Philip Lowe: The labour market, structural change and recent economic
developments
Speech by Mr Philip Lowe, Deputy Governor of the Reserve Bank of Australia, to the
Financial Services Institute of Australasia (FINSIA) Leadership Event, Hobart,
9 October 2012.
* * *
I would like to thank Patrick D'Arcy for his valuable assistance in the preparation of this talk.
It is a pleasure to be in Hobart today and I would very much like to thank Finsia for the
invitation to this lunch.
My remarks this afternoon are largely centred on the Australian labour market. They pick up
on two important issues. The first is one that the Reserve Bank has spoken about at length
over recent years, and that is structural change. Today, I would like to focus on how this
change has been affecting the operation of the Australian labour market. The second issue is
a more timely one, and that is how recent developments in the labour market can help us
better understand the current balance between supply and demand in the economy.
Structural change
No doubt, you have all heard much discussion over recent times about structural change in
Australia, and why it is occurring. At the centre of a number of the changes that are taking
place is the industrialisation and growth of Asia. This has resulted in high prices for
Australia's commodity and food exports, as well as a high exchange rate. The most obvious
effect is the rapid expansion of the resources sector that has been underway for some time.
Another important factor has been the marked change in Australians' propensity to borrow to
buy assets, especially houses. And then there is the ongoing growth in our demand for
services as our incomes grow and the population ages. Just as other forces have done so for
more than 200 years, these forces are reshaping our economy.
But the concept of structural change - which is talked about a lot by economists - is a fairly
abstract one for many people. It does become very real though when it affects people's jobs
- the nature of their work, the industries they are employed in, the security of their
employment, their career opportunities and the wages they get paid. The Reserve Bank
must, by the nature of our responsibilities, focus primarily on aggregate outcomes. However,
we also try to understand what is going on beneath these aggregates, and how people's lives
are being affected.
Before I talk about the detail, it is worth starting with the aggregate unemployment rate
(Graph 1). The key point here is that unemployment remains low. In the past 30 years, there
have only been four years in which the unemployment rate has averaged below its current
51⁄4 per cent. Australia has one of the lowest unemployment rates among the advanced
economies, an outcome that seemed improbable for much of my professional career.
Underneath this low and steady unemployment rate, there is a great deal of movement at the
individual worker level. Although it is still typical for most people to have relatively long tenure
in a single job, a large number of people change jobs each year. The latest data available
from the Australian Bureau of Statistics (ABS) show that at February 2012 around 2.3 million
people - almost one-fifth of the total number of employed people - were newly employed,
having been in their job for less than a year. While a little under half of these were starting
work for the first time or were not previously working, 1.2 million people moved from one job
to another. And this is in a year when the net growth in published employment was just
23,000. This changing in jobs occurred for a range of reasons. Around three-quarters were
voluntary, including for personal reasons or to take advantage of new opportunities. The
remaining quarter was involuntary, including because the previous employer went out of
business or the nature of the business has changed.
Graph 1
The structural changes in the economy are clearly one factor contributing to this movement
of people. This is of course nothing new. There is always a degree of structural change
occurring, and the strong growth in the resources sector is but the latest example.
Nevertheless, there is some evidence that the changes taking place have led to a higher rate
of job turnover in recent times than has been the case for the past two decades (Graph 2).
The number of people who left a job over the year to February 2012, as a share of those
employed some time during the year, was the highest in two decades, with fairly high rates of
both voluntary and involuntary separations.
Graph 2
This high rate of turnover, with relatively modest aggregate employment growth, is consistent
with a lot of new job opportunities opening up in various parts of the economy and, at the
same time, other jobs ceasing to exist. Another indication of this is that the official measure
of job vacancies has remained relatively high, yet employment growth has been relatively
subdued.
An additional way of looking at these changes is to examine the dispersion - or standard
deviation - in employment growth across the 19 industries for which the ABS publishes data
(Graph 3). For a number of years now, there has been a high dispersion in employment
growth across these industries, with especially strong growth in the mining sector.
Graph 3
The cumulative effect of this dispersion in growth rates can be seen in total employment
growth in different industries (Graph 4). Since 2007, around 300,000 net new jobs have been
created in the health care sector, 200,000 jobs in professional and scientific services and
around 130,000 jobs in each of the mining and education sectors. In contrast, the number of
manufacturing jobs has declined by around 70,000, and the number of jobs in retailing is
largely unchanged.
