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"Sustaining prosperity: new reform opportunities for Australia" - Address to the Australian/Melbourne Institute conference dinner: Hotel Sofitel, Collins Street, Melbourne: 31 March 2005.



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ADDRESS TO THE AUSTRALIAN/MELBOURNE INSTITUTE CONFERENCE DINNER

“SUSTAINING PROSPERITY: NEW REFORM OPPORTUNITIES FOR AUSTRALIA”

HOTEL SOFITEL COLLINS STREET, MELBOURNE

THURSDAY, 31 MARCH 2005

Introduction

The theme of your conference is “Sustaining Prosperity: New Reform Opportunities for Australia”

The topic is entirely appropriate on both counts. First, because we are truly living through a period of great prosperity in Australia - a period rivaling the so-called “Golden Age” of post-war expansion in the late 1960s. Secondly, we will not sustain this prosperity without continuing economic reform. The prosperity of the 1960s ended in the chaos of the Whitlam Government and the high inflation and high unemployment of the 1970s. Without strong economic management and continuing reform this expansion too could end badly. And aside from the cycle we now have much larger structural changes to attend to.

Since 1996 total household disposable income in Australia has increased by a third in real terms. The household balance sheet is stronger than ever. Net household wealth (after allowing for borrowings) has increased 8.6 per cent per annum in real terms. Since 1996 over 1.5 million new jobs have been created. In Australia the unemployment rate has fallen to the lowest level in 30 years.

These achievements are significant in their own right, but are even more remarkable when considered against the challenges that we have faced along the way. These challenges included: the Asian Economic and Financial Crisis; the recession in the United States; the unprecedented terrorist attacks leading to the subsequent War on Terror; the SARS epidemic; the worst drought in 100 years; and now record high oil prices.

Our relative success in dealing with these shocks has seen the Australian economy outperform the rest of the developed world, propelling us up international league tables to positions that we have not occupied for several decades.

According to the OECD, Australia’s GDP per capita fell to 19th in 1990 but has now recovered to be the 8th highest in the world. More broadly, the United Nations’ Human Development Index - which measures a country’s average achievement in terms of adult literacy levels, education enrolment, per capita GDP and life expectancy - places Australia 3rd out of 177 countries.

Our economic achievements over recent years have now focused attention away from the demand side of the economy to the supply side of the economy. There is a lot of focus now on supply “bottlenecks” - in physical infrastructure and skilled labour. I propose to address the issue of labour shortage tonight.

And the first point I will make is that as far as problems go, this is a good one to have.

If we had been meeting 10 years ago with unemployment at 8.6 per cent we would have drooled over this problem. Australia’s abiding focus for nearly the last 30 years has been unemployment. And, of course the ‘problem’ of labour shortage could be quite easily fixed today by following the recipe that created the high unemployment of the 1990s. As one of my predecessors termed it: “The Recession we had to have.”

Success in the Labour Market

A lot of the recent commentary has focused specifically on shortages of skilled labour in the traditional trades. Anybody who has built or renovated a house in the past few years will readily confirm that it is hard to get skilled tradesmen and women and that prices are pretty steep.

But the labour shortage is not just confined to skilled workers. Labour shortages are also present in a range of unskilled occupations. Indeed, of the 87 000 vacancies registered on the Australian Job Search database, the occupation groups recording the most vacancies are: labourers, factory and machine workers (at 14,000); and hospitality and tourism workers (at 7,000) - occupations that economists would not normally define as ‘skilled’.

In other words, Australia is not in the grip of some unique skills problem. Australia is in the grip of record low unemployment. When unemployment is low it is hard to find labour.

The unemployment rate of 5.1 per cent estimates that 533,000 people are looking for work and can’t find it. The Australian Bureau of Statistics Job Vacancies released today estimates there are 148,300 job vacancies at present. The 10 year average of job vacancies in Australia is 99,200. Today’s figure of 148,300 is an all time record.

This is what happens when you have sustained economic expansion. This is the object of economic growth: to produce jobs for people who want to work. And sometimes there are more jobs than people willing or able to fill them.

Is this full employment?

Back in the 1960s, unemployment was lower - around 1.9 per cent in November 1969. But participation rates were lower - around 60.9 per cent compared to 64.1 per cent today. This meant a smaller proportion of people wanted to participate in the paid workforce. In particular married women tended to stay out of the paid workforce to a much higher degree. Also back in the 1960s a lot of employment which was otherwise uncompetitive was subsidized through the tariff system. Without the tariff system, and on today’s participation rates, the unemployment rates of the 1960s would have been substantially higher.

Is 5.1 per cent unemployment full employment? I suspect not. But it might be quite close to the cyclical low.

