ABBREVIATIONS
ABS = Australian Bureau of Statistics
ASEAN = Association of Southeast Asian Nations, (comprising Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand)
COAG = Council of Australian Governments
G4 = Group of 4 (comprising Germany, Japan, United Kingdom and United States)
G7 = Group of 7 (comprising Canada, France, Germany, Italy, Japan, United Kingdom and United States)
GATT = General Agreement on Tariffs and Trade
GDP = Gross Domestic Product
GNP = Gross National Product
OECD = Organisation for Economic Co-operation and Development
NAIRU = Non-Accelerating Inflation Rate of Unemployment
TAFE = Technical and Further Education
PREFACE
Unemployment is once again the foremost social and economic problem in Australia (as it is in some other mature industrial economies). Although social security payments prevent the extremes of poverty experienced in the 1930s, over a million Australians are either unemployed or have dropped out of the labour force. They and their families are denied the security and independence which Australians of only 20 years ago regarded as their birthright.
As the unemployed fall out of social mainstreams, unemployment undermines the fabric of society. Family relationships suffer. Children suffer. An alienated underclass, often living in ghettos, is created. Australia is becoming a less egalitarian society, with the tensions that that implies.
Australians are concerned about unemployment. They understand its consequences but not its causes. Many have come to believe that it is inevitable rather than caused by inappropriate policy.
Although not inevitable, it is true that unemployment is too entrenched to be eradicated overnight. And, sadly, it is also true that, unless the policy framework that causes it begins to change now, unemployment levels will again exceed 10 per cent in the next economic downturn.
The Full Employment Project was created to convince voters that governments can restore full employment in the foreseeable future.
The broad outlines of the policy changes needed to achieve full employment are well known. If the voters choose to support them, they can be implemented. The political process is the key to overcoming the claims of the narrow interest groups that stand in the way of full employment.
This is the first of a series of discussion papers designed to bring the public debate about employment to the forefront of politics. It argues that full employment is practicable and outlines how it may be achieved.
Richard J. Wood
1 SUMMARY AND CONCLUSIONS
Australia is now in the fourth year of recovery from the recession, with a 5 per cent annual growth rate for the last quarter of 1993-94. Large businesses show solid earnings. It seems that private productive investment is at last starting to pick up so that the recovery will no longer be dependent on increasing spending on consumer goods and housing and on public expenditure.
Most Australians enjoy unprecedentedly high standards of living. In developing East Asia the remarkable development strength of the last 30 years is continuing. Recovery is evident in most other OECD countries and growth has resumed in other developing countries, except in Sub-Saharan Africa. If we were to judge by past upswings from recessions, Australians could look forward to a few years of job growth. The next downturn is not being forecast to occur until 1996-97 and optimists put it even later.
As the number of jobs increases with the economic upturn, a sense of security is adding to the well-being of the majority of the population. Unemployment fell from its peak of 11.3 per cent in October 1993 to 9.5 per cent in October 1994. If unemployment were to continue to fall, the nearly two million Australians now affected (the unemployed, the underemployed, those who have been pushed out of the workforce by unemployment, with their children, estimated at another half a million), would not need to worry. By the end of the 1990s unemployment would be down to the 2.5 per cent peak of the 1950s and 1960s, the trend toward increasing inequality would be reversed, and the present "have-nots" in our society would once again be able to enjoy the good life of the "haves". The dangers of a divided society would be averted. Social security and social organisations could focus on the needs of the "underclass" that has been created by high unemployment, to ensure that its numbers recede and that the children in the affected families are given opportunities to participate fully in society.
The White Paper on unemployment, Working Nation, claims that the economic "settings" now in place will deliver unemployment levels of 5 per cent by the year 2000-01. Working Nation hopes for six years of uninterrupted annual growth averaging 4.75 per cent to deliver this outcome.
But with 5 per cent unemployment at the end of the 1990s, long-term and youth unemployment would persist. The present unemployed queue might be shuffled by a successful "jobs compact" programme (and success is doubtful), but only to create a different group of more than 300,000 long-term unemployed. Some of the youngsters leaving school this year would still be unemployed when the Olympic Games come to Sydney. And opportunities for severely disadvantaged groups, such as Aborigines and Torres Strait Islanders, would scarcely have improved.
Economic forecasting is notoriously inaccurate. The "optimistic" Working Nation scenario may eventuate, although an already-growing balance-of-payments deficit and already-emerging pressure on interest rates suggest that Australia's long-term downward trend in the per capita income stakes has not been halted. Most analysts' forecasts are much more pessimistic than Working Nation's. The Treasury's 1994-95 Budget Statements assume a growth of 4.25 per cent to 1996-97. The MONASH model forecasts a drawn-out slow recovery, averaging about 3.8 per cent per year. Such a growth rate, according to the Green Paper on unemployment, Restoring Full Employment, would mean an unemployment rate of 7 to 8 per cent in 2000-01.
The Westpac-Melbourne Institute Centre for Business Cycle Analysis predicts that the next downturn in the Australian economy is likely to occur sometime after December 1995, though perhaps not until 1997. Unexpected international or domestic events could postpone the downturn further. There is little doubt, however, that a downturn by the late 1990s is possible and even likely.
The combination of a downturn with less than sustained 4.75 per cent annual growth, would mean a return to double-digit unemployment before or by the end of the 1990s. Unemployment could be even higher than the 11 per cent unemployment peak of the last recession.
CEDA's A Long Term Economic Strategy for Australia (the Argy Report) and the Business Council's Australia 2010: Creating the Future Australia, use similar modelling frameworks to those used by the Green Paper on unemployment, the Treasury and the Economic Policy Advisory Commission (formerly the Economic Planning Advisory Council, EPAC). These studies agree that annual growth rates would need to average 4.5 to 4.75 per cent to reduce unemployment to 5 per cent by 2000-01, but both consider that the pace of economic reform would have to be substantially accelerated to achieve such rates of growth.
The analysis of growth and employment relationships is complicated by assumptions about population and workforce participation trends. The Green Paper assumes that workforce participation rates will fall somewhat during the 1990s. Given that Australian work participation rates are still low by comparison with many OECD and developing countries, this assumption could prove to be unrealistic, making the unemployment forecasts of Working Nation too low on these grounds alone. The 5 per cent unemployment target is thus likely to require a sustained annual economic growth rate of some 5 per cent.
The employment debate has been derailed since the 1970s by the assumption that a return to the 2-to-3 per cent unemployment levels of Chifley's 1946 White Paper on Full Employment is not a practicable national target. The Australian electorate has been led to believe that high unemployment is the price that the unemployed have to pay for the prosperity of the rest of the nation. The entry of women into the workforce, immigration, the increasing use of machinery and the unemployed themselves are being blamed for the persistence of unemployment. Since the early 1970s, slice by thin slice, the voters have been fed economic mumbo jumbo about "natural" rates of unemployment, Phillips curves and the Non-Accelerating Inflation Rate of Unemployment (NAIRU). The conventional wisdom is that inflation in Australia today can only be contained with 7.5 per cent unemployment. The high annual growth rates of 6 or 7 per cent achieved by our neighbours in East Asia, with marked growth of employment and improvements in living standards, are not for us. The only comparisons normally permitted are with the OECD "average", that is, with countries that have opted for low growth and high unemployment.
The justifications for low growth and high unemployment are the arguments of those defending privileged positions in the economy. They include bureaucrats who find it easier to manage inflation when high unemployment reduces the upward pressure on wages, members of the industrial relations "club" afraid of seeing their substantial power bases swept away, the education establishment that fears a movement away from tenure to rewards for excellence, managers afraid of competitive pressures, and those workers who fear, erroneously, that full employment can only be achieved with low wages and poor working conditions. Those who would benefit most from high growth rates, low unemployment and a reversal of the trend towards inequality have not made themselves heard in the political process. Middle and upper income Australians would also benefit from a richer society with more resources for education, health, social and environmental care as well as for personal expenditures, but they fear change.
Relief that recovery is finally here makes it difficult to recognise that this upswing is only another peak in a cyclical economic rollercoaster. Accepting current economic "settings" and reform timetables will mean that standards of living will continue to slip in relative terms so that before long we will cease to be a high-income country in the East Asian neighbourhood.
The recovery since mid-1991 has been much slower and weaker than the recovery from the 1982-83 recession. Although the reforms of the 1980s have made Australia more competitive than it was a decade ago, we have become even less competitive in relation to the rest of the world in the past decade because other countries have moved forward faster. Low competitiveness combined with low savings has resulted in balance-of-payments deficits which are already being forecast to rise to $22 billion for 1994-95. Unchecked, balance-of-payments deficits will lead to growing unease about the exchange rate of the Australian dollar, rising interest rates, a credit squeeze, and a return to rising unemployment which will sharply cut living standards. Devaluation will put pressure on prices.
In marked contrast to such a scenario, the sacrifices which most working Australians would have to make to increase the rates of growth and improve the balance of payments, that is, to choose the economic and social settings that will deliver full employment, are not sacrifices of income or goods and services. Starting in an economic upswing means that most of the transitional costs could be absorbed by growth. The essential policy changes require new mind-sets and a return to the social priorities of an egalitarian and fair society.
Australians have been persuaded to distrust, rather than to welcome, change. They have been encouraged to think of their narrow sectional interests rather than the community, including the unemployed.
What about a "quick fix"?
Though many have been proposed, there are no "quick fixes" for unemployment.
Levies on employed workers and other wage-reduction schemes are not politically acceptable. Unless very carefully designed and implemented, they would not lead to the economic transformations that would lift growth appreciably and so stimulate sustained job creation. Tax increases that would be needed to provide the employment in the public sector that would mop up unemployment do not lead to sustained increased growth rates and job creation. This approach was tried in the Scandinavian countries. It failed. "Work-sharing" and the shortening of working hours would set the economy and standards of living into a downward spin. So would a return to barter trade schemes which flourish by avoiding the taxes that other Australians pay. Working Nation's "job compact" may seem to be effective as the recovery creates additional jobs, but as the process continues it will be evident that the "job compact" merely recycles the unemployment queues. Only a policy agenda that will reduce the obstacles to growth and employment throughout the economy will deliver full employment.
A POLICY AGENDA FOR FULL EMPLOYMENT
Once an economy has been allowed to go into long-term relative economic decline -- Australia has slipped from 10th to 18th place in per capita income in the last 20 years -- turning it around requires economy-wide measures. The experience of reform in many countries, moreover, clearly indicates that unless a rapid pace of reform is maintained across the board, particularly in the early stages, the reform impetus peters out and the economy again starts to slip back. This is what has happened in Australia. The reform process has to be accelerated quite markedly if full employment is to be achieved. Every year of delay makes the necessary changes harder to put in place.
Macroeconomic settings
Australia's growth potential is being undermined by weak macroeconomic policies. A high budget deficit is inexcusable four years into recovery, when growth is at last higher than it has been for ten years. Short-term and narrow, election-cycle fiscal policies cannot be allowed to dominate national priorities and the costs of unemployment. Australia's low savings can only be improved quickly through public savings, that is, through Commonwealth budget surpluses and continued improvement in State budgets. In the recovery phase of the business cycle, the total public sector should be in sizeable surplus.
Fiscal mismanagement is reflected in falling public investment and ageing public infrastructure. Australia is competing with countries such as Thailand, which plans to spend $9 billion a year on infrastructure during the next 5 years, and Taiwan, which plans to spend $25 billion a year on infrastructure during the next 10 years. If present Australian trends continue, Australia's infrastructure will be completely outclassed within the region by the year 2010.
Australia has to adopt prudent budgetary policies, building up budget surpluses and substantially increasing public savings during cyclical upswings. Investment in infrastructure must be encompassed in such budget policy. Budget deficits must be reserved for counter-cyclical measures in economic downswings.
Australian taxes are about average among advanced industrial countries (when social security contributions are excluded for all countries), but the Australian tax system is inefficient and inequitable. Payroll taxes penalise employment. Indirect taxes are narrowly-based and biased against exports. The vast structure is so difficult to interpret that it appears, and to some extent is, arbitrary. Businesses receive conflicting instructions and are subject to punitive measures as a result. This severely discourages investment, particularly small business investment. The Australian tax system has such a poor international reputation that it also discourages foreign investment. Tax compliance costs are extremely high, particularly for small business. The changes of recent years have increased the fairness of the tax system in some respects, but they have also added to its costs and inefficiency. Further tinkering will lead to even higher costs.
A full review of the present taxation system and its administration, to lay out the principal reform options that would provide a strong, equitable and efficient fiscal base appropriate for each level of government, is long overdue.
The Reserve Bank's interest rate rise on 17 August 1994 was, no doubt, intended to be a shot across the bows to warn of the Bank's determination not to tolerate a return to inflation. Its immediate effect, however, will be to feed inflation through its impact on the cost-of-living index, thus encouraging wage claims. It will also reduce the profitability of business, particularly of small business, and hence reduce business savings which are a critical component of total savings. Australian real interest rates are still high by international standards, in part, of course, as a reflection of high international borrowing. After the very high interest rate policies of the late 1980s, the likelihood of further interest rate rises discourages investment. High interest rates also lead to the overvaluation of the exchange rate and thus undermine exports and import substitution.
Prudent budget policies and vigorous export growth are necessary to bring real Australian interest rates down to the levels of advanced industrial countries, to cease discouraging business, particularly small business, and to avoid the overvaluation of the exchange rate.
Current household savings "settings" are clearly inappropriate. Australians enjoy high levels of consumption without much need for thought for tomorrow. Unemployment relief, health protection, social security support and old age pensions contribute to a high sense of security. And security is an important aspect of well-being. But if Australians want such a high degree of social security, they will have to pay much higher personal taxes than they pay now so that the government can save on their behalf. One way or another they will have to save.
The savings "settings" are skewed toward consumption. Uncapped exemption from capital gains tax on the first home creates a considerable bias toward the consumption of luxury housing. Lending against the security of housing tends to be at low rates to reflect low risks but also to meet social objectives, but consumers are being encouraged to use such funds on luxury consumer durables.
The superannuation system, which should have been designed to become a major future source of household savings, is creating false expectations. Queensland government superannuation is the only fully-funded public service superannuation scheme. The industry schemes funded by deductions from wages have shifted some savings from bank deposits to superannuation funds, but because they have very high administrative costs, it is already clear that they will not provide adequate retirement benefits for many people, particularly for low-paid workers. Even if contributions are raised as planned, the benefits for the bulk of the workforce will not be appreciably better than current old age pensions. Serious prudential dangers are already emerging, with the proposal to use the maritime workers' superannuation funds to buy shares in the unprofitable Australian National Line, and more recent suggestions that superannuation funds should be "encouraged" to invest in airport leases. Investing employees' superannuation funds in the employees' own industry is especially risky.
The biases against savings have to be ended. If superannuation is to become equitable and so efficient that it ensures a comfortable old age for Australians, it will have to be rebuilt around individuals' own savings, the bureaucratic infrastructure which eats up small earners' contributions will have to be reduced, and prudential supervision will have to be strengthened.
