a step in this direction. 3 here, the challenge is to get the balance right between funding innovation and protecting investors. most of the areas, though, that affect the flexibility of the economy lie beyond the world of central banks and finance. i would like briefly to mention four of these. the first is the competitive environment in which firms operate. where competition is robust and entry to markets is easy, businesses have a stronger incentive to find better ways of doing things. they also have a stronger incentive to move quickly, lest a competitor seize an opportunity before they do. i think it is fair to say that few businesses really like competition, but, often, it is competition that drives them to do better and respond to new opportunities. and competition benefits us all as consumers, bringing new and lower - cost goods and services to market. so, we need a regulatory environment that is conducive to new entry, including by those who are able to harness new technologies to reinvent how things are done. a second area is the nature of the incentives to innovate and to start new businesses. these incentives are affected by the tax system and the regulatory and legal systems. they are also affected by the general community attitude to risk taking. we will be better placed to take advantage of the opportunities made possible by our strong fundamentals if our culture is one that accepts risk and appropriately rewards risk taking. a third area is the operation of the labour market. from a macroeconomic point of view, australia ’ s labour market arrangements have worked well over recent times. during the global downturn, flexibility in hours worked helped limit the rise in unemployment. then, during the years of the resources boom, very large wage increases were mainly confined to the areas where skills were in the shortest supply and they did not spread across the economy as a whole. and more recently, the slowing in aggregate wage growth has helped employment to grow reasonably strongly despite below - average growth in the overall economy ( graph 6 ). so, from a cyclical perspective, the labour market has proved to be quite flexible and things have worked reasonably well. a more open question is the degree of flexibility in dealing with structural change. again, we are more likely to be able to capitalise on our strong fundamentals if our system of workplace relations helps businesses and their employees respond quickly and effectively to new opportunities. this is especially so when business models and the preferred working patterns of australians are changing. as the productivity commission ’ s recent draft report

few of us who could have imagined many of the new occupations that have emerged. there are big data architects, cloud computing experts, social media strategists, mobile app developers, information security technicians, green retrofit architects, genetic counsellors and the list goes on. each of these new occupations is possible only because of advances in technology. more broadly, the huge growth in employment in the services sector has taken many by surprise ( graph 4 ). again, i suspect that if in the early 1990s we had known that there would be a net loss of over 100 000 jobs in the manufacturing sector in australia over the next 25 years, there would have been a sense of despair about the future. this despair would probably have been compounded if we had also known there would be no growth in jobs in both the utilities and wholesale trade sectors over the next quarter of a century. yet, over this period, we have enjoyed a strong rise in our living standards, the unemployment rate has bis central bankers ’ speeches come down substantially and we have generated around 4 million new jobs across the economy, mostly in the services sector. as i said, the other big source of unpredictability has been shifts in the global economy. you might recall that around the time of the sydney olympics there was much gnashing of teeth by those who saw australia as an old economy, just selling resources to the rest of the world at ever - declining prices. we were seen by many to be locked out of the ‘ new economy ’ and destined for decline. at the time, few people saw the great opportunities that would come our way as a result of the emergence of china as a major force in the global economy. one example of the difficulty of predicting change that i am fond of quoting comes from the conferences that the rba organises every decade or so to provide a stocktake as to how our economy has evolved and the challenges ahead. in the volume published after the conference in 2000, the words ‘ china ’ and ‘ chinese ’ do not appear a single time, but there were nearly one hundred references to the united states. in contrast, a decade later, in the volume published in 2011, there were nearly 300 references to china ( with the number of references to the united states being similar to that in the 2000 volume ). a related example of the changes that can take place due to the shifts in the global economy is from the changing destination of australia ’ s exports. the very strong growth