How should we respond to it?

We could slow the economy to produce fewer jobs. Or we could boost the labour supply to fill those vacancies.

It will not surprise you that I favour the latter.

But it is important to think about this issue carefully. We need to respond to our immediate situation. But more than that, what we are seeing now could be an early foretaste of what I believe will become a long term problem.

I do not believe we are yet seeing the beginning of the long term problem, I think we are just at a favourable point in the economic

cycle - a point we should attempt to continue and improve upon. But I do believe in the longer term - in decades time - Australia will face a long term structural shortage of labour. Like now but significantly worse.

And I would like to respond to our immediate situation by starting some of the long term structural changes which we will need to cope with the much greater changes that are coming upon us.

The Demographic Challenge and Labour Supply

The Intergenerational Report, published in 2002, found that growth in the number of people of working age was expected to fall from around 1.2 per cent per annum over the last decade to almost zero in forty years’ time. This means that the number of working age people is hardly going to grow in Australia over the next 40 years. But the number of people aged over 65 is expected to double over that period. This means that the ratio of working age people to support every person aged over 65 is expected to halve within forty years. Instead of 5 people of working age to support each person over 65 there will be 2½ people of working age for each person over 65. In the absence of significant policy change, this transition will involve a decline in Australia’s trend economic growth rate and put unsustainable pressure on the Government finances.

When I released the Intergenerational Report in 2002 I described our economic prospects as turning on 3 “Ps” - Population, Participation, Productivity.

Put simply our economic prospects will be governed by the number of people in our country, the rate at which they participate in the labour market, and the productivity of those people who do participate.

Our population will be principally determined by our fertility rates - not just the fertility rates of today but the fertility rates of the last 40 years. They have locked in the population structure in particular the ageing nature of our society over the next 40 years. Demography is destiny.

In broad terms, the participation challenge requires a three pronged attack:

• preparing children and young adults for a lifetime of productive participation;

• encouraging mature aged workers to remain attached to the labour market for longer; and

• encouraging those who currently do not seek to join the labour force to join in.

Education and Participation

We need high quality education for children and young adults because education is a powerful driver of labour force participation.

81 per cent of people aged 15 to 64 with a post-school qualification are employed. This compares to a 61 per cent employment rate for those without post-school qualifications - a 20 percentage point gap in employment outcomes.

And education and training is becoming increasingly important to sustaining employment. The rapid pace of technological and structural change means that people often need to up-skill to perform more sophisticated roles required in their current job, or to re-skill to enable them to change occupations or industries where their employment becomes vulnerable.

Furthermore, while overall employment growth has been strong, the threshold level of skills required to access the labour market is rising as many low skilled jobs are disappearing from the Australian economy.

For all of these reasons, the Government is investing strongly in education, through schools, universities and the vocational education and training sector.

Encouraging Mature Age Participation

Life expectancy in Australia is seventh highest in the world. And it is increasing. Our health standards are amongst the highest in the world. But the participation of mature Australians, particularly men, in the workforce is comparatively low. For men between 55-59 Australia’s participation rate counts 20th in the OECD. What is significant about age 55 in Australia? Any financial advisor will tell you immediately. Age 55 is the superannuation preservation age in Australia.

With life expectancy continuing to rise and with health standards good we must encourage mature age workers to keep working past the preservation age for superannuation at least to the retirement age of 65.

Mature aged workers - who can draw on a wealth of experience and well developed skills - have a substantial contribution to make to the workforce. And, needless to say, the longer they stay in the workforce the further they will stretch their retirement savings.

This is why the Government has introduced a range of incentives to encourage continued workforce participation by mature workers, in the 55-65 age range.

The Government’s initiatives have included more flexible superannuation access arrangements and the mature-age worker tax offset available to those aged 55 and above. This tax offset will encourage mature age workers to choose to stay in the workforce and will provide a maximum annual rebate of $500 on their earned income, payable on assessment (it begins to phase out once earned income reaches $48,000).

• More will be done over the coming years to ensure that the retirement income system does not encourage people to prematurely leave the workforce.

• More will be done to encourage employers to value and retain mature workers. And our industrial relations system should be open and flexible enough to encourage mature workers to retain a part-time connection with the workforce where they want to slow down but not permanently retire.

Welfare Reform and Labour Market Assistance

Increasing labour supply is also about boosting participation by those who are not presently looking to join the workforce.

More than one in five of all adults of working age are on income support. Of these seven out of 10 do not have an ongoing obligation to seek work in return for receiving that income support.

Most of these people are recipients of either the disability support pension or single parenting payment previously know as the sole parent pension.