The end of protection
Reducing import restrictions and tariffs, so that Australia could catch up with the trade reforms that began in other industrial countries in the 1950s, was an essential turning-point on Australia's path to competitiveness. The globalisation of the world economy that began in the 1950s (although in Australia it is often still perceived as something that has only happened in the 1980s and even 1990s), ended Australia's ability to subsidise urban employment in Australia out of our rich agricultural and mineral endowment. Australia looked extremely foolish in the Dillon and Kennedy rounds of multilateral GATT trade negotiations when it pleaded that it was only partly-developed. In the Tokyo round of multilateral negotiations Australia still participated half-heartedly. Only in the Uruguay negotiations was the value of the ever-widening GATT network recognised, particularly through the worldwide Cairns Group of agricultural producers.
When the Uruguay gains are put in place, Australia will still have a relatively high tariff level of 10.9 per cent, compared to 2 or 3 per cent for advanced industrial and developing countries. The timetable for catching up with these countries, to reduce tariffs by the year 2000, is slow by international standards. Mr Keating recently promised the lagging industries -- motor vehicles and footwear, clothing and textiles -- that he would give sympathetic consideration to delaying their tariff reductions. Australian non-tariff barriers are of the same order of magnitude across the board as those of other industrial countries, except for anti-dumping measures. Within East Asia particularly, Australia is regarded as using dumping measures for protectionist purposes.
To make trade liberalisation effective, Australia floated its exchange rate and considerably liberalised capital flows and the financial sector. But these measures alone have not been sufficient to keep pace with productivity and competitiveness in the rest of the world, notably in East Asia. Australian producers have not been able to take advantage of trade liberalisation because microeconomic reforms have not taken place.
The evidence is clear. Domestic productivity growth, and import and export competitiveness, are two sides of the same coin. Export performance is relatively easy to measure. Comparative data indicate quite unequivocally that Australia is lagging behind in export performance:
- Australia's export-to-GDP ratio is below 20 per cent. Although it has increased in recent years, it is still the lowest among small and medium-sized industrial countries and less than half that of most East Asian countries;
- Australian exports of elaborately transformed manufactures have only grown at 8 per cent a year since the mid-1980s, a significant proportion of them is highly subsidised, and they represent only 10 per cent of manufacturing output and 14 per cent of total exports of goods and services;
- Australia ranks 21 out of 22 OECD countries in the share of service exports to GDP.
Australian exporters have only 3 per cent of the huge US$1,000 billion worth of imports of goods and services into Asia. They blame the Asian countries' import restrictions for this small share. But other exporters within and outside the region face the same access conditions. They supply 97 per cent of Asian imports because they are more competitive than Australian producers. The craters that Australians perceive in the international playing field are predominantly of our own making.
Low productivity leads to uncompetitiveness which is the principal cause of low exports. Australian products also cannot compete with imports. External debt accumulation adds to debt-service costs, and rising world interest rates now seem likely to add to service costs further. These are the reasons for balance-of-payments difficulties. Low productivity reflects the slow reform of redundant regulations, infrastructure and the labour market. A backlash against the reduction of protection is encouraged.
Australia should continue to participate in the improvement of the multilateral trading system. To ensure credibility, particularly in East Asia, it must reduce its tariff levels to those of other advanced industrial countries and ensure that anti-dumping or other measures are not used covertly for protectionist purposes.
Reforming the regulatory environment
High protection and statist ideologies created an intensive regulatory environment in Australia. Some regulations are certainly essential to ensure safety, health and environmental protection standards. Most sectors have some regulatory requirements to reconcile private and social interests and the interests of various groups in the community. But Australia is grossly over-regulated because statist philosophies have assumed that bureaucrats "know better" than individuals and markets. Worldwide events have almost universally proved this assumption to be wrong. Most measures to correct market failure have proved to be more costly than the market failure they sought to fix.
Redundant local, State and Commonwealth regulations impose heavy costs on businesses and individuals. The opening of a coffee shop, a small engineering establishment or a printing business, requires up to 20 separate licences and permits. Many of these are impediments to doing business. Continuing compliance demands of the taxation, superannuation and industrial award systems are loaded onto other Commonwealth, State and local regulations. All Australian businesses were recently advised that it was their responsibility to collect for the Taxation Office any money owed to the Government by graduates who had opted to postpone paying fees until they were working. These sums could be collected at lower cost directly through annual tax returns.
Businesses object to being turned into policemen. In practice, small businesses have to break the law constantly to stay in business. They resent being forced into illegal activities. With the increasing costs imposed by the Industrial Relations Reform Act 1993, they are under even stronger pressure not to hire additional staff.
Unwarranted regulation keeps many public servants at work. Indeed, they have a vested interest in increasing regulation to ensure that they are busy and become supervisors of others. Regulatory language remains convoluted. It leads to high compliance costs and control, but gives the public service control. The morning planes to Canberra are full of businessmen seeking "clarifications". Australian business of all sizes is intimidated by the regulatory environment; small business is most intimidated.
Political parties searching for electorally-attractive measures seize on claims that small business problems arise from the lack of loan funds. In fact small businesses are afraid to invest their own funds in equity and to borrow because of their past experience of macroeconomic squeezes. It is little wonder that small business people are pushed to invest in real estate, become employees, notably in the highly protected public sector, or at worst, live on social security benefits.
To provide a climate in which private enterprises can flourish, each State and Territory and the Commonwealth should establish an Ombudsman for Deregulation to ensure that redundant and gobbledygook regulations are taken off the books.
Reducing infrastructure costs
The high costs of the government trading enterprises that dominate infrastructure have been clearly documented. Their charges help to make Australian goods and services uncompetitive with imports and in exporting. Reforms to date have not gone nearly far enough. Users are being exploited through inefficiency and monopolistic pricing that is used to subsidise State budgets. Costs of shipping primary products by rail are 2 to 3 times those in the United States. Coastal shipping freight rates are totally uncompetitive. Despite the reforms on the waterfront, Melbourne was until recently the highest-cost port in the world. It was replaced this year by Hamburg, indicating the growing lack of competitiveness of West European countries. It has been estimated that when the reform of the Australian waterfront is completed at the end of the 1990s, Australian ports will still be several times as costly as Singapore, which is already better equipped than the ports envisaged for Australia in the year 2000.
Many government trading enterprises have to be subsidised to stay afloat. The recent Australian National Line settlement provides some $20 million a year to enable it to compete abroad. The retention of the Australian coastal and Tasman shipping monopolies will mean that high domestic shipping costs will continue. Despite some reductions in manning, vessels not only continue to be grossly overstaffed, but the "6 months on and 6 months off" practice is still in place. Ships still have 2.2 sailors for each "berth". The ratio is to be reduced to 2:1 by the end of 1995!
The Hilmer Report underlined the importance of introducing competition to the public goods and services sector. In some areas, encouraging competition is relatively easy. Railways could compete with road and air transport. Privately-owned trucks make road transport the most internationally competitive infrastructural industry, and buses and airlines could compete among themselves and with each other and with railways. Telecommunications technology has made competition possible in what was until recently a "natural monopoly". Privatisation is likely to improve operating efficiency as shareholders replace bureaucratic masters. But many public goods and services, such as water supply and sewerage, whether they are publicly- or privately-owned, will not operate at international efficiency standards without regulatory supervision. It is extremely important that new forms of regulating monopolistic sectors do not replicate old errors. State surveillance authorities are taking up the challenge of regulating public monopolies as the States reform their public infrastructure sectors.
Lowering infrastructure costs to international levels requires vastly improved efficiency. States have the primary responsibility in most areas, though some national co-operation is needed. Privatisation, efficient business practices in remaining publicly-owned enterprises, and regulation to prevent monopoly exploitation of consumers are needed. Cost savings must be passed on to consumers, not used to subsidise government budgets.
Labour market reform
Labour market reform is unquestionably a central, largely unaddressed and certainly unresolved policy issue. The last decade has seen some steps forward, notably in the introduction of multiskilling and enterprise bargaining, and attempts to simplify awards and to reduce demarcation disputes; but more recently, there has been a retreat toward greater inflexibility and inefficiency. The costs are borne primarily by the unemployed, underemployed and those who have dropped out of the workforce, and by their children. The trade union movement has totally neglected these workers.
The slow pace of reform is also responsible for falling real earnings for those at work. Australia is becoming a relatively low-wage country. Hours of work have also increased in Australia, so that we now have among the longest hours of work among advanced industrial countries.
High unemployment, falling real wages and rising hours of work are not the result of economic globalisation. They arise from the rigidities in the Australian economy that have made it very unresponsive to changes in the rest of the world. Some Western European countries have similar rigidities, and similar unemployment and declining wages. Industrial awards, through penalty rates and other limitations on flexibility, prevent the full utilisation of capital. But penalty rates do not benefit workers if they are not paid. They merely drag down the economy. Shiftwork is concentrated in mining, continuous process manufacturing, some manufacturing firms that have introduced shiftwork through enterprise agreements and service industries such as tourism and hospitals. These account for 14 per cent of the workforce. Shops are extending their hours in most States. But elsewhere the four-and-a-half-day working week and 200-day-working-year prevail. Buildings and machines are typically only used 20 per cent of the time available. The low utilisation of capital is a major reason for the inability to compete with imports and to increase exports. It also leads to low investment and low research and development spending. Equipment and buildings take twice or three times the time to depreciate that they take in other countries. If Australia used its machinery more intensively, unit costs of production would fall, there would be a jump in productivity, earnings could rise without a rise in hours worked by individual workers, and the profitability of capital would rise, encouraging business savings and investment.
Some efficient managements have moved away from the practices affordable in the years of high protection to shiftwork through productivity-oriented enterprise agreements or by taking workers on as staff. Multiskilling, on-the-job training, improved work organisation and other productivity-increasing practices have been introduced.
The firms that have increased capital utilisation through shiftwork have not had difficulty in finding workers. Many unemployed people jump at the chance to work shifts. It suits many parents to work unconventional hours so that they can look after their children, shop and organise their recreation as they want to. Unfortunately the costs and risks of negotiating innovative enterprise agreements have been so greatly increased by the Industrial Relations Reform Act 1993, that the pace of labour market adjustment has substantially slowed.
Unless the trade union movement recognises the need for accelerated change in work practices, unemployment will continue to be high and earnings will continue to fall in comparison to the rest of the world. Unions are evidently increasingly unable to convince workers that they represent their interests. Outside the public sector, trade union membership is down to 30 per cent of the workforce and falling. The unions' strength is in the public sector (some 60 per cent of union membership) where competition is absent, hours of work are low, earnings are relatively high but productivity is low. The rest of the labour force is subsidising these workers.
During the years of protection, the industrial relations system sought to determine wages, hours of work, working conditions and welfare standards. For example, not only did annual leave, which should be related to productivity, become part of the award system, but a 17.5 per cent leave loading was added, presumably because it costs more to go on holiday than to stay at home and go to work! Long service leave became divorced from productivity by becoming vestible. The differences between the remuneration of skilled and unskilled workers have been squeezed to maintain socially desirable minimum wages for low-skilled workers, but without taking the productivity of highly-skilled workers into account.
Industrial relations judgments bear no relation to economic development or social justice. They lack analytical skills that a first-year student would be expected to demonstrate. The system has encouraged adversarial posturing rather than the pursuit of productivity. Malaysia and Singapore were both saddled with the Australasian industrial relations system in colonial days. They both abolished it because they saw it as an obstacle to increasing their living standards. Their wages have grown rapidly. New Zealand has only retained central wage-fixing as a safety net.
Trade unions have an important contribution to make to a just and democratic society. They can only make it if they represent the interests of all workers, including unemployed and underemployed workers and those only marginally attached to the economy. The unions today should be spearheading a movement to increase the productivity of capital and labour so that the falling wage trend can be reversed and Australia can return to the ranks of high-income countries. The industrial relations system has served its "club" well but it has failed the workers, particularly those that it has deprived of jobs. It should be reduced to a wage and working conditions safety net. The unions, like managers, should focus on enterprise-based productivity growth to serve employed workers and bring the unemployed back to work.
LABOUR ABSORPTION
The primary cause of unemployment is the absence of jobs, but labour supply factors also affect employment. Inappropriate social security arrangements encourage workers to leave the labour force. Re-entry becomes very difficult for such workers. Their adolescent children also often find it difficult to find and keep jobs. If Australia is to compete internationally at high wage levels, the labour force and the capital it uses must be technologically advanced. Education, training and re-training must be internationally competitive.
Social security
Social security ensures that unemployed workers and those who have dropped out of the labour force do not sink into poverty. The implementation of social security programmes, including access to health care, has been a great achievement of most advanced industrial countries since the end of World War II. The impact of recessions has therefore been mitigated for the unemployed and the economy. Consumer demand has not collapsed as it did in the 1930s, avoiding catastrophic cyclical unemployment.
But like industrial awards, the social security system also has undesirable side effects. The present social security system is extremely intrusive. Social security payments are very demanding bureaucratically and hence costly. Because payments cannot be policed properly, they encourage cheating. Combined with tax evasion, this lowers moral standards in the community. Both the person who mows a lawn "for cash" and the person having the lawn mowed, break the law.
Social security encourages unemployment by creating a "poverty trap". Unskilled workers can often obtain higher payments from social security than if they work. And they do not have to pay fares, buy clothes and make the other expenditures that go with working.
Working Nation took steps to improve the standards of living of unemployed families and also to make it easier for unemployed men and women to seek part-time work as a prelude to full-time entry into the labour force. These measures, however, are too tenuous to encourage unemployed people and those who have dropped out of the labour force to make determined efforts to get back to work. The difference between social security benefits and low wages remains, encouraging low-income earners to leave the labour force, neglect such skills as they have and sink into an "underclass".
The social security system needs serious rethinking from the point of view of the individual, the family and society. The system has to be less intrusive, less discouraging to employment and administratively simpler.
Education and training
As work becomes less arduous and more productive, jobs require increasing social and technical skills. Productive work also requires involvement and commitment. The alienation associated with repetitive semi-skilled, mass-production processes is giving way to responsibility, teamwork and customer orientation. These qualities require improved formal education, on-the-job training and further education and training through what are likely to be longer working lifetimes.
The last 10 years have seen education in turmoil as attempts have been made to rectify past mistakes. Some gains have been made. Children and parents want more education. Most youngsters are staying at school till year 12. Girls have caught up with boys in the length of education and in entry into higher education. To some degree, indeed, boys are now having serious problems in entering the labour force because those not in academic streams have greatly inferior social and educational skills to girls.
Australian primary schools have become greatly differentiated by location. In low-income and high-migrant areas, primary schools are not teaching children reading, writing, arithmetic, general knowledge or social skills adequately. While academic secondary streams in private and state schools frequented by the wealthy have advanced, the secondary schools which draw on children from lower-income groups are failing to educate their pupils in technical or social skills. Discipline is often a problem. There is no point in keeping teenagers at school if they are bored, learn little, and acquire antisocial attitudes. The differences between the "haves" and "have-nots" are being exacerbated rather than modified by the education system.
