This is an edited excerpt from Ross