth in nominal GDP will continue, meaningful growth in per capita GDP will languish.
The labour market has become stratified, with a hollowing out of middle-class, middle-income occupations, leading to more income inequality. This structural change is associated with a large increase in the ‘working poor’ population and a small, but substantial, increase in high-income workers. The policies of exposing Australia’s industries to global competition appear to have had real world consequences of systemic shifts in the workforce leading to an increasing share of employment in low productivity sectors.
The market power of firms in a range of industry sectors appears to be unchecked by the competition regulator. This, together with the collapse of the wholesale trade industry, is likely to further reduce competition, entrench existing oligopolies, stifle innovation and deter new entrants into the market. Reduced competition and the increased market power of existing firms is leading to rent seeking behaviour and an to an undermining of legislation prohibiting retail price maintenance…
If we are to have a workforce with a high level of disposable income, we need growth in labour productivity. The evidence in this study illustrates the negative impact that free trade policies have had on labour productivity. This means that we need to re-evaluate policy options on trade, competition, industry support, innovation and technology.
These TAPRI findings align closely with MB’s research on the matter. It’s a crying shame that more economists and think tanks (I’m looking at you Grattan Institute) can’t see the forest from the trees.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also Chief Economist and co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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