Vocational education is woefully inadequate. The reforms that sought to invigorate Technical and Further Education (TAFE) institutions, so that young people would have greater flexibility of working and learning, have failed. Only a few TAFEs measure up to the standards of countries like Germany, Japan, Korea, Singapore and Taiwan. Only 20 per cent of school leavers attend vocational schools; the comparable figure for Germany is 80 per cent and the average for OECD countries is 50 per cent. A severe bias against girls continues.
About 25 per cent of young people between 18 and 24 years of age are said to attend universities, but this is not a meaningful statistic because of the variability of standards following the Dawkins reforms. Amalgamations of very disparate institutions have led to severe diseconomies of scale, lowering academic standards and creating unwarranted bureaucratic intervention by the Commonwealth Department of Employment, Education and Training. Resources have had to be shifted from teaching and research to administration to respond to the Department's demands. Some campuses look like slums.
Partial fees have somewhat reduced the subsidies to middle class students who dominate enrolments, particularly in professional disciplines such as medicine, law and engineering. But other major opportunities for cost-efficiency were rejected. The tenure system, which, under the disingenuous guise of protecting freedom of speech, rewards incompetence and laziness, was retained in the TAFEs and universities. Buildings and equipment are used only for a short part of the day, they are little-used at weekends and they are only open for about 36 weeks of the year. Fear of the reaction of tenured staff has prevented a move to full-year (three-semester or "four-quarter") use of campuses. Full-year operation works well in Bond University and many high-quality North American campuses, giving teachers a semester for research each year. Students who want to accelerate their progress benefit. Year-round utilisation of campuses could increase higher education enrolment by some 100,000 students without major investment.
The market is reacting to the effects of the Dawkins plan. Guides to universities are being written and students are choosing among institutions as they do in other countries with variable standards. But unless high-quality education standards again become a central concern and postgraduate education is developed, tertiary standards will be further diluted. The sales of quality education abroad will decline and the high leadership qualities which are universities' most important contribution to society and its development will not be available.
Centralisation of education has been a failure. Education is a State responsibility. Common national examinations should establish national standards, test school performance and determine entry into undergraduate and graduate courses. Such systems work well in countries as disparate as the United States and Malaysia. An experienced international testing service could introduce nationwide testing quickly on a voluntary basis. Commonwealth funding could then be made available to the States on the basis of examination results. Low-cost universities that used their capital efficiently would be able to innovate.
WHERE ARE THE JOBS?
Australia would have to create well over a million jobs in the next 6 years to eliminate today's visible unemployment and underemployment by the year 2000. New labour-force entrants will largely offset the number of aged leaving the workforce; increased productivity will lead to further labour-shedding, notably in public enterprises, as productivity rises; work participation of women will again rise; and some of the "drop-outs" will re-enter the workforce. More young people will enter vocational education. With these trends, the civilian labour force would rise from some 8.5 million in 1993 to 9.2 million in 2000. Cyclical and frictional unemployment of 3 per cent would mean about 300,000 people out of work.
To put people to work requires capital, competitively-priced inputs and competitiveness in production to win markets for additional output at home and abroad. Moving to high capital utilisation by a jump in shiftwork would minimise investment requirements. Australia should follow the example of East Asian countries by adopting export-led growth. This would respond to the large and rapidly-growing market in East Asia and to the likely growth elsewhere in the world. Balance-of-payments problems would not stall the economy if exports grew rapidly. Wage increases would be limited to productivity growth and would therefore not lead to inflation. New Zealand has increased its exports to 30 per cent of GDP. There is no reason why Australia cannot follow.
Roughly a million workers are employed in manufacturing. Exports of manufactures currently probably employ less than 100,000 workers. Raising the exports of manufactures from 10 to 30 per cent of the output of manufacturing would employ less than another 200,000 workers (because production for export is more productive than for the domestic market), but some employment would also be created by increasingly competitive production for the domestic market, so that the total increase in employment would be well in excess of 200,000.
About a million international tourists enter Australia annually. They employ about 100,000 workers. There is considerable excess capacity in tourism and the price elasticity of demand for tourism is high so that the inflow of tourists could be greatly increased if penalty rates were abolished and costs and prices fell accordingly. This could provide work for another 100,000 people.
Construction employs 600,000 workers. Introducing shiftwork could eventually double that number without a commensurate increase in additional investment, substantially reducing construction costs and the time taken to complete a project. As a start, following the example of the handful of firms that are attempting to improve productivity by using their capital and labour more intensively, another 100,000 workers could be employed, in part substituting for overtime.
Additional workers would be employed in agriculture, mining and services for export. Adding some 400,000 workers very quickly into the workforce would have immediate multiplier effects on the service sectors where most of the labour force is employed. As a rough order of magnitude this would provide the 600,000 jobs needed to make up the more than a million jobs targeted. Annual GDP growth would rise well above the most optimistic current forecasts as it did in East Asian countries when they adopted export-led strategies. In Singapore, the preparation of annual plans had to be abandoned in the late 1960s because the planners could not keep up with the rapid growth of the economy. Singapore moved from 13 per cent unemployment to welcoming immigrants to overcome labour shortages within 5 years.
Accelerated microeconomic reform would have to back the employment increases. Unnecessary regulations would have to be eliminated to stimulate production. As their compliance costs fell, small-scale firms would hire workers. Government state enterprise reform would have to be greatly accelerated to lower costs to exporters.
The freeing up of the labour market would be the critical component of the employment programme. Enterprise bargaining would return to the pre-Industrial Relations Reform Act 1993 environment to enable capital utilisation and labour productivity to increase sharply. Earnings would rise. Social security and education reform would interest workers in being part of the labour force to improve their life styles. Social problems would be reduced.
Macroeconomic policy would have to stand behind such a programme. The budget deficit would have to be turned immediately into a surplus. Expenditures on unemployment and social security would fall steeply, contributing to saving and investment. Subsidies would be sharply reduced. Wasteful government expenditures would be cut. Interest rates would not be under pressure to rise and the money supply would not be allowed to blow out. With taxation and superannuation reform, private as well as public savings would start to rise, underpinning long-term growth.
Australia cannot afford to wait 10 to 20 years to turn the economy around and return to full employment. The recipients of production subsidies are becoming more entrenched with every set of election promises. The greater the distortions that create benefits for some sections of the workforce, the harder they are to give up. Those dependent on welfare handouts lose hope. Reform will become more difficult with every year that passes. The time to start achieving full employment is now.
2 THE WORKFORCE
It seems incredible that a country as richly endowed as Australia, located close to the fastest-growing region in the world, should be in the throes of serious economic difficulties, including high unemployment. A century ago Australia had the highest per capita income in the world. It is now down to nearly 20th in the per capita incomes league, and falling. Among countries emerging from poverty, Japan moved ahead of Australia ten years ago; Singapore and Hong Kong will do so shortly. Other East Asian countries are catching up quickly.
Looking at per capita income alone, of course, understates standards of living in Australia. A rich and varied continent provides a great wealth of natural resources as well as unparalleled living space. A climate ranging from cool temperate to tropical favours healthy and satisfying lifestyles. Australian "haves", in real terms, still enjoy one of the highest living standards in the world.
Until the 1970s, Australia was also one of the world's most egalitarian societies. Inevitably, there were some poor people, but a far-reaching social welfare system, together with strong support from volunteer organisations, was able to keep deprivation at bay. This is no longer the case. Twenty years of unemployment have created a new "underclass".
Although the workforce grew in the 1970s and 1980s by an average of 2 per cent a year, so did work participation rates, largely because of increasing work participation by women. The economic policies of these years failed to provide employment for the increasing workforce or adequately to prepare the new entrants for participation in the workplace.
The potential workforce consists of males aged 15 to 65 and females aged 15 to 60. Work participation is defined on the basis of gainful civilian employment, unemployment (those who wish to work but cannot find jobs), and membership of the defence forces. It excludes those in full-time education, those who wish to nurture children and families, those who can afford to live without working and those who have dropped out of the workforce and live by subsistence activities or are supported by social welfare. These definitions necessarily overlap, but Table 2.1 gives an indication of the composition of the workforce.
Immediately after World War II, the women who had played a key role in the war effort in factories, offices and the defence forces, were sent back to the kitchen to make room for the soldiers returning to civilian life. But women were no longer prepared to be only wives and mothers. Like husbands and fathers, many sought membership of the workforce and the community. Full-employment policies and the expansion of education created the job opportunities that women increasingly wanted.
Technological change in the home and shorter hours in workplaces made it possible for two-income families to enjoy high living standards. Women's workforce participation added to society's wealth. Their taxes boosted the availability of public goods and services. The entry of increased numbers of women into the workforce thus did not displace men but created new jobs. In the 1970s, however, the entry of women into the workforce was slowed below its potential by rising unemployment rates. Opportunities for career development through supervisory and management jobs were reduced.
Table 2.1: Australian civilian labour force aged 15 and over
December 1993
| ('000s) | % | |
| Employed (full-time) (part-time) Total | (6,097) (1,843) 7,940 | (68.6) (20.7) 89.3 |
| Unemployed (looking for full-time work) (looking for part-time work) Total | (794) (156) 951 | (8.9) (1.8) 10.7 |
| Total labour force | 8,890 | 100 |
Source: ABS, The Labour Force, Australia, Cat. No. 6203.0.
The work participation of Australian women lags behind such countries as the United States (68 per cent), the United Kingdom (65 per cent) and Sweden (80 per cent).
Table 2.2: Workforce participation rates by gender, 1979 and 1991
Percentage of working population, 16-64 yrs
| 1979 | 1991 | |
| Men | 87.6 | 85.6 |
| Women | 50.3 | 62.2 |
| Total | 69.2 | 74.0 |
| OECD average | 69.1 | 71.3 |
Source: OECD Employment Outlook, July 1993.
Other social and economic changes were reflected in new workforce trends. Part-time and casual work increased as a proportion of total employment as shops and other private sector facilities opened for longer hours to improve customer services. The weight of the service sectors increased in total production, reflecting consumption shifts from goods to services. On the supply side, it suited many women, and some men, to combine part-time work with other life-style objectives. Growing unemployment put pressure on jobseekers to accept part-time or casual work even if the hours were shorter than those they wished to work.
Table 2.3: The growth of the workforce during the 1980s
| 1980s million | 1993 million | average annual growth 1980-1993 % | |
| Total civilian workforce men women | 6.7 4.2 2.5 | 8.6 5.0 3.6 | 2.0 1.4 2.9 |
| Total full-time workforce men women | 5.3 3.8 1.5 | 5.9 4.0 1.9 | 3.4 0.5 1.8 |
| Total part-time (1) workforce men women | 1.0 0.2 0.8 | 1.8 0.5 1.4 | 4.5 6.1 4.1 |
Note: (1) Includes casual work.
Source: ABS, The Labour Force, Australia, Cat. No. 6203.0;
Labour Statistics, Australia, 1992, Cat. No. 6101.0.
Changing technology, stimulated by the increasing openness of the Australian economy, has increased the skill requirements for a satisfying job and income. More than 70 per cent of youngsters stay at school till year 12. There has also been a rise in higher education. But Australia lags behind leading industrial countries and the rapidly-growing East Asian countries are catching up in educating 18-to-24-year olds.
Table 2.3: The workforce by occupation, February 1994
| Number ('000s) | % | |
| Managers and administrators | 874 | 11 |
| Professionals | 1,034 | 13 |
| Para professionals | 463 | 6 |
| Trades persons | 1,142 | 15 |
| Clerks | 1,303 | 17 |
| Salespersons and personal service workers | 1,209 | 16 |
| Plant and machine operators and drivers | 565 | 7 |
| Labourers and related workers | 1,163 | 15 |
| Total | 7,752 | 100 |
Source: ABS, The Labour Force, Australia, February 1994, Cat. No. 6203.0.
Table 2.4: Changing structure of the workforce by industry (a)
| 1976 (b) | 1994 (c) | Av. annual growth % | |||
| Number (000s) | % | Number (000s) | % | ||
| Agriculture | 385 | 7 | 399 | 5 | 0.2 |
| Mining | 80 | 1 | 87 | 1 | 0.5 |
| Manufacturing | 1,282 | 22 | 1,111 | 14 | -0.8 |
| Electricity, gas & water | 103 | 2 | 90 | 1 | -0.7 |
| Construction | 494 | 8 | 558 | 7 | 0.7 |
| Private sector services | 2,425 | 41 | 3,689 | 47 | 2.4 |
| Public sector services | 1,130 | 20 | 1,818 | 24 | 2.6 |
| Total | 5,898 | 100 | 7.752 | 100 | 1.5 |
Notes:
(a) A change of definition in 1976 excluded unpaid family helpers.
(b) August 1976.
(c) February 1994.
Source: ABS, Labour Force statistics, Australia 1986, Cat. No. 6101.0 and
The Labour Force, Australia, February 1994, Cat. No. 6205.0.
Reflecting changes in consumption, the most marked changes in the industrial composition of the workforce have been out of manufacturing and into private and public services. Greater opportunities for women and greater demand for skilled workers correspond to these changes.
3 THE EXTENT OF UNEMPLOYMENT
Unemployment in Australia grew steadily from the early 1970s, peaking at 9.9 per cent in 1983. Unemployment remained high through the 1980s cycle of prosperity, averaging 7.3 per cent for the 1980s. It peaked again at 11.3 per cent in October, 1993. In September 1994, it was still 9.5 per cent of the workforce. In addition, many part-time and casual workers worked shorter hours than they wished. Some workers have become so discouraged by their job search that they are only regarded as being "marginally attached" to the workforce. They have dropped out of the workforce database. The underemployed workers add another 2 or 3 per cent to unemployment as usually measured, so that the actual proportion of people out of work toward the end of 1994 was still about 11 or 12 per cent of the workforce. Together with those who have dropped out of the workforce, this adds up to about one and a half million people. And half a million children are affected.
As unemployment grew, the number and proportion of "long-term" unemployed (those unemployed for more than a year) grew faster. So did the proportion unemployed for 2 years or more. In March 1994, 351,000 men and women had been unemployed for one year or more and about 200,000 of these had been unemployed for two years or more. These figures understate the number of long-term unemployed because a short job spell or a training course takes an unemployed worker from the long-term back to the short-term unemployment queue.
Table 3.1: Long-term unemployment by age and gender
(number and percentage of total) March 1994)
| Men | Women | Total | ||||
| ('000) | % | ('000) | % | ('000) | % | |
| 15-24 | 58.4 | 25.2 | 41.9 | 35.2 | 100.0 | 28.5 |
| 25-34 | 59.9 | 25.8 | 25.7 | 21.6 | 85.6 | 24.4 |
| 35-54 | 75.1 | 32.4 | 45.5 | 38.2 | 120.6 | 34.4 |
| 55- | 38.4 | 16.6 | 6.1 | 5.1 | 44.5 | 12.7 |
| Total | 231.8 | 100.0 | 119.2 | 100.0 | 350.7 | 100.0 |
Source: ABS, The Labour Force, Australia, Cat. No. 6203.0, March 1994.