Forty years ago, less than 1 per cent of the population was on an invalid pension. In 2004, we had about 3.5 per cent of the population (around 700,000 people) on DSP, with musculoskeletal conditions such as back pain now registered as the most common complaint.

In 2004 around 450,000 single parents received parenting payments, almost double the number of 20 years ago.

It is true that birth rates to single parents have substantially increased over the last 20 years. It is hard to believe that disability has tripled in the last 40 years.

Let me be very clear. Those people genuinely disabled and unable to work should not be required to seek work. But those people who do have a capacity to work should be encouraged to look for it.

We need to create an income support system that focuses on workforce participation first; a system where work requirements are appropriately set, so that people are required to search for work where they are capable of work. Work can bring so much for people compared to a life on welfare - greater social contact, higher self esteem, another avenue to contribute to society and higher income. It is our duty to ensure that these benefits are realised for as many Australians as possible.

Let us now consider those that are eligible for parenting payment. Predominantly these are single parents mostly mothers. At present they are not required to look for work whilst they receive this payment because they need to look after their children.

But what about when the children go to school? Would it be possible then to look for part-time work? There are a lot of single parents that do work. Many work full-time. A system that has no work requirement - not even a part-time work requirement - for a parent of school age children is a very generous one and an inappropriate one in a country with possible labour shortages and the long term ageing of the population.

This does not mean that they lose benefits if they cannot find work. It just means that they should be encouraged to look for work in the same way as those who are on an unemployment benefit.

Another element of encouraging participation is facilitating labour market mobility. If people can't find work in their existing location, they should be encouraged to look for work in areas of labour shortage. Job Network arrangements and other employment services have assisted in this regard, by better matching jobseekers with suitable job vacancies. But labour mobility should be encouraged.

Workplace Relations Reform

A flexible workplace relations system is also a key factor in allowing the labour market to effectively deal with skills shortages. By allowing wages to act as a better signalling mechanism, it provides incentives for workers to move to areas where their skills are most valued. And by more closely aligning wages with productivity in workplaces, wage rises in one area of shortage should not lead to across-the-board wage rises.

Pattern bargaining which attempts to spread wage rises from productive enterprises to less productive ones is the greatest challenge to our climate of low inflation and thereby the greatest challenge to continuing of growth.

Until now, the key element of the Government’s workplace reforms has been the introduction of the Workplace Relations Act 1996, which placed the emphasis for determining employment arrangements on employers and employees at the enterprise level.

Agreements made directly between employers and employees have delivered greater productivity and flexibility in the workplace than industrial awards. This is partly because there are fewer prescriptions giving more flexibility and clear incentives for employers and employees to take responsibility for the employment relationship.

But we need a new dose of active wide-reaching and vigorous industrial relations reform in this country. No single reform would boost productivity in the Australian economy to the same extent.

The Government never intended the Workplace Relations Act 1996 to be the final stage in the reform process. As you know, many of our past attempts to increase flexibility, reduce employment transaction costs and achieve a closer link between wages and

productivity were blocked by the Senate.

The Government remains committed to reforming workplace relations so that more Australians can share in the benefits of productivity and economic growth.

There are currently thousands of federal and state awards that apply to different workplaces in different conditions, in different parts of the country and create confusion for businesses and workers. The awards carry a great deal of complexity and rigidity in the terms and conditions of employment. Whilst parties can enter agreements to set terms and conditions between themselves, they must be assessed against awards with all of the complexity that they entail.

No one argues with the view that minimum wages are necessary to provide a safety net for employees. However, we must ensure that the way in which minimum wages are set is sustainable and does not unfairly deny people - particularly the low skilled - from entering the employment market. We must ensure that voluntary agreements are encouraged to operate as widely as possible and that individual workplaces set individual outcomes. Sustaining prosperity is all about rising wages backed by rising productivity.

If rising wages are not backed by productivity or if pattern bargaining or award variation takes them outside productive areas to unproductive ones then a round of inflation will soon follow and our prosperity will soon falter.

Conclusion

Whilst we have been successful in many areas, and improved Australia’s prosperity by historical standards and by comparison with like countries, new challenges are now emerging and new threats are apparent.

Our greatest long term challenge is our ageing population bringing a slower economic growth rate together with a much faster demand for services particularly health services.

All of our policies should be passed through this test. Will it help or will it hinder our response to this challenge?

Do our policies promote participation?

Do they improve productivity?

An open society characterised by flexible work arrangements, mobility, rapid adjustment to technological change, utilising skills from a strong education and training base is going to be equipped to respond to these challenges.

And our institutional arrangements must promote such an economy.

This is the reform opportunity to sustain our prosperity into the future.

© Commonwealth of Australia 2000