The cumulative effect of a three-month spell of unemployment is equivalent to nearly a year of lost pay.
Tight labor markets mean that people can find new work more quickly and hopefully avoid these economic scarring effects, not to mention the mental and emotional issues that often run hand-in-hand with unemployment.
But the benefits of full employment extend far beyond those who would otherwise be out of work. Tighter labor market conditions catalyse better labor market outcomes for all Australian workers.
As we know, real wages have been in holding pattern for the best part of a decade. With the current breakout of inflation, they are going backwards. Grattan Institute analysis suggests at least one-third of the slowdown in wage growth in Australia since 2013 occurred because of tepid macroeconomic conditions.
While we may have slightly overshot in adjusting the taps – with things now running a little too hot – pressures will likely dissipate, especially if the federal government and the central bank work in tandem to address strong demand and do what is possible to boost supply across the economy.
But my central point remains: strong macroeconomic conditions and a strong labor market will, over time, translate to higher pay for all workers.
There are of course many things that affect the rate of wages growth, as we’ll discuss over the next two days. But a strong economy with low unemployment is necessary and vital to getting wages moving again.
Our work shows that lower-wage and lower-wealth workers have the most to gain. Their unemployment rates fall by more than other groups when the overall unemployment rate is lower. Macroeconomic conditions matter for inequality.
When unemployment is low it lowers the cost of leaving a bad job and finding a better one. This is good for workers but it’s also good for productivity. Poor-performing businesses that survive, not on the strength of their products or services but off the back of exploiting their workers, are driven out. Investments and workers flow instead to better-run businesses.
And when workers are harder to find, businesses have an incentive to invest in new equipment and processes, which ultimately boosts productivity and drives higher living standards.
But when the dust settles on the current unusual period of hot demand and deep upheavals to supply – what will Australia be recovering to? Can we lock-in the
benefits of full employment, or will we return to the so-called secular stagnation of the previous decade?
Around the industrial world, the decade sandwiched between the GFC and COVID was one characterized by economic funk. Wages were stagnant, unemployment was elevated, and aggregate demand was weak.
The animal spirits of business appeared to be largely in hibernation. Profits were high and interest rates were low, yet investment was weak, rates of new firm entry and entrepreneurship declined, and so did rates of firm exit.
Whether we can permanently shake that funk depends on the actions of the groups represented in this room.
Can we today agree to make full employment our economic lodestar? A commitment to strive to maintain full employment is probably the single biggest commitment we could make to deliver better economic outcomes for Australians.
- Maintaining a full employment economy will require a prioritization of pro-growth investment.
- It will need an emphasis on taking on and training Australian workers – not just able-bodied, job-ready 30-year-olds, but the younger people reaching for their first job, people with disabilities and older workers who still want to make a contribution.
- And it will require a substantial upgrade of the policy scaffolding from government – especially the enablers – the climate policy, digital policy, industrial relations and human capital-boosting policies – to provide a positive ecosystem for this investment.
Also alive is the question of the role of Australia’s central bank and federal government in bolstering demand to maintain full employment. In a world of structurally lower interest rates, what role does fiscal policy have in helping the economy run hot enough to maintain its full employment position? These are issues that are front-and-center in the current review of the RBA, and indeed in similar reviews around the world. So while the macro policy levers are not in play for this summit, they do form an important backdrop to our conversation.
What is in play here is the issue of productivity – indeed, it is the second headline act of this morning’s session.
While full employment is about making sure we are not leaving Australia’s precious human capital on the shelf, productivity growth is about making the best use of every worker who is employed.
Work smarter not harder may be trite but it has been the defining feature of almost 80 years of extraordinary growth in living standards.
It might be easy to dismiss productivity as the niche fetish of economists and journalists on The Australian Financial Review but the recent Productivity Commission report, The Key to Prosperity, makes it clear why productivity matters.
At the beginning of the 20th century, life was materially worse than it is today for the average Australian on many dimensions.
Most obviously we had less stuff, with output of goods and services per person at federation less than 1/7th of what it is today. But even more significantly:
- For every 10,000 newborn babies, more than 1,000 died before they reached their first birthday, compared to just 3 in 10,000 today.
- For those who survived childbirth, life expectancy was about 60 years, compared to more than 80 years today.
- During their 60 years of life, the average Australian worked much longer hours, in more dangerous workplaces, and with little access to paid leave.
- Homes were smaller and more crowded – to say nothing of the absence of indoor toilets, dishwashers, and washing machines.
Productivity and wages growth go hand in hand. And while productivity remains the secret sauce of higher incomes, it is worth noting that recent research finds some reduction in the share of productivity gains passed through to workers has declined by 25 percent over the past 15 years, with the largest declines in retail trade , accommodation, and food services.
The other thing we know about productivity growth is that we have less of it than we used to. No matter how you cut it, the rate of productivity growth has slowed over the past decade.
This is not just an Australian phenomenon. The slowdown has been seen around the developed world, although our relative performance has slid down the international rankings.
Everyone is running slower, but Australia is also falling back in the field.
So why has productivity slowed down?
There is no single answer, but there is broad agreement on the main explanations:
- expansion of the services sectors, which are generally lower productivity,
- a declining contribution from technological advancements,
- smaller gains from education, as richer countries begin to reach saturation
point on school completions and the proportion of people going to post-school education,
- a reduction in economic dynamism and, related to that, greater market concentration and power.
But while the whys have been well thrashed over, and the problem admired from almost every angle, this summit is about the whats.
What levers do we have and what commitments can we make as businesses, as unions, as civil society, or as governments – to drive improvements in living standards in Australia for the next decade and beyond?