Graph 4
These disparate trends have added to a general sense of uncertainty in many parts of the
community. Job losses can be very disruptive when they occur. They tend to be more visible
than job gains. And they often take place all at once when firms are downsizing or closing,
rather than the more gradual process of job creation. The large variation in experience
across industries is probably one reason why many people view the labour market to be
quite weak. Over the past year, we have had the rather unusual situation in which consumers
have become quite concerned about rising unemployment, yet the overall unemployment
rate has been steady (Graph 5).
Graph 5
More positively, and to the surprise of many people, the significant variation in employment
growth across industries has not led to greater variation in the unemployment rates across
the country. One way to see this is to compare the distribution of unemployment rates across
the 68 regions for which the ABS publishes data with the distribution of unemployment rates
10 years ago (Graph 6). The picture is pretty clear: the average unemployment rate is lower
and the variation across the country is also lower. Today, around half the regions have
unemployment rates below 5 per cent and 50 of the 68 regions have an unemployment rate
below 6 per cent. In only three regions is the unemployment rate above 8 per cent, compared
with 13 regions a decade ago.
Graph 6
One factor that has played at least some role in these outcomes is the willingness of people
to travel or move to where the jobs are. The most high-profile example of this is perhaps the
FIFO - Fly In Fly Out - and the DIDO - Drive In Drive Out - workers. Industry estimates and
recent census data suggest that there are currently upwards of 50,000 such workers. Internal
migration, of course, has also played some role, with the rate of net interstate migration to
Western Australia over the past year is the highest for around 25 years (Graph 7). It is also
worth noting that interstate migration has played an important role in the Tasmanian
economy, with the situation switching from sizable net inflows to net outflows and back again
over the course of just a few years. For a period in the 2000s, internal migration was adding
around 1⁄2 per cent to Tasmania's population annually. Today, it is subtracting almost this
amount.
Graph 7
The structural changes that have taken place across the economy have also altered the
relative wages in different industries. Workers in the resource sector have long been paid
higher wages than in many other industries, and this gap has widened over recent years
(Graph 8). Since 2004, average wages in mining have increased by about 10 per cent
relative to the average for the economy as a whole. Workers in professional services have
also experienced faster-than-average increases, partly due to spillover effects from the
resources sector. Conversely, relative wages have declined in the manufacturing, retail and
the accommodation industries, each of which has experienced difficult conditions over recent
times. These divergent trends since the mid 2000s stand in contrast to the period
immediately before that, when there was less structural change.
The overall impression from these various facts and figures is that the labour market has
coped reasonably well with the significant changes taking place in the Australian economy.
While there have been shortages of skilled workers in some areas, these have been fairly
limited. Workers have moved in large numbers to the industries that are benefiting from
growth in Asia and the increasing domestic demand for services. They have done this at a
time of close to full employment and larger divergences in unemployment rates across the
country have been avoided. The adjustment of relative wages has helped, and this
adjustment has occurred without igniting the type of economy-wide wages blowout that
contributed to the derailment of previous mining booms.
Graph 8
One reason that things have worked out this way is that the industrial relations system is
more flexible than it was two decades ago. The exchange rate appreciation has also been an
important factor, helping to maintain a reasonable balance between demand and supply
during what has turned out to be a once-in-a-century investment boom. Another factor has
been Australia's monetary policy regime, which has provided a strong anchor for both
inflation and wage expectations. After two decades of the inflation-targeting regime there is a
fairly broad understanding that unsustainable aggregate wage growth is likely to lead to
higher inflation, and thus higher interest rates.
Looking forward, it is clear that the structure of the economy will continue to evolve. Over
time, the strong growth in investment in the resources sector will give way to a large increase
in exports of resources. This will likely mean some moderation in the demand for labour in
the resources sector, and other forms of activity and employment will need to pick up. As this
transition occurs, the types of new jobs that are created will also continue to evolve.
Inevitably, there are uncertainties as to what these new jobs will be, and where they will be
located. In the face of this uncertainty, it is essential that the labour market retains its
flexibility. The industrial relations laws and practices are important here, but they are by no
means the full story. Flexibility also comes from having an adaptable workforce - one that
has the right general skills, the right training and the right mindset. Over the medium term,
whether or not Australia fully capitalises on the opportunities that the growth of Asia presents
depends critically upon the ability of both workers and businesses to adapt, and to build and
use our human capital. Many of these opportunities lie beyond the resources sector - in
areas like the unique tourism experiences that are possible here in Tasmania, in high-end
manufacturing, in high-quality food and in professional services. If we are to take advantage
of these opportunities, a highly skilled and outward-looking workforce is critical.