UNEMPLOYMENT BY AGE
In March 1994, 376,000 or 20 per cent of young people aged 15 to 24 were unemployed. Of these, 100,000 had been unemployed for a year or more. Youth unemployment was so high in the boom years of the 1980s that many school leavers could not get jobs. Some of the youngsters now unemployed have only worked intermittently and some not at all since leaving school. Youth unemployment emerged as a serious problem in the 1980s, increasing in the early 1990s despite increasing participation in schooling. Overall unemployment for 15-to-19-year olds was about 14 per cent, but in some low-income areas it was as high as 40 per cent. Young Aborigines, Torres Strait Islanders and immigrants from Indo-China and the Middle East were the worst affected.
Unemployment is markedly lower, 10 per cent, for 25-to-34-year olds; declining further to 6.4 per cent for 45-to-54-year olds; but then rises again to 9.9 per cent for 55-to-59-year olds and 12.5 per cent for 60-to-64-year olds.
Table 3.2: Unemployment by age and gender
(number and percentage of total labour force) March 1994
| Men | Women | Total | ||||
| ('000) | % | ('000) | % | ('000) | % | |
| 15-24 | 201.2 | 19.9 | 174.7 | 18.9 | 375.9 | 19.4 |
| 25-34 | 142.2 | 11.0 | 82.5 | 8.8 | 224.7 | 10.0 |
| 35-44 | 91.1 | 7.4 | 77.0 | 8.1 | 168.1 | 7.7 |
| 45-54 | 65.4 | 6.8 | 39.9 | 5.8 | 105.3 | 6.4 |
| 55-59 | 30.5 | 10.5 | 13.1 | 8.8 | 43.6 | 9.9 |
| 60-64 | 28.7 | 16.2 | 0.8 | 1.4 | 29.5 | 12.5 |
| 65- | 1.8 | 2.2 | 0.3 | 1.0 | 2.1 | 1.8 |
| Total | 560.9 | 11.1 | 388.3 | 10.3 | 949.2 | 10.8 |
Source: ABS, The Labour Force, Australia, Cat. No. 6203.0, March 1994.
UNEMPLOYMENT AND SKILL
The more skilled workers are, the less unemployment they are likely to experience. University graduates have the lowest unemployment record (6.2 per cent in February 1993 when total unemployment was around 12.1 per cent on a seasonally unadjusted basis), while those without post-school qualifications had the highest unemployment (14.8 per cent in February 1993). The incidence of unemployment was also relatively low among skilled workers.
THE LOCATION OF UNEMPLOYMENT
While unemployment has been high in all States and Territories, there are major variations. The Australian Capital Territory clearly had a privileged position in the economy, with unemployment peaking at 8.8 per cent in 1993. The rise in public service employment during the 1970s and 1980s and its cushioning from the competitive pressures that led to labour-shedding elsewhere, have resulted in the environment of unreality that permeates the Canberra bureaucratic culture.
The Northern Territory also has relatively low unemployment. It is largely a non-labour intensive mining and pastoral economy, with the bulk of employment in the public sector. Western Australia also relies heavily on primary industries.
In Victoria, Tasmania, Western Australian and South Australia, State economic mismanagement created severe problems for the economy and added to unemployment.
Table 3.3: Unemployment by States and Territories
(number and percentage of total labour force) March 1994
| Men | Women | Total | ||||
| ('000) | % | ('000) | % | ('000) | % | |
| NSW | 188.6 | 11.2 | 121.6 | 9.7 | 310.1 | 10.5 |
| Vic | 156.1 | 12.2 | 116.2 | 12.2 | 272.3 | 12.2 |
| Qld | 96.6 | 10.6 | 70.5 | 10.6 | 167.2 | 10.6 |
| SA | 47.4 | 11.5 | 32.6 | 10.7 | 80.0 | 11.2 |
| WA | 44.8 | 8.9 | 31.5 | 8.8 | 76.3 | 8.9 |
| Tas | 17.4 | 13.4 | 8.6 | 9.4 | 26.0 | 11.7 |
| NT | 3.5 | 7.9 | 2.2 | 6.2 | 5.6 | 7.2 |
| ACT | 6.6 | 7.3 | 5.2 | 6.9 | 11.7 | 7.1 |
| Australia | 560.9 | 11.1 | 388.3 | 10.4 | 949.2 | 10.8 |
Source: ABS, The Labour Force, Australia, Cat. No. 6203.0, March 1994.
The highest concentrations of unemployment are in the cities hit by the inefficiency that manufacturing built up during the 100 years (and more in Victoria) of high protection. The unemployed are concentrated in the southern and north-western suburbs of Melbourne, in Geelong, in western Sydney, Newcastle and Wollongong and in the north-western suburbs of Adelaide.
Unemployment in country areas affects fewer people, but it is highly concentrated. Although the cost of living is lower than in the main industrial cities, award rates are the same or even higher, so that investment is not forthcoming in industries dependent on traditional trades.
The regional employment situation is, however, far from being uniformly bleak. In the Cairns area, for example, employment has grown rapidly, though unemployment has not declined because of the continuing influx of workers into the area. Other tourist centres are also developing rapidly. Food processing has been successful where enterprise agreements have been negotiated. Many country districts have a considerable employment potential that is being held back by awards that disregard local conditions.
ABORIGINES AND TORRES STRAIT ISLANDERS
Although Aborigines and Torres Strait Islanders only number 265,000 people (1.6 per cent of the Australian population), their unemployment problems are the most serious and intransigent in the Australian community.
Table 3.4: Labour force status, Aborigines and Torres Strait Islanders, 1991
| Workforce participation % | Unemployment % | |
| Aborigines Men Women Total | 68 43 55 | 34 30 32 |
| Torres Strait Islanders Men Women Total | 78 49 64 | 22 21 22 |
Source: J. Taylor, 1994, The Relative Economic Status of Indigenous Australians, 1986-91, Centre for Aboriginal Economic Policy Research, Canberra.
For Aborigines, particularly for women, labour force participation is low. Unemployment is, nevertheless, extremely high for Aborigines and Torres Strait Islanders. Traditional lifestyles only explain a small part of the differential, for most Aborigines (67 per cent) and Torres Strait Islanders (71 per cent) live in urban areas, not in the outback. The explanations of low workforce participation and high unemployment mainly lie in poverty, racial discrimination, and consequent social marginalisation of generations of Aboriginal and Torres Strait Island communities.
IMMIGRANTS
Overall work participation rates are slightly lower and unemployment rates are somewhat higher for immigrants than for people born in Australia. But immigrants from most European and a few Asian countries have higher work participation and lower unemployment rates than people born in Australia. Particularly low work participation and high unemployment are associated with immigrants from the former Indo-China countries and from some Middle Eastern countries. Women are particularly at risk. They are often forced to work long hours in family enterprises for extremely low, if any, wages. "Outworkers" being paid 90 cents an hour have been found in ghetto communities. Low work participation and high unemployment are the result of low educational levels, and most importantly, inability to speak English. These workers are the victims of a form of multiculturalism that denies immigrants integration into the Australian community. Inability to speak English is likely to deny them employment opportunities throughout their lives. Australian multicultural policy has severely disadvantaged migrants by not making the learning of English mandatory and ensuring that this is the priority in migrant settlement policies.
Table 3.5: Unemployment by place of birth, March 1994
| Workforce ('000) | Workforce Participation % | Unemployment % | |
| Born in Australia Men Women Total | 3735.3 2850.1 6585.5 | 76 56 66 | 11 10 10 |
| Born Outside Australia Men Women Total | 1314.6 887.4 2202.0 | 71 49 60 | 13 13 13 |
| English Speaking Men Women Total | 567.2 408.7 975.8 | 76 56 66 | 9 8 9 |
| Non English Speaking Men Women Total | 747.4 478.8 1226.2 | 68 45 57 | 15 16 15 |
Source: ABS, The Labour Force, Australia, Cat. No. 6203.0, March 1994.
4 THE COSTS OF UNEMPLOYMENT
In the nineteenth century, Marxist critics accused the "capitalist system" of maintaining a "reserve army of the unemployed" to depress the earnings of blue-collar workers. Few workers could afford to be unemployed no matter how low the wages offered. The nineteenth century was marked by strong economic expansion so that living standards improved, albeit slowly and not for all. But in cyclical downturns, unemployment, nevertheless, became a serious problem leading to great poverty and deprivation. The economic waste of unemployment became an issue, but attention did not begin to turn to the policies necessary for full employment until the 1930s. At the end of World War II, full employment became the central economic and social objective of all advanced industrial economies, with developing countries becoming increasingly concerned with employment issues as they emerged from the colonial past. Social security support for the unemployed was expanded in most advanced industrial economies, avoiding the miseries of the 1930s and previous eras, but social security payments unfortunately disguised the real costs of unemployment when it re-emerged in the 1980s.
Unemployment has high costs on the output side. National output in Australia is reduced below possible levels by the potential output of the unemployed. This output could be used to satisfy the demand for both private and public goods. Tax revenues would increase.
A significant proportion of government expenditures provides social security payments for the unemployed and those "marginally attached" to the workforce who want to work. Commonwealth social security and welfare payments could be cut substantially if full employment was restored. Some $1,719 million is being spent on assistance to jobseekers (including special training). These expenditures could largely be forgone. The funds could be used to create current budget surpluses and fund public investment to revive the ageing infrastructure and reverse environmental degradation.
The dynamic economic losses of unemployment are probably greater than the static losses. Output losses lead to growth losses. When people are unemployed, their technical and social skills deteriorate and do not become developed further on the job. Should anyone (even today) be so short-sighted as to argue that unemployment is desirable, even in peaks of economic activity, to provide flexibility in the economy, it might be noted that a "reserve army of the unemployed" is not simply analogous to unused trucks. If unused trucks deteriorate, they can be depreciated as having completed their useful life and be sent to a scrap yard to be recycled. The flexibility achieved by unemployment comes at a high economic cost. Much of it is illusory since people laid off today may not be employable after a period out of work. Disuse of skills and changing technology will have left them behind. Training for training's sake, rather than for a job, also has high costs and low returns, as has been demonstrated in Sweden in recent years.
The downward pressure that unemployment exerts on earnings and working conditions is partly the result of output and growth forgone, and partly arises from psychological effects which damp down labour demands. This has given rise to arguments that there exists a "natural rate of unemployment" that is compatible with the maintenance of price stability. Such arguments would suggest that if labour markets cannot be reformed, unemployment would be an inescapable ingredient of economic management.
The "Phillips curve" and its evolution into the Non-Accelerating Inflation Rate of Unemployment (NAIRU) thesis describe the relationship between unemployment and inflation at a given time. It is claimed the NAIRU rate in Australia has risen from 2 per cent unemployment in the 1960s to 7.5 per cent unemployment currently. Restoring Full Employment suggests that over time it could be driven down to 5 per cent unemployment. With microeconomic reforms, however, notably with much greater labour market flexibility, there is no reason why it could not be lowered further.
It is important to note that inflation is not simply (and not even mainly) the result of cost-push pressures in the labour market, even in Australia where such pressures can be strong. A whole range of macroeconomic and microeconomic policies determine inflation trends. New Zealand has shown that rapid and radical labour market reform is possible in a society very similar to Australia's. The use of a NAIRU to justify past failures to reduce unemployment is as bogus as it would be to use unemployment as the principal weapon against inflation.
SOCIAL COSTS
Unemployed people pay the visible cost of the inappropriate policies that fail to create jobs. Their skills become obsolete and their on-the-job learning is interrupted. There are also high, less visible costs. Unemployed people become socially alienated. They and their children cease to participate in social and cultural activities. Their lives become extremely limited, even if social security payments enable them to maintain a minimal standard of living. Birthdays, Christmases and school holidays become guilt-ridden as children are deprived of the pleasure that other Australians take for granted. A beer, a cup of coffee, having family or friends to a meal have to forgone. Many peoples' lives collapse under the financial and psychological stresses of unemployment, so that they become dependent on charitable handouts. The unemployed suffer an unduly high incidence of family breakdown and physical illness. Some become depressed, take to drink, drugs and, at worse, crime. In addition to those discouraged by their search for jobs, the least able of the unemployed and those in particularly disadvantaged groups drop out of the workforce. Job opportunities for disabled people are difficult to find when unemployment is high. The children of the unemployed suffer acutely. They become second- and even third-generation long-term unemployed. They not only drop out of the workforce, but out of society.
Unemployment does not only lead to misery for the unemployed and their families. It undermines the mores and compassion of society. The "haves" in Australia give little thought to the unemployed. The unemployed are stigmatised for being out of work. Working Nation castigated the lack of skills and an unwillingness to work by the unemployed, not government policies which have resulted in a lack of jobs, for unemployment.
POLITICAL COSTS
Communism and fascism both had their origins in the economic and social deprivation and lack of self-esteem bred in societies with high unemployment. Self-esteem is again being undermined. While social welfare has alleviated extremes of absolute poverty for the unemployed, the disparity between the "have-nots" and the "haves" is growing. The political consequences of continuing high unemployment are already visible.
If the measures needed to increase jobs are not taken and high unemployment continues, the political debate is likely to deteriorate further with nationalism, typically, being used to screen the deterioration of the economy and society. Extremist views disguised as populist ideals could then threaten Australia's essentially democratic and liberal political system.
5 THE INTERNATIONAL DIMENSION
The world economy has changed more rapidly since World War II than at any previous time. In the OECD countries, a rapid acceleration of technological change, open trade and financial policies resulted in unprecedented growth with accompanying rises in living standards. Full-employment policies were also a key input. Even more remarkably, as the former colonial and semi-colonial countries gained independence, they also accelerated their growth (except in Sub-Saharan Africa). For most of the world's population, health is improving and longevity is increasing. The rate of population growth is falling. Access to education and educational standards are rising and absolute poverty is receding. In rapidly-growing countries with rapidly-rising per capita incomes, income distribution is becoming more egalitarian and unemployment has been sharply reduced. In Singapore, Hong Kong, the Republic of Korea and Taiwan unemployment is down to 2 to 3 per cent.
International trade, capital and migration flows have been an "engine of growth" in these remarkable developments. All countries face the same international environment. Those that have taken advantage of increasing international economic flows, and hence have become internationally competitive, have grown most rapidly. Those that have looked "inward" so that they protected their industries by tariffs, subsidies and domestic market regulations have fallen behind. Australia's slipping down the relative per capita income ladder is largely the result of being one of the last OECD countries to reduce trade protection and liberalise the economy.
THE OECD COUNTRIES
The OECD countries had great difficulty in absorbing the changes in the price of petroleum in the 1970s. After a determined and successful effort to overcome inflation in the early 1980s, their economies recovered, but new problems emerged.
Australia is not the only advanced industrial country with high unemployment. Most Western European countries and Canada have unemployment rates of 8 to 11 per cent, and outliers such as Ireland have even higher unemployment (15 per cent). In 1993, the United States (6.7), Germany (5.8 despite the problems of unification), and Norway (6.0), however, had lower unemployment rates than Australia despite slowdowns in their economies.
