Job-creation Spruikers Ignore Counter-factual

The Age

Tuesday June 5, 2007

Ross Gittins

NEXT time you hear someone advocating some project or policy change on the grounds that it would create lots of new jobs, close your ears. They're pushing something that would be bad for the economy.

We've lived with high unemployment for so long - three decades - that it's become second nature to see job creation as a virtue.

Even when job creation isn't the real reason people are spruiking a project, they'll throw it in as an argument likely to widen its appeal.

These claims are often dubious because they invite you to forget what economists call the "counter-factual," - what would occur if what you were proposing did not happen.

In other words, if the money wasn't spent on your pet project, it would probably be spent on someone else's, so that it would have created jobs either way. And it's a moot point whether your project would have created more jobs than the other one.

The trick is that all spending creates jobs and it's only when the spending you're advocating adds to total spending that it's likely to add to jobs in total. But even that conclusion rests on a hidden assumption: that there are plenty of idle workers waiting for the extra jobs. That's been true for 30 years and, come the next recession, it will be true again. But right now it isn't.

As Treasury noted in last month's budget papers: "The Australian economy is currently operating somewhere near full capacity.

"In this macro-economic environment, further gains in labour utilisation are unlikely to come from policies that target (try to increase) aggregate demand."

Elsewhere, Treasury notes: ". . . in an economy approaching full capacity utilisation, all activity, including of governments, that commands additional real resources without at the same time expanding supply capacity must impose a cost."

"But," you object, "don't we still have an official unemployment rate of 4.4 per cent, not to mention a lot more underemployed workers?"

Yes, but those workers are mostly unskilled and not necessarily located where they're needed. Moreover, there'd be few new projects that didn't require skilled workers, who are generally scarce.

So it's little wonder Treasury's pushing the line that what we need now on the part of politicians, economists and bureaucrats is a change in attitude, ". . . away from the promotion of resource utilisation - job creation - to resource allocation and resource creation; that is, supply-side improvement."

Of course, to say the economy is close to full capacity is not to say demand can no longer grow.

Demand can continue growing provided it grows no faster than the economy's capacity to supply.

Treasury says that any employment creation in present circumstances will have to involve adding to the potential supply of labour - to labour utilisation - not just to the demand for labour.

"This may come about, for example, through raising the labour force attachment of older workers, providing assistance for people with disabilities to enter employment, or employment of indigenous Australians who would otherwise face a life of passive welfare dependency.

"Another avenue is to increase the size of the labour market through immigration of suitably skilled workers."

Notable for their absence from that list are young mothers, particularly those otherwise willing to work full time, who have been discouraged from working by the Howard Government's increase in the family tax benefit, which is means tested according to couples' combined incomes.

Another key supply-side issue at a time such as this is education. Treasury says improving the skills of the Australian workforce will help, ". . . given the positive link between education and workforce participation and productivity.

"Those with higher levels of education are generally more employable and able to earn higher wages than those without."

Just so. And all the greater pity that the Howard Government has only in this budget ended a decade of neglect of education at every level. This is not a Government that's big on foresight.

© 2007 The Age

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