Recent outcomes
I would now like to shorten my gaze a little to look at quite recent developments in the labour
market and what they tell us about the overall balance between supply and demand.
As I discussed at the outset, the current national unemployment rate is 51⁄4 per cent, and has
been in the 5 to 51⁄4 per cent range for two years now. As I said, this is a very good outcome
by international standards.
Notwithstanding this, the labour market appears to have generally softened in recent months,
with only modest growth in total employment, a decline in average hours worked, and a
decline in the employment-to-population ratio (Graph 9). Various indicators also suggest a
lower rate of job creation than was the case a while ago.
Graph 9
Two industries stand out as having particularly weak employment growth over recent times
(Graph 10). The first is the construction industry where, according to the ABS, there has
been a net decline in employment of 70,000 over the past 12 months. Activity in important
parts of the industry - including in house building and commercial construction - remains
subdued, as does the immediate outlook, and this has led to a fair amount of job shedding.
The second industry is public administration, where employment has fallen by 50,000 over
the past year, with governments cutting back due to budgetary pressures.
Graph 10
One interesting aspect of the recent outcomes is that despite only modest overall
employment growth, the unemployment rate has not moved up, as had been widely
expected. Part of the reason for this is that there has been a decline in labour force
participation - that is, in the share of the working-age population either with a job or looking
for a job (Graph 11). While one always needs to interpret short-run movements with caution,
the current participation rate is around 1⁄2 a percentage point lower than the average of the
past five years. This stands in contrast to the general upward trend in participation over the
past 30 years.
Graph 11
The Reserve Bank has recently spent some time trying to understand what is happening
here and what it says about the balance of supply and demand in the labour market.
On the supply side, demographic changes are potentially an important factor. As with many
other countries, the Australian population is ageing. This tends to reduce labour force
participation, as older people are less likely to have a job, or be looking for a job, than are
younger people. Our estimate is that this ageing effect, by itself, has reduced the
participation rate by around 1 percentage point since the mid 2000s.
Over this period, however, this effect has been more than offset by the higher participation of
successive generations of women in the workforce as well as a tendency for older workers in
general to participate in the workforce longer than their predecessors. Taking account of this
so-called cohort effect, as well as the ageing effect, it would appear that these longer-term
supply-side factors are not a central part of the recent decline in participation.
A second potential factor is the relatively high rate of structural change in employment that I
talked about earlier. With the increased rate of job turnover, it may be the case that workers
who have left a job have decided not to re-enter the labour market immediately. This could
be for a variety of reasons - perhaps employment prospects are poor or perhaps they are
seeking to update their skills before re-entering the labour force. Unfortunately, the existing
data make it difficult to assess how important these effects are. To the extent that they are
playing some role, there is likely to be a bit more capacity in the labour market than indicated
by the unemployment rate alone.
A third possibility is that the decline in participation is linked to the recent fall in demand for
construction workers. There has been a large decline in the number of people who identify
themselves as being self-employed and many of these worked in the construction industry. It
may be the case that some of these people are not recorded as unemployed, despite
actually not working in the reference week and being available for additional work. Again, if
this were the case it would suggest that there is a bit more capacity in the labour market than
suggested by the unemployment rate alone.
This weakness in the construction sector, particularly of new homes, has been one of the
bigger surprises in the economic outcomes over recent times. Looking forward, a pick-up in
construction activity is one of the factors that could provide an offset to the eventual
moderation in the current very high level of investment in the resources sector. A pick-up in
other forms of investment could also play this role.
With the peak in mining investment now coming into view, it is not surprising that attention is
turning to the questions of what forms of activity might pick up, where the future jobs might
come from, and what combination of interest rates and exchange rates might keep the
overall economy on an even keel. No doubt, international developments will have an
important bearing on the answers to these questions. Recently, the global outlook has
softened somewhat and the various indicators that I have just mentioned suggest the labour
market also has moved in this direction. Given these developments, and the outlook for
contained inflation, the Board judged at its meeting last week that it was appropriate for the
stance of monetary policy to be a little more accommodative than it had been.
Despite the recent focus on the weaker global economy, it is important not to lose sight of the
longer-term benefits to the Australian economy of the growth of Asia. It remains the case that
this growth provides Australia with tremendous opportunities. Over recent years we have
seen these in the resources sector. But in coming years we are likely to see them more
clearly in a wide range of other areas. Our flexible, adaptive and well-trained workforce will
be the key to taking advantage of these opportunities.
Thank you for listening and I would be very happy to answer any questions.