The causes of the change from full employment to high unemployment in Western Europe and Canada are clear. These countries followed full-employment policies in the 1950s and 1960s. Liberalisation of trade, financial flows and immigration had very high returns. But with prosperity came new rigidities that slowed growth. Sectoral regulation blossomed. Increased incomes were not only taken out in earnings but also in social security arrangements through the workplace. While the improvement of social security was welcome, production costs were raised and the capacity for absorbing labour was reduced. Other rigidities came from agricultural protectionism. In the European Communities, the Common Agricultural Policy was already responsible for over a million unemployed in the 1970s. The formation of the European Union liberalised some markets, but through common monetary policies and increased regulation greatly exacerbated rigidities. The Canadian constitutional debate has added to that country's economic difficulties.
Comparing Australia with Western European countries and the OECD more generally is thus no longer a measure of international competitiveness. It is often comforting, because many of the OECD countries are slipping back, but the comfort is deceptive.
EAST ASIA
The growth of developing countries, notably rapidly-growing East Asian countries, can have major positive consequences for Australia. Starting in Japan, rapid development followed in the four "tigers" (Hong Kong, the Republic of Korea, Singapore and Taiwan). These economies have wiped out poverty and reduced unemployment to the 2 to 3 per cent Australia used to have. Indonesia, Malaysia and Thailand followed the lead of the "tigers". In the 1980s, China joined the rapidly-growing group. India, Vietnam and the Philippines started to move forward in the 1990s.
Instead of being isolated by the "tyranny of distance", Australia is now in the most rapidly-growing neighbourhood in the world. If it can become competitive, Australia will have a locational advantage over Europe and the Americas. It is no longer possible to plead that "there is no demand". A market of 3 billion people beckons from Asia. Already about 150 million of these are "middle class", with considerable spending power.
To date, Australia has only adjusted to these opportunities to a very limited extent. About 55 per cent of Australian exports go to Asia and over 35 per cent of imports are sourced there. Australia should retain worldwide trade to offset trade risks. But Australia has only about a 3 per cent share of the US$1,000 billion annual imports into Asia. The failure to take advantage of East Asian markets is a major explanation of high unemployment in Australia.
Trade with Asia is not, however, a reason for "integrating" into Asia. Asia consists of a complex network of countries that want to maintain their national independence to run their economies according to their national priorities while they catch up with the productivity and living standards of market-oriented industrial countries. Australia should follow their lead rather than follow the United States into trying to split the world into three discriminatory regional areas. The United States would like to benefit by having a share in two of the three regional markets, but Australia would have no say in an Asian grouping. It is simply too small. Trade, investment and migration relations with Asia will greatly benefit Australia. So will cultural exchanges. The most competitive countries, and the ones which are likely to dominate competitiveness in the future, are the countries in Australia's neighbourhood. It is their standards of economic management that Australia will have to meet in the twenty-first century.
6 HOW CAN FULL EMPLOYMENT BE ACHIEVED?
Full employment must take account of seasonal unemployment and frictional unemployment that occurs as people change jobs. Some cyclical unemployment is inevitable. In the 1950s and 1960s all these were covered by unemployment of 2.5 per cent. In addition, some people may opt out of the workforce to choose subsistence lifestyles. Providing they do not disadvantage their children and do not make heavy demands on social security, the possibility of such choices is part of a liberal and democratic society. Some people are psychologically unable to meet the give-and-take of everyday life. They will need full social support as will those considerably physically or mentally disabled. Such "drop-outs" from the workforce are small when employment is high. A larger, socially-disadvantaged group consists of the 416,000 single parent households (9 per cent of the 4.6 million households in Australia). Child care costs keep many of the single parents (89 per cent of them women) unemployed and push them out of the workforce because they are poorly educated and trained. The improving education of women should lead to a substantial reduction of this social problem in the future. But the mechanisms of social security also discourage workforce participation, creating a class of "new poor". Full employment and changes in social security will also be required to ensure that single parents and their children are not pushed into an "underclass".
Most youngsters are keen to participate in the workforce as they finish their education to take advantage of mainstream social standards of living. The principal determinant of their entry into the workforce, and their continuing workforce participation, is the overall impact of their education, reflecting community attitudes to work, social security arrangements, and above all, job availability. Full employment makes for high workforce participation. Those discouraged by unemployment move back into the workforce and community tolerance of not working declines.
TECHNOLOGY AND UNEMPLOYMENT
The growth of unemployment has been accompanied by many disingenuous justifications for what is essentially a failure of public policy. Machines and technological advances more generally have borne the brunt of the blame. The arguments can be traced back to the industrial revolution, and probably back to prehistoric times. The inventors of the wheel and the domesticators of draft animals were probably all accused of destroying jobs. Those whose jobs are lost are seized by acute myopia. They cannot see that it is the increased productivity of machines that creates new jobs.
When water- and steam-driven looms began to replace handlooms at the end of the eighteenth century, handloom workers were convinced that their jobs were being stolen. They could hardly envisage the tremendous rises in living standards that the use of machines would bring. A stocking worker, called Ned Ludd, smashed stocking looms. As machines multiplied in the early nineteenth century, Luddite movements became widespread. It is not surprising that Ned Ludd and the original Luddites did not understand the beneficial effects of mechanisation. But some 200 years later, there is little excuse for using essentially the same arguments to claim that advances in technology are the principal cause of unemployment.
Mechanisation and, more broadly, the application of science and technology to production, by enabling capital to combine with labour for greater productivity, have raised living standards immeasurably. The improvement of living standards since the late nineteenth century has accelerated with every generation. The availability of material goods and of public services has increased beyond all expectations. Consumers' choices are constantly being widened. Participation in education is increasing. People are healthier and live longer. The hours worked in a week have been halved since Ned Ludd's day. Environmental problems can be tackled on a broad scale. It is the increased application of technology to every aspect of life that has made these advances possible.
But possibilities have to be translated into actualities through policy choices. There are queues for hospital beds and university places. Most of the cars on the road should be replaced by more ecologically efficient ones and many roads need to be improved to make them safer. Australia's infrastructure is ageing because it has been, and is being, starved of investment. We should spend a lot more on helping handicapped people live as satisfying lives as the rest of us. We should be able to help people in developing countries more generously.
The rate of progress has slowed in the past two decades and social inequality has increased because unemployment has been allowed to grow. The output associated with full employment is essential for high standards of living in terms of both private goods and public services. People have to be well-educated to be able to take up most of the jobs coming up. This means producing enough to be able to save and invest in high-quality education for the mass of the population. Most youngsters will have to take part in education well into their twenties and go back for re-training several times during their lifetime. Those at work will not only have to support those being trained, but also the growing proportion of aged in the population. Whether this is done through private or public saving, people have to work to save as well as consume. Unemployment, part-time work or job-sharing, are not going to deliver the private and social goods and services that people want, or provide for their retirement. It may be that a hundred years hence technologies will have made economies so productive that the excess leisure will become a social problem. It is not going to be one in the foreseeable future.
QUICK FIXES
The wonderful imaginativeness of the human mind is reflected in the many "quick fixes" for unemployment emerging out of the distress that unemployment is causing. Many of the schemes embody ideas that can play a role in the reduction of unemployment if they are embodied in wider policy changes. But as stand-alone schemes they are unlikely to be successful.
Since it is evident that unemployment is accompanied by unmet consumer needs, many of the schemes intended to "fix" unemployment aim to replace markets by a return to a barter system of exchange of goods and services. To a limited extent, such systems are operating among the unemployed. They have the advantage that no tax is paid on the production of such goods and services. As the unemployed have ample "leisure", or rather, as their time has a very low value placed on it by society, such schemes appear to work on a small scale. The use of computers to record barter "currencies" has encouraged their expansion.
The market economy has its origins in barter trade. Products such as salt and flint heads were traded over long distances in the Stone Age. But markets in their present sophisticated form embody the benefits of comparative advantage, of specialisation and of the economies of scale. While unemployment lasts, and on a small scale, unemployed people cannot be blamed for resorting to barter to brighten their lives; but as a substitute for markets, barter arrangements are a way backward, not forward.
Increasing employment in the public sector is seen by some as another way of reducing unemployment. Taking environmental tasks into account as well as social needs, there is plenty to do. It would be great to expand funding for the arts. But how is such employment going to be financed? With full employment, increased tax revenues and reduced social welfare and other costs would release funds.
In the present economic framework, however, budget deficits are already putting pressure on price levels, leading to rising interest rates, and hence reducing both job opportunities and the tax "take", as well as making greater demands on the social security budget. The experience of countries such as Sweden and Denmark suggests that while public deficit-financing can create jobs in the public sector in the short-run, in the longer-term the result is a rapid growth of unemployment as the public sector "crowds out" private sector productive activities. The balance between public and private sectors has economic implications for public finance and for microeconomic efficiency. Experience indicates that it has to be managed carefully if it is not to increase rather than decrease unemployment. Voters have first-hand experience of public sector inefficiency. They understand that it is inherent in non-market activities. The political limits to taxation and public sector activities have grown out of recent state experience. They are not likely to be changed.
Economic analysis suggests that a cut in labour costs is one way of increasing Australian competitiveness both against imports and in exports, particularly in manufacturing, tourism and other services, so that more workers could be employed as demand expanded at home and abroad. A number of "job levy" proposals have therefore been advanced to make those employed -- the "haves" -- bear a direct responsibility for putting the unemployed back into the workforce. Some proposals have been for a centrally-administered levy, others for workplace-based ones that would indicate to those whose wages have been cut how their sacrifices would put people back to work.
Job levy schemes have run into such serious political opposition that they have been largely abandoned. Their logic is also diluted by the practical difficulties that administering such schemes would face. It is widely feared that funds raised by a centralised scheme would disappear into the maws of public budgets. Employees would strongly resist wage cuts. In workplace levy schemes, workers would be hired by all firms in an industry, rather than by the more efficient firms that could employ workers productively. Efficiency would decline.
The Working Nation's "job compact" wage subsidies and learners' wages are versions of the job levy approach. Funds are being raised by blowing out the budget, thus implicitly taxing the community through likely inflationary effects and prolonged debt repayments, to subsidise the placement, training and employment of long-term unemployed workers. The wages that have to be paid by employers will be significantly lower than award rates, but the duration of the subsidies is short.
Insufficient evidence about the working of the schemes that preceded the "job compact" plan makes it difficult to assess its likely effectiveness. Monitoring of "jobstart" has been limited to 3 months' subsequent employment. This is not long enough to enable judgements to be made about the programme's effectiveness. Control groups have not been clearly separated from "jobstart" participants.
The likely outcome of the programme will be muddied by the reduction of unemployment that may be expected as the economy continues to move out of recession, the removal of unemployed people over 60 years of age to age pensions and the shift of young people to Austudy. Changes in social security arrangements are also likely to facilitate moves to part-time employment. But, unless the creation of new jobs is accelerated, the "job compact" can only be a queue-shuffling exercise. As subsidies place today's long-term unemployed in the workforce, the opportunities of school leavers and other, "short-term" unemployed, will be reduced, leading to a new cohort of "long-term" unemployed.
GROWTH AND EMPLOYMENT
Australia can draw on a vast volume of research in reducing unemployment. Agreement is widespread that growth is the key element. The leading economic studies of 1993 and 1994 -- A Long Term Strategy for Australia, prepared by the Committee for Economic Development of Australia (CEDA), the Business Council's Creating the Future Australia and the Government's Working Nation -- all agree that Australia needs to achieve higher growth rates than the 3.1 per cent a year averaged during the 1980s, and that growth is essential to the reduction of unemployment.
The growth rates assumed in all these exercises round out at about 4.75 per cent per annum, uninterrupted by cyclical economic downturns, for the 1990s, for a 5 per cent unemployment target. The similarity of principal outcomes is not surprising as all these studies share similar modelling frameworks. Differences lie mainly in the assumptions about further reform requirements. The Restoring Full Employment-Working Nation model suggests that an uninterrupted, 4.75 per cent annual growth rate overall, could be reached for the 1990s with current economic settings, that is, with the current pace of economic reform. That would mean nine years of uninterrupted growth from the low point of the recession. The CEDA and Business Council studies argue that the pace of reform would have to be substantially accelerated if the growth rates that would deliver this target are to be achieved. Ongoing analysis by the Economic Policy Advisory Commission (formerly the Economic Planning Advisory Council, EPAC) assumes a continuation of the present pace of economic reforms, but is cautious about the growth outlook and unemployment outcomes this will generate.
The Budget Statements 1994-1995 took a less sanguine view of growth prospects to 1997-98, projecting a 4.25 per cent annual average growth rate between 1993-94 and 1997-98 for the economy. Unemployment, on this assumption, would be above the 5 per cent target for 2000. It would be substantially higher than 5 per cent if a cyclical downturn occurs meanwhile, as is now considered likely in about 1996 or 1997 (by the Westpac-Melbourne Institute Centre for Business Cycle Analysis).
The similarity of the model results is related to their common conceptual framework. They tend to neglect issues of labour absorption and labour supply, and they give little weight to the possibilities opened up by trade. All model projections must, in any case, be taken with a large pinch of salt. They are almost always wrong. The principal use of models is to test the hypotheses and arguments on which projections are built for consistency. While the detailed projections of the various models are not likely to eventuate, together they contribute a sense of direction in which the Australian economy is likely to move. If cyclical downturns continue to occur in the Australian economy, unemployment levels are likely to be around 7 or 8 per cent in the late 1990s, and they could ratchet up again in an economic downturn to 11 per cent or more.
Changes in any one economic area will not deliver full employment. Reform across the board is needed. There is general agreement that the social dimensions of growth cannot be ignored, so that the design of a "safety net" that will avoid disincentives to work will have to be part of the policy package. The East Asian countries have demonstrated that the achievement of long-term growth is a continual process of reform and adjustment.
7 MACROECONOMIC POLICIES
The worldwide emphasis on the critical importance of low inflation for sustained growth reflects practical experience as well as research results. In East Asia, strong and rapid growth has been grounded in 30 years of macroeconomic stability. The OECD countries brought the high inflation of the roller-coaster 1970s to an end by restrictive policies in the early 1980s. A strong burst of growth followed. Australia's macroeconomic management has, in contrast, been weak. Until 1988, lax monetary policy fuelled an unwarranted boom. The attempt to bring down inflation by high interest rates led to the overvaluation of the exchange rate, undermining exports and precipitating a severe recession with very high unemployment.
Macroeconomic policies are not only important in influencing the short-term economic environment. Savings and investment, key factors in long-term growth, are in large part determined by macroeconomic policies. Australian savings have fallen from 25 per cent of GDP in the 1950s and 1960s, to 20 to 23 per cent in the 1970s. They came down to 16 per cent in the early 1990s. This is below the OECD average and about half of the savings rates of the rapidly-growing East Asian countries. Low savings mean heavy reliance on capital inflows if investment is to be increased to assure future output and increases in employment.
Macroeconomic policies also affect the microeconomic working of the economy through their impact on the efficiency of production units. High interest rates reduce investment and high inflation introduces severe distortions. Australian interest rates, partly reflecting the premium imposed by servicing high borrowing but also reflecting deliberate government policy, are well above the average for leading industrial countries.
Australian interest rates were close to, or below, those of the largest industrial countries from the late-1970s to 1989 when they became markedly higher.
Fiscal policies are the core of macroeconomic probity. Deficit financing has proved to have narrow limits. It should largely be confined to counter-cyclical measures. Otherwise, budget deficits exert pressure on monetary policy which has to be so restrictive that it undercuts growth. Private investment is crowded out of capital markets. Australian governments rely on annual budgets to set the public finance agenda. The focus is on short-term detail and electoral issues rather than on long-term perspectives for the economy. Australia has no medium- to long-term perspectives. In East Asia "plans" are not planning documents in the centralised planning sense, but means of exploring medium-term economic prospects. They lead the public debate on economic and social directions. CEDA and the Business Council have tried to fill this gap by providing medium-term perspectives for the economy.
FISCAL POLICIES
In Australia, Commonwealth taxation (except for payroll taxes) dominates public revenues, but both the Commonwealth and the States have expenditure responsibilities, so that public finance is fraught with political complications. Overall, the levels of Australian taxes are not out of line with other OECD countries (when social security contributions are taken into account), but the taxation system has grown in a higgledy-piggledy way over the last 30 years until it has become enormously complicated and difficult to interpret.
Indirect taxes, which account for some 30 per cent of total tax collection, fall mostly on manufacturing, avoiding services on which consumers spend rising proportions of their income. Indirect taxes are mostly at the wholesale level, so that they may become cumulative as products pass through various stages of manufacturing. They disadvantage exporters in comparison with value-added taxes. Value-added taxes discourage consumption and thus stimulate saving. The relative efficiency and equity (they are hard to evade) of value-added taxes have come to be recognised worldwide. The need to rationalise indirect taxes by introducing a value-added tax was recognised in 1985 by the then Treasurer, Paul Keating, but abandoned for political reasons. Mr Keating's political defeat of Dr Hewson's attempt to introduce a value-added tax in the 1993 election has made the introduction of value-added taxes so electorally difficult that, although it is widely agreed that their adoption is essential, they are regarded as politically suicidal.
The effort to reform the Australian taxation system has thus been stalled, although the system still has serious problems. Some improvements in personal income tax equity have been offset by arbitrariness and uncertainty arising from constant tinkering with the system. The business tax structure is grossly complicated. From areas such as mineral taxation to fringe benefit taxes, the rules lack transparency and logic. Regulations change so frequently that instructions to business often conflict. Incentives, intended to attract business from abroad, fail to offset well-known disincentives. Business compliance costs have been shown to be five times as high as those of some other OECD countries. Compliance costs are particularly high for small business. The 1994-95 Budget added $100 million to tax administration resources to cover continuing increases in administrative costs arising out of unwarranted complexity.
A bipartisan review of taxation, involving taxation expertise, business and social equity concerns, is long overdue. Such a review should elucidate the principles that should be adopted to turn the present ramshackle system into a taxation law that will make the collection of revenues in Australia efficient and equitable and reduce administrative inputs and compliance costs. The resentment and fear that Australian voters feel towards the tax system need to be turned into political objectives to ensure that tax reform receives a high political priority from all political parties.
Payroll taxes are a major independent revenue source for the States. But payroll taxes reduce the economy's capacity to absorb labour by raising the cost of labour in relation to capital. It pays Australian firms to buy machines rather than employ workers.
States have important responsibilities for law and order which are foundations of social well-being and essential for economic growth. They have the principal responsibility for health and education which are also key elements in social and economic development. They make a major contribution to the quality of life. In the 1980s, several States totally lost budget control and engaged in extravagant public enterprise, notably State Bank adventures. State financial management thus became a critical issue. Well-managed States could abandon payroll taxes and thus make industrial location seriously attractive.
Commonwealth expenditures mainly reflect past trends, though they are affected by electoral promises and the demands of lobby groups. Prudence is notoriously in short supply as elections approach, but it is a strength of the democratic parliamentary system that public expenditures are not only subject to examination by ruling parties, but are also subject to parliamentary and electoral scrutiny.
In retrospect, it seems incredible that political parties and voters allowed the excesses that occurred in several States in the 1980s to take place. Analysts in government departments and instrumentalities, universities and research institutions were unable to detect the waste of expenditures taking place. The EPAC watchdog proved to be drugged. The parliamentary press galleries were so much in thrall to the news makers that they failed -- and are failing -- to draw attention to fiscal problems.
Australia is clearly not the only advanced country with such problems. Some have accordingly established parliamentary budget offices that are independent of the departments that put together and spend budgets, but can react more rapidly and broadly than audit departments. They report directly to parliament to limit public waste and focus on longer-term public finance issues. The experience of the 1980s suggests that the Commonwealth and the States should examine such an option.
MONETARY AND FINANCIAL POLICIES
Monetary and financial policies are the second leg of macroeconomic management. The freeing of exchange rates and international capital movements, together with the deregulation of the financial system in the early 1980s, greatly improved the operation of financial markets, created new opportunities for the financial sector at home and abroad, but also placed new requirements on the management of monetary and financial policies. Whereas fiscal policies are the responsibilities of the Treasury and the Department of Finance and hence susceptible to political and lobbying pressures, central banks are expected to play a relatively politically independent role in macroeconomic management.
With the deregulation of financial markets and exchange rates, it is generally agreed that central banks have two principal tasks: the prudential overview of banking, and the maintenance of stable prices largely through interest rate policies. Experience suggests that they cannot regulate other variables. It would be naïve to suppose that a central bank could be entirely independent of political forces as reflected in the government of the day, nor, in a democratic society, would this be desirable. But a considerable degree of central bank independence is essential if monetary policy is to contribute meaningfully to the achievement of price stability. The Reserve Bank is widely regarded as having less independence than central banks in many other industrial countries.
The Reserve Bank's role was restricted in the 1980s both by fiscal laxity and its own errors of judgement. In the mid-1980s, a laissez-faire supply attitude fuelled the financial boom, stimulated by financial deregulation as the economy recovered from the 1982-83 recession. The high costs of entry into the limited Australian commercial banking market enabled the local commercial banks to maintain their oligopolistic dominance. They used it for some high-risk lending practices that led to high costs for their shareholders. Australia largely missed out on the opportunities created by its advantageous time zone location. When New York and London slept, so did Sydney and Melbourne. Hong Kong and Singapore were able to take advantage of the new technologies which encouraged round-the-clock financial trading.
Maintaining sound monetary and financial policies is extremely difficult. Despite the development of sophisticated models and other analytical techniques, a great deal ultimately depends on judgement. Until the Reserve Bank abandoned its policy of not recruiting staff over 26 years of age, it could not draw on the experience available in the financial community. Its monetary management did not compare well, for example, to the Bank of Thailand, which has managed to deliver inflation rates averaging 4 per cent with average annual per capita growth of 6 per cent during the 1980s and into the 1990s.
The Reserve Bank failed to develop its financial supervisory responsibilities at a pace parallel to the rapidly-growing financial sector, permitting banks to exceed the bounds of prudence with very considerable cost to their shareholders and the economy. Two State Banks were able to run amok in the absence of effective supervision.
The introduction of compulsory superannuation brought a new dimension to the financial service industry at the end of the 1980s. Several Australian colonies had introduced non-contributory old age pensions before Federation, leading the world in providing security for the whole population. By the 1980s, it was clear that revenue-funded old age pensions were inappropriate as well as inadequate, and that the situation would be likely to deteriorate as the population aged. It was essential that Australians should save throughout their working lives for what were likely to be retirements of increasing length.
Introducing superannuation in lieu of increases in cash earnings was made acceptable to trade unions by associating it with industry superannuation funds which trade union bureaucrats would control. Defusing opposition at the ballot box may have seemed like a stroke of political genius, but it has saddled Australians with an inefficient and highly bureaucratised superannuation system. Individuals have no control over their savings. In most funds, for example, trustees can disregard a member's wishes about how to leave any residual benefits at death. Because of the structure of the system, the funds have unduly heavy administration costs and low returns to the contributors. Part-time and casual workers subsidise the fund administrators. Under some industrial awards, such as that for University staff, for example, people over 65 who wish to continue to work, no matter how well they have provided for their retirement, have to continue to contribute to superannuation funds. The costs of administration to business, particularly small business, are high. The costs of transfer between funds are absurdly high, ignoring the need for greater flexibility in the workforce. The 200 pages of the superannuation legislation are written to deny superannuation contributors control over their savings, to the great benefit of lawyers and other beneficiaries. The main effect on savings appears to have been a transfer of deposits and savings out of traditional bank and life insurance instruments. Savings have not increased. It seems that the superannuation scheme, even were the full scheme to come into operation, would not give the majority of Australians such a retirement income that they would not have to reduce their standards of living substantially. An important social and financial initiative has thus been sacrificed to political expediency. Reforms will be difficult and extremely costly.
8 IS AUSTRALIA COMPETITIVE?
Like all countries, and particularly countries with a small population, Australia has to be internationally competitive to achieve full employment. If it is not competitive, imports flood in, exports do not grow, balance-of-payments deficits and high external debts follow. High productivity at home and success in sales abroad are two sides of the same coin. In today's world of easy communications, even very large countries like the United States have to be highly productive and trade internationally. Discriminatory regional trade areas at first stimulate economic activities by "trade diversion", that is, by encouraging trade to take place within the discriminatory area. Trade with the outside world is reduced. But trade within a discriminatory area is less efficient than worldwide trade. In the long run, countries in the discriminatory area lose out on growth.
For Australia, self-sufficiency is impossible. In most manufacturing and service industries, businesses have to participate in international markets to benefit from economies of scale and competition. Agricultural exporters and miners are the most efficient Australian producers because they have always been exposed to international competition. Government intervention in wheat, wool, beef and other agricultural industries as well as in mining, to cream off some of the primary industry efficiency gains, has led to some redistribution of income within Australia, but the principal effect has been to undermine export efforts and earnings. Exporters are also handicapped by high infrastructure costs and the high costs of protected (mainly manufactured) inputs.
Measuring competitiveness directly is difficult. It varies from industry to industry, from firm to firm and even from product to product. The notion of "total factor productivity" has been developed as a summary measure of an economy's productivity and competitiveness, but it is so fraught with technical difficulties that it has very limited practical application. Both total factor productivity and simpler measures, such as output per worker, suggest that Australian productivity improved in the 1980s with the reduction of protection, but that it grew less rapidly than average productivity in OECD countries. Trade indicators suggest that Australia is now less competitive internationally than it was ten years ago. In the rest of the world, and particularly in East Asia, productivity is increasing faster than in Australia.
Low labour costs in developing countries have been blamed for Australia's unemployment. Intuitively, it seems unfair that Australian workers with average weekly earnings of $600 (for men) have to compete with average weekly wages of $60. They don't.
Real wages are higher than they seem in developing countries. A haircut that costs $10 in Australia costs a few rupiahs in Indonesia. There is a "purchasing power" difference. As labour remuneration rises in Asian countries, they are increasing skills and technology. Ensuring that workers receive market wages, that their workplaces are safe and that they receive the benefits of skill enhancement, are important issues with which rapidly-developing countries are concerned. But as income rises so do pressures to improve technology.
But in the meantime, real wages are lower in developing countries and this enables them to use their comparative advantage in labour-intensive industries to produce and export labour-intensive goods. They use different technologies from those of high-income countries such as Australia. As poor countries increase their skills and income, they climb the technology ladder until they catch up to the advanced industrial economies which are rich in capital, skill and technology. This gives countries like Australia a potential competitive advantage in many products and services. The period during which such comparative advantage strongly favours Australia is limited, but Australia is not taking advantage of this potential.
Low labour costs per se do not lead to unfair trade. Australia's problem is not that we cannot compete in the production of cheap standard footwear and clothing. These are not products we should manufacture because they are internationally low-wage products. We can and do compete in fashion-intensive clothing. But the rapidly-growing developing countries are catching up in skills and producing goods and services in which we used to have a comparative advantage. Singapore for example, is making robots and pushing its labour-intensive processes to Indonesia. Australian policy responses to these trends are "too little and too late".
TRADE POLICY
The principal source of Australia's past lack of competitiveness lay in its trade policies, that is, in high tariff and non-tariff trade barriers. While North America and Europe began to reduce international trade and financial barriers in the 1950s and 1960s, Australia became more staunchly inward-looking in those years than it had been in the 1930s. Many quantitative restrictions were replaced by tariffs in the 1960s, but protection increased in manufacturing and spread to agriculture. The economy became highly regulated as the costs of protection impinged on every aspect of production and the balance of payments.
As balance-of-payments difficulties, typically high costs of protection, began to threaten Australian prosperity, the Vernon Committee (1965) was asked to identify the causes of growing economic problems. Its mild warnings were overtaken by the growth of mineral exports and the primary product price boom of the early 1970s.
Australia exposed itself to ridicule during the Dillon and Kennedy rounds of multilateral GATT trade negotiations by not participating on the grounds that it was only a semi-developed country. It only participated half-heartedly in the Kennedy round of multilateral negotiations and its implementation.
Australia's traditional protectionist stance began to be effectively questioned only in the 1970s. The first steps to reduce protection were taken by the Whitlam Government, but trade policy reform was suspended during the Fraser Government (1976 to 1982). The high costs of protection in an increasingly competitive world were only accepted after the Hawke Government came to power in 1983, that is, some 30 years after other leading OECD countries opened their economies.
Protectionist sentiments are not dead in Australia. Protectionists argue that the growth of unemployment in Australia has coincided with, and derives from, the reduction of protection. The coincidence is undoubted. But would unemployment have grown less or more quickly, if Australia had not begun to reduce protection? In more open OECD countries, unemployment has grown relatively recently, and in very open countries it is still lower than in Australia. If Australia had taken part actively in the earlier multilateral trade liberalisation negotiations, the pressures for reforming the economy would have come earlier. Large blocks of relatively unskilled labour working in technologically-backward industries would have been retrained in the 1970s in such areas as steel and motor vehicles. The clothing, footwear and textile industries would have come under international competitive pressure, forcing earlier restructuring of those industries. At the end of the Kennedy round, Australia (together with New Zealand) had average tariffs of over 20 per cent compared to 6 per cent average for other OECD countries.
When the Hawke Government began to tackle protection, vested interests in steel, motor vehicles (mostly foreign-owned firms) and footwear, clothing and textiles slowed progress. Australia for the first time participated actively in GATT negotiations in the Uruguay Round. Its main contribution was the formation of the Cairns Group of primary-product exporters. Despite its geographic and income-level diversity, the Cairns group was able to put the reduction of protection in agriculture on the Uruguay agenda.
Suggestions that the Uruguay Round was unlikely to be successfully concluded abounded throughout the protracted negotiations. These suggestions were fuelled by the protagonists of regional trading blocs who sought to retain and develop protectionist regional arrangements. Although Australia contributed to the undermining of the Uruguay negotiations through its sponsorship of the APEC (Asia Pacific Economic Co-operation) group, it sided with the Asian countries in supporting the multilateral trading system against discriminatory regional trading blocs. At the successful conclusion of the Uruguay round, with many gains to Australia, the average Australian tariff remains above 10.9 per cent, again the highest among OECD countries, which have average tariffs of 2 per cent.
On the positive side, the need to reduce protection has become bipartisan political policy. Australia is to catch up with other OECD industrial nations, Singapore and Hong Kong, by the year 2000. Many developing countries, having reduced tariffs and non-tariff barriers substantially, are liberalising trade policies further.
Opening up the economy to international competition through trade reform and financial deregulation was the key reform of the 1980s. By increasing competition in manufactured goods and financial services, the economy became open to international competition directly, and costs were reduced for primary exporters. But nearly a hundred years (and more in Victoria) of trade protection gave rise to other inefficiencies which have to be overcome if Australia is to become internationally competitive. These causes of uncompetitiveness fall into three main areas: sectoral regulations, labour market inflexibility, and high costs of State trading enterprises.
REGULATION AND COMPETITIVENESS
Variable, "tailor-made" protection which seeks to give every product "just the protection it needs", results in many inefficiencies and inconsistencies. Commonwealth and State governments sought to minimise and offset the costs of protection-caused distortions, but this led to more "non-border" protection in the form of economy-wide and sectoral regulations. Exchange rates, capital flows generally and inflows of private direct foreign investment, had to be regulated to avoid the use of foreign capital to exploit Australia's protected markets. But because direct foreign investment contributed capital where savings were scarce and also brought management skills and advanced technology to an economy starved of these by protection, they were allowed entry and the repatriation of profits under highly-regulated conditions. They exploited the domestic market, made high profits and repatriated them. They were a brake on the exports of manufactures and of Australian investment abroad. And they were -- and are -- among the loudest supporters of protection.
Sheltered from world markets, and with a small domestic market, monopolies, oligopolies and imperfect competition were rampant. Retail price maintenance in refrigerators, washing machines and other "white goods" was a typical effect, preventing competition among retailers. Cartel arrangements were officially sanctioned, for example in the "two airlines" policy, and developed in other areas such as road transport.
Sectoral regulation became a mania in Commonwealth and State jurisdictions. Telecommunications and media were prime targets. Lobby groups thrived. In transport, it was said that everything that should not be regulated was regulated, and everything that should have been regulated, such as traffic congestion, was not.
Agriculture was intensely regulated by product and region, substantially reducing prices at the farm gate and raising them to domestic consumers and to importers in other countries. Agricultural marketing boards have not caused the total economic breakdowns to which they led in Sub-Saharan Africa, but they seriously weakened the rural economy and exports. The ultimate regulatory debacle, that of the wool industry, is still with us.
The multiplication of State regulations and State government purchasing preferences for local producers fragmented the national market, encouraging State monopolies in products such as cement. Labelling laws, measurement and quality standards varied. Commonwealth-wide standardisation did make headway in the 1980s, but at considerable cost in negotiating time, and the process still has some way to go.
Local councils took over where State governments left off. Council sub-committees have trouble in coming to grips with development and aesthetic issues. Planning officers can't read architects' plans. The inspectors who have to give on-site approvals have neither a secretary nor a mobile telephone and cannot be reached. The resulting inefficiencies of local council regulation are said to add 20 to 30 per cent to the cost of construction in established urban areas. These regulatory problems are not unique to Australia. The Brussels bureaucrats of the European Union are equally undermining the constituent economies by insisting on new regulatory conformity.
Some regulations are, of course, necessary. Health, safety, environmental and aesthetic concerns are important. They have to be managed. But most regulations arise out of past policies and technologies. A movement to reduce the complexity of regulations and allow commonsense discretion on minor issues is beginning despite difficulties many staff have in making judgements rather than following rule books in which every contingency is spelled out. Ombudsmen for deregulation are beginning to appear in some countries, for example Mexico, to rid the books of out-of-date and redundant regulations. Australia lags far behind.
The pervasiveness of regulations, together with the remnants of protective business in the domestic and export markets, have made Australian management highly dependent on government benefits. It is often easier to make a profit by seeking favourable treatment from State and Commonwealth governments than by attending to higher productivity. At the same time, regulations are costly for firms that do not benefit, so that Australian business is intimidated by the fear of "getting on the wrong side of government". Past protectionism and the present regulatory environment thus account for widely-held perceptions that Australian management standards, on average, are IOIV.
Regulatory compliance is particularly costly for small firms that bear the brunt of the constantly changing stream of regulations to which they are subject. Starting a business normally requires compliance with some 20 regulations and licences; and compliance is a continuing cost as most of these come up for annual renewal or review. Together with arduous taxation compliance costs, small business is so heavily burdened that entry and expansion are often discouraged. Attempts to offset such discouragement border on the ludicrous. Small business assistance schemes frequently teach small business people how to deal with regulations that are redundant and should not be burdening them.
LABOUR MARKET RIGIDITY
When Australia was the highest per capita income country in the world it was, nevertheless, a caring society, and a major effort was devoted to sharing high standards of living throughout the community. Since farmers and miners were paying for jobs by subsidising manufacturing, it was deemed to be fair that workers as well as factory owners should benefit. Social objectives were thus built into wages. Mr Justice Higgins' 1907 Harvester Award was not related to productivity but to minimum standards of living for a man, his wife and three children. By implication, enterprises that were not productive enough to pay a living wage did not warrant a subsidy.
As the arbitration and conciliation frameworks developed in the shelter of protection, welfare continued to be located in the workplace side-by-side with work remuneration considerations. Not everybody benefited. Significant numbers of unemployed were left from the 1890s recession and their numbers grew in the 1920s and 1930s. The literature of the times records what it was like to be a poor farmer, on the margins of the workforce, or unemployed. Aborigines and Torres Strait Islanders were totally excluded from the good life. Women were dependents or poorly paid workers in "women's" occupations.
After World War II, some pre-war values persisted. Many women were pushed out of the workforce to give way to returning soldiers, or were relegated again to underpaid "women's" jobs. Aborigines and Torres Strait Islanders continued to be shut out of society. But there was also social change. Unemployment was no longer tolerable, at least for men. When full-employment policies created labour shortages, immigration was encouraged, with a major positive impact not only on labour supply, but also on productivity and the quality of Australian life.
The years of full employment and labour shortage saw appreciable increases in real wages, falling hours of work and increasing equality of pay for women. Working conditions were improved. Increasingly complex industry awards tied wage rates to job descriptions rather than a worker's productivity. Wages for young workers were raised. Penalty rates for dirty work, dangerous work, overtime, weekend work and shiftwork increased until they were among the highest in the world. Earnings were also boosted by increasing holiday periods, long-service leave and severance payments related to length of employment. Paid maternity leave was widely introduced. Superannuation was linked to employment. Some enterprises added child-care facilities. Australia was not unique in raising remuneration and linking social welfare, such as superannuation, to remuneration.
To support this system of remuneration Australia built up a unique industrial relations framework. The industrial relations "club" -- judges, officials, employers' and employees' advocates and a substantial academic wing -- forms a large superstructure that has taken on executive functions for the economy, albeit without either understanding the issues at stake or being responsible to parliament or any other democratically-elected body. It is a comfortable, well-remunerated "club" where mid-career network members can go into semi-retirement. The industrial relations network, not surprisingly, has a strong interest in the maintenance of the existing system.
High remuneration, leisure, good working conditions and job security for the mass of the population are the highly desirable objectives of growth. A safety net under disadvantaged people in society is essential. These form the core of high living standards. This is what economic development is about. Many European countries have similar wage structures, though some features of the Australian system, such as leave loadings and long-service leave, are uniquely Australian. But the system is not synonymous with the high standards of remuneration achieved. The industrial relations system is, on the contrary, a principal cause of Australia's unresponsiveness to changing world conditions. It has separated remuneration from productivity and loaded the workplace with payments that properly belong to social welfare to such a degree that Australia cannot take advantage of world markets. Measured by the equity and efficiency criteria, labour market reform is proceeding so slowly that progress is hardly perceptible. Some labour market rigidities are directly responsible for low labour absorption and hence for unemployment.
In the 1982-83 recession, steeply rising unemployment ushered in a sharp reduction in industrial disputes. This trend was maintained by the Hawke Government's call for national co-operation, although at some 500,000 working days lost a year, Australia still rates poorly in international comparisons. There has been some attempt to reduce demarcation disputes by more rational trade union behaviour.
The introduction of multiskilling, the reduction of the complexity of industrial awards and associated changes in the recognition of skills have attempted to reduce rigidity. Some firms have appointed workers to staff positions to be able to negotiate flexible agreements. The introduction of enterprise bargaining to enable workers and management to tailor working conditions and earnings to the specific needs and productivity of an enterprise has also moved along these lines. In a handful of cases it has led to the desired outcomes of greatly increased productivity, lower unit costs, higher earnings and higher productivity. In the majority of the enterprise agreements negotiated thus far, however, particularly in the public sector, while lip-service has been paid to productivity, the agreements are simply about wage rises.
The Government-trade union "Accord" of the 1980s helped to sustain macroeconomic policies that led industrial countries in inflation and culminated in an early and unwarrantedly deep recession. The Accord resulted in falling real wages and rising hours of work.
Costly as these failures have been for employed workers, the main costs are borne by the unemployed, the underemployed, those pushed out of the workforce and their families.
Trade union membership has, not surprisingly, been falling. Union membership is now less than 30 per cent of the private sector workforce and 40 per cent of the total workforce. In the public services and government trading enterprises, productivity is low, incomes are relatively high and risks of dismissal for non-performance are minimal. Unable to stem the drain of membership, the unions have turned to political power to endorse their claims. The disingenuously-named Industrial Relations Reform Act 1993 was therefore introduced to strengthen the industrial relations system. It was no doubt meant to reverse the decline in trade union membership, but this is unlikely to happen unless workers not only see improvements in their remuneration but also a decline in unemployment, that is, in the risks they face. The Industrial Relations Reform Act has been a major backward step in industrial relations. It is working against flexibility by discouraging employment by small enterprises and productivity-oriented enterprise agreements.
INFRASTRUCTURE
While Australia was highly protected, there was no reason to put competitive pressure on transport, power and other public utilities and services. Except for road transport, most infrastructural industries were publicly-owned state monopolies. Over time they became overmanned and inefficient and yet able to supplement state finances by overcharging consumers. Mining operators and farmers, and other Australian producers and consumers, bore the costs.
Once developing countries started to compete in primary product markets, and as protection for Australian manufacturers had to be reduced, high infrastructure costs emerged as an important reason for Australia's lack of international competitiveness. Many reports and reviews later, a start has been made on improving the productivity of some 60 of these enterprises and monitoring the process. Some reform has taken place, but no hard data and no comparison with neighbouring country productivity, costs, charges and profitability have been made available by the Steering Committee on National Performance Monitoring of Government Trading Enterprises. Other sources provide worrying data of continuing high costs, very high severance payments for redundant workers, for example on the waterfront, with a need for further labour-shedding. Truck transport appears to be the only industry operating within international cost benchmarks. The coastal shipping arrangements probably create the highest unit costs. They were recently extended in the Commonwealth agreement with the maritime unions.
The establishment of competitive standards in infrastructure is essential to Australia's competitiveness, but it is extremely difficult. Many European countries are having similar difficulties, and Australian performance sometimes only looks better because the European comparators are getting worse. Private ownership is likely to improve efficiency because of the surveillance of shareholders and the discipline of the capital market. Private monopolies can, however, also be inefficient and exploit consumers through high prices. It follows that, whether monopolies are private or public, in most cases some regulation is likely to be required to ensure that both efficiency and equity criteria are met.
Most public utilities are State responsibilities, and reform cannot take place without State action. The Greiner Government took the lead in public enterprise reform in New South Wales and other States are following. The Commonwealth needs to follow these examples rather than to try to control the reform process.
9 THE DEMAND FOR LABOUR
Although growth is undoubtedly essential to employment creation, the present structure of the Australian economy results in very low labour absorption for given outlays of capital. In looking at job creation, moreover, the possibilities of export-led growth have been neglected. A combination of increased labour absorption and export-led growth could create the million-plus jobs that Australians needs by the year 2000 to achieve full employment.
LABOUR ABSORPTION
Capital utilisation in the Australian economy is extremely low. A visit to any factory area that does not have continuous processes shows that machines and buildings are only used about 70 hours, (9 days out of a 14-day fortnight), that is, 20 per cent of the 336 hours available. A typical plant only works 200 days a year. Most economic commentators, nevertheless, discuss capacity utilisation in terms of the hours normally worked. It is argued that to increase capacity utilisation, considerable new investment is needed. But in most industrial enterprises, output could be increased with minimal investment but with much greater employment by working two or more shifts, working regularly at the weekend, and working close to 52 weeks in the year. The hours worked by individual workers would, of course, not increase, but the number of workers in jobs would rise very rapidly. This is what is meant by full capacity utilisation in the rapidly-developing countries of East Asia.
The proportion of shiftworkers in the labour force has only increased from l1 to 14 per cent of the Australian workforce in the past 10 years. Mining had to move to shiftwork to be able to compete internationally. Continuous processes in manufacturing, such as steel-making and chemicals, work round the clock, but most manufacturing enterprises do not. A few manufacturing enterprises have negotiated productivity-related enterprise agreements that have in effect abolished penalty rates for shiftwork. But in most manufacturing plants capital is idle most of the time. In an internationally-competitive environment, investment, particularly if technology is changing rapidly, does not pay if capital is not fully used. But with present awards, when demand rises, businesses put on extra machines rather than work an extra shift and employ more labour.
Penalty rates that prevent shiftwork and weekend work are a dead weight on the economy. No one benefits. No extra work is done, and no extra money is paid. Working one early-morning shift and one afternoon shift would suit many two-job families with children. Some people prefer weekend work with time off during the week. It is possible that some premiums would have to be paid to attract workers to work at times that they regard as inconvenient. An efficient market would bring such rates to light. Sophists argue that not working shifts and weekends are important Australian values. Does attending that football match every week-end have a higher value than jobs? Ask the unemployed.
Substituting additional shiftwork to increase capital utilisation in manufacturing could economise on new investment, raise employment and earnings, reduce costs in the domestic market and stimulate exports. Returns to capital would also increase. As equipment would be depreciated more rapidly, technological change would be accelerated.
Penalty rates are particularly injurious in the tourist industry which is labour intensive and also has a large potential demand. The demand is very "price elastic", that is, relatively modest falls in hotel costs are likely to lead to more than proportionate increases in the inflows of tourists. Some hotels are negotiating enterprise productivity agreements to be able to offer better services and lower costs.
Construction is another labour-intensive industry in which capital equipment is utilised for relatively short hours. Some productivity-oriented enterprise agreements have been negotiated leading to a marked shortening of the time taken to complete major projects, but such agreements are not widespread. The industry relies heavily on overtime rather than using systematic shiftwork.
Retailing has expanded the hours that shops are open in several States but, for the most part, shops are still shut when people are free to shop. Banks are slowly extending hours of opening, but public services, such as car registration and driving licence offices, keep hours that impose maximum inconvenience on working people. Most have to take time off from work to use such services, reducing their productivity.
EXPORT-LED GROWTH AND EMPLOYMENT
Outward-oriented countries have found that demand management becomes a minor issue when a country exports to the world. Australian producers have a huge market for their products in Asia and worldwide. Except for a few primary product exports, Australia is a small contributor to world markets and thus will not affect the world price by exporting. Successful exporting countries in any case do not worry as much about the relative prices of their imports and exports (the barter terms of trade) as about how much their growing exports will buy in world markets (the income terms of trade). Successful exporters compete by increasing their productivity so that they can lower their prices and gain a larger share of markets. An export culture means an understanding of markets and being able to produce a quality product for that market at a competitive price. Primary exporters have long known and practised this approach to exports. A small number of enterprises in manufacturing and services are becoming exporters. Unfortunately they still represent a very small proportion of total Australian enterprises.
Australian export performance, reflecting its lack of competitiveness, is very poor by international standards. The ratio of exports of goods and services to GDP in 1993 was 18 per cent. This was well below the OECD average and far below the performance of East Asian countries.
Primary exports account for half of total exports and must be expected to continue to be dominant to take advantage of Australia's natural endowment. They will have to grow in volume and increase their efficiency to maintain and expand their share of world markets. While they do not employ a great deal of labour directly, they have large multiplier effects.
The exports of manufactures, including products such as aluminium, and services account for roughly another 20 per cent each. In services, using the service export-to-GDP ratio, Australia ranked 21 out of 22 OECD countries.
Table 9.1: The composition of Australian exports, 1993
| $ billion | % | |
| Merchandise Primary Manufactures Other Total merchandise | 37.7 16.2 6.0 59.9 | 50 22 8 80 |
| Services | 15.0 | 20 |
| Total goods and services | 74.8 | 100 |
Source: Department of Foreign Affairs and Trade, Exports of Primary and Manufactured Products, Australia, 1993.
Total exports of manufactures accounted for only 10 per cent of the output of manufacturing. Exports of "elaborately transformed manufactures" have attracted a great deal of attention. They are undoubtedly of considerable potential importance, though in 1993 they only amounted to $10 billion (excluding re-exports). They grew quite rapidly, in Australian terms, at 8 per cent a year in the 1980s (in constant prices), but this rate of growth is very low by the standards of East Asian countries. Subsidies to these exports, moreover, amount to about $500 million a year. Australian exports to Asia have also been growing, but Australia only has about 3 per cent of the Asian imports of merchandise.
The opportunities for increasing exports are enormous, but they can be won only if Australian production costs drop appreciably. Firms that export have introduced flexible work practices and work their machines more than 20 per cent of the time. Industrial relations reform is thus essential for a real boost to exports.
10 LABOUR SUPPLY
In the modern world, the quality of labour -- human capital -- plays as important a role in economic development as physical forms of capital such as roads, buildings and machinery. Technology links the quality of human and physical capital, but the quality of labour supply is not merely technology-determined. Although the quality of labour is primarily dependent on education and training in a broad sense, it is also affected by the way in which social security impacts on attitudes to work.
Technological change and competitive pressure from low-income countries have made it imperative that advanced industrial economies develop the education and skills of their workforces to very high levels. A threefold development is taking place. First, with technological improvements, unskilled and semi-skilled jobs are disappearing in existing industries. In production and service industries, jobs once regarded as needing minimal skill requirements, such as delivery-van driving, public park maintenance and basic factory work, now demand social and on-the-job skills as well as versatility and initiative. Delivery-van drivers, for example, have to respond to clients' concerns in an era when paper invoices are being replaced by electronic communications. Factory workers may be mainly machine-minders, but the failure to take immediate appropriate action when a machine malfunctions is extremely costly.
Second, technology is opening up new industries, particularly in services, to meet the complex consumer demands made possible by rising living standards. The electronic communications highway is one of many examples. Such new industries, regardless of sector, require skills unthought of 10 or 20 years ago.
Third, competition from low-income countries is making it uneconomic to compete in labour-intensive industries such as mass-produced clothing, though it is important to note that a considerable body of research indicates that this is the least important cause of the displacement of unskilled labour.
The conclusion, that entry skills for most jobs are high and increasing, is inescapable. Most workers, moreover, will have to improve their skills throughout their lifetime, on the job and through formal re-training.
Human capital does not only encompass knowledge of a technical nature. A striking feature of strongly-performing countries with low unemployment, whether they are industrialised like Switzerland or newcomers like Taiwan, is the commitment of the workforce at all levels, from unskilled manual workers to senior managers, to work-intensity and the quality of the work they produce. Attitudes to work are partly individual, but they reflect education at home as well as in formal schooling. A society's moral values and sense of social responsibility are also important components of a work ethic. Work ethic issues are becoming important in East Asian countries. It is feared that as they become prosperous, they will lose some of the human capital quality of their years of rapid growth. They are examining ways of maintaining the values that gave them a high quality workforce.
A sense of social cohesion is an important component of quality in the workforce. The division of a society into "haves" and "have-nots" undermines social responsibility. The financial boom scandals of the 1980s indicated diminishing social standards and responsibilities among the "haves". At the same time, because unemployment remained above 6 per cent through the 1980s, the social distress of the "have-nots" was reflected in social problems in "have-not" communities.
EDUCATION AND TRAINING
Education and training begin formally in primary school. A considerable debate has developed about the quality of education in Australia, but benchmarking of primary education over time among States and between schools is not available, so the debate lacks analytical precision. Anecdotal evidence suggests that primary education varies enormously from world-class standards in private schools and state schools in prosperous suburbs, to very inadequate standards in some low-income areas where children receive least support from home and where children speaking poor English are concentrated. The present primary education system thus does not deliver quality education, on which subsequent educational and working opportunities are based, to a significant proportion of primary school children.
Awareness of deficiencies in primary education is widespread. Many steps are being taken to improve the quality of education: teachers are demanding smaller classes and more administrative help; there is a move to increase attention to the "basics" such as grammar; there is considerable disenchantment with the decline of specific knowledge content; some attempts are being made to introduce second languages; some views seek to improve teacher training and thus teacher quality and there is concern with behavioural issues. Many flowers are blooming. But there is little evidence of steady quality-improvement. Nationwide objective testing of school children to enable schools and States to be benchmarked and compared is strongly opposed by teachers and teaching administrators.
In private and leading state school streams, secondary schools also provide quality academic education. The international baccalaureate, that is, a world-class objective examination standard, has been introduced on a very limited scale, mainly in private schools. University entry provides academic standards State by State. Movement toward a national standard, which would create student mobility among tertiary institutions and thus enable much greater institutional specialisation than is at present possible, is moving painfully slowly. Once a national standard is established, academic secondary training will be able to be benchmarked nationwide, as it is, for example, in Malaysia.
But entrants into tertiary institutions only represent a small proportion of secondary school students. About 20 per cent of students go on to vocational education and about 45 per cent go straight into the job market.
Employers are concerned that high school graduates do not have adequate basic language and mathematics standards and general knowledge for entry into the workforce. The absence of social skills and social motivation is an even more serious problem. In high schools, it is reflected in lack of discipline and even in violence. Subjects which could interest many students, such as computer literacy and electronic skills, are either not taught at all or are in limited supply. Students are bored, perform poorly, and "drop out" while perfunctorily still attending school. Boys are the main victims. In service industries, where personal contact with customers is important, girls' higher social skills, their ability to relate to customers, enable them to find jobs where boys cannot.
Benchmarking in secondary schools is thus not just an academic problem. Secondary students' perceptions are that they do not need formal skills to embark on vocational education or to find jobs directly. In most European and in East Asian countries, entry into vocational schools and directly into the workforce requires secondary school graduation in basic language and mathematical skills as well as considerable general knowledge. A second language, generally English, is mandatory. Paradoxically, entrants into vocational schools in some Asian countries may have a better knowledge of English than some graduates from Australian secondary schools.
Secondary school weaknesses have not been recognised because of the severe problems in Australian vocational education. It has been known for many years that Australian vocational education attendance, at about 20 per cent of the late teenage population cohort, is abysmally low. The average for OECD countries is 50 per cent. In Germany, 80 per cent of the late-teenage group, that is, all but those who are at University, are in vocational schools. The East Asian industrialising countries, notably the Republic of Korea, Taiwan and Singapore, also place a strong emphasis on vocational education. In Australia, the majority of vocational students only attends part-time.
The attempts to reform the apprenticeship system, which were to be linked to the evolution of vocational education, have made little headway, because of the decline in apprenticeship opportunities with rising unemployment. In the 1982-83 recession and again in recent years, labour-shedding made for limited opportunities in large-scale manufacturing. Many training facilities became idle. Small employers find on-costs and compliance costs too high to be able to employ apprentices. Starting wages are generally too high to make it economic to employ learners more generally.
Attempts to facilitate entry into the skilled trades, by replacing apprenticeship with trade certificates, and unifying TAFE and university streams to enable youngsters trained in vocational institutions to go on to University at a later date, were well-meant, but they have foundered on the poor quality of education available in many TAFEs. The TAFE system has now been in crisis for more than 10 years. The States have not taken their responsibilities for vocational education seriously, so that change and reform are painfully slow. Any State which pays serious attention to vocational education will gain in competitiveness within Australia and internationally.
With the Dawkins reforms, Australia unintentionally opted for a tertiary system in which market forces are beginning to determine the level and quality of education and training available in undergraduate courses. The centralisation of control is widely perceived to have failed. The identification of quality and cost-effectiveness of courses is beginning to emerge with publications targeted at potential students. Word-of-mouth is likely to become an even more potent indicator of market values.
Attracting some 45,000 overseas full fee-paying students to Australia, mostly for undergraduate studies, suggests that undergraduate courses have been internationally competitive in broad terms. Australia, however, only attracts a small proportion of students going abroad from neighbouring countries despite some marked cost advantages. Top scholarship holders from neighbouring countries do not come to Australia, particularly for postgraduate study. They go to Northern America or Europe. Australia would have to build up its graduate studies and concomitant research to be competitive at levels which have become mandatory for professional leaders.
The Dawkins reforms have led to diseconomies rather than economies of scale. Administrative costs have not only been raised by amalgamations, but also by increased centralised control. Resources have had to be moved out of teaching and research into fulfilling vast new bureaucratic requirements. University facilities are running down. Attempts to find funding outside the mainstream, both from government and non-government sources, have had some positive effects, but have also had negative impacts on the quality of courses, and in time could reduce the resources put into non-commercial research.
The objectives of the Dawkins reforms, to reduce university costs and raise intellectual standards, were admirable. They failed because they did not tackle the causes of the problems. The rapid growth of the universities in the 1960s brought many new staff members on board. Entry into university teaching became easier than it had ever been or than it is now. All the new entrants were immediately given tenure for life. This led to the "greying" of the universities in the 1980s, when the entry of new staff that would have been associated with steady growth, was stalled. The reforms have not altered the basic composition of staff. New graduates, much better trained and with much greater drive than their seniors, are denied opportunities on university staffs. Since there is a worldwide market for high professional skills, Australia is losing many of its best university people.
The costs of post-secondary education could be lowered and places could be found for additional students if the TAFEs and universities did not leave their capital idle for a great part of the day, the week and particularly for a good part of the year. The establishment of the private Bond University brought this source of gross inefficiency to light almost immediately. Bond University has three semesters in an academic year, enabling students to accelerate their progress or take a semester off to earn money, and gives staff additional research and consulting time through rotation. "Four quarters" of three months each are common in high quality North American universities for similar reasons. Why does Australia not follow?
Centralising tertiary education has not been markedly successful worldwide. The States' active role at all levels of education should be the focus of attention.
SOCIAL SECURITY
Providing a safety net for disadvantaged people in the community has been one of the very considerable achievements of the twentieth century. Social security support for those unable to work has alleviated the extremes of poverty of previous times. Supporting the unemployed has in addition had the very important effect, by maintaining consumption, of preventing negative multiplier effects. Recessions have not developed into depressions.
Social security and welfare expenditures at $43,440 million in 1994-95 were over a third of the total Budget expenditure. The social security and welfare budget has grown at 4.5 per cent a year during the last ten years, much more rapidly than productivity or national income. The trends are, of course, connected. Low national economic growth and high unemployment fuel the need for welfare expenditures. But this process cannot go on forever. In the macroeconomic framework, rising social welfare costs reduce the funds available for public investment, and hence future growth, and for spending on health and education which are important investments in human capital. Growing social security and welfare expenditures must ultimately lead to higher taxes which are likely to dampen economic growth further.
Most of the social security and welfare budget is spent on direct payments to families and individuals who qualify for payment benefits. There is undoubtedly some welfare cheating, but it does not account for the bulk of the social service and welfare costs or the rapid growth of the social service and welfare budget.
Social security and welfare payments, moreover, do not only have positive effects. They influence people's behaviour in negative ways. For example, the very presence of a social security and welfare system makes saving less necessary than in countries with less generous unemployment, old age and other benefits. With basic income insured no matter what happens, a high propensity to consume is inevitable. Prudent governments need to offset such behavioural characteristics with neutral tax systems and higher public savings.
Social security and welfare payments for unemployed people and for those that have dropped out of the workforce have direct negative impacts on the community. The combination of income, child, housing and other entitlements may give higher incomes to families and even to individuals than going to work at a low wage for unskilled or semi-skilled work. Taking on a part-time job may diminish social security income by more than a job is worth, particularly when job costs such as fares and clothing are taken into account. The opportunity that could arise if the part-time job leads to a full-time job is lost. The cost of child care, particularly in an authorised facility, is likely to mean that even full-time jobs are out of the question for single parents. Social security and welfare have thus created a "poverty trap" that keeps people out of the workforce. By the time children are grown, parents' skills have eroded.
The combination of poor education and dependence on social security support is now affecting second- and even third-generation families, creating an environment in which dropping out of the workforce is much easier than looking for a job. But such choices are the result, not the cause, of unemployment.
Working Nation introduced some changes to the social security system which will lessen the "poverty trap", encouraging more unemployed men and women to return to work. But there are also moves in the opposite direction. Men who turn 60 will no longer have to look for work to receive social security benefits, but will receive a form of age pension instead. In some ways this is a humane move. Looking for work at 60 years of age and more is very dispiriting. But the new rules will also encourage some older people to leave the workforce prematurely.
The social security and welfare system is complex and administratively intensive. The administrators do their best to minimise cheating. This inevitably makes the system very intrusive. It is even more intrusive if poor families have additional welfare needs. Some do not reveal their problems because of the intrusiveness of the system, often to the cost of their children.
Avoiding the pitfalls of social security while retaining welfare standards and a "safety" net for underprivileged people is a major social and economic challenge. A social security system has to be efficient, but it also has to be humane and preserve human dignity. It must not discourage people from working. The best solution is to avoid the need for widespread social security by pursuing policies that deliver rapid growth and full employment.
READINGS
Economic Policies
Argy, F. (1993), A Long Term Economic Strategy for Australia, CEDA, August.
Australia, Commonwealth of (1994), Budget Statements 1994-1995, Budget Paper No. 1, AGPS, Canberra, May.
Australia, Commonwealth of (1965), Report of the Committee of Economic Enquiry, (the Vernon Report), AGPS, Canberra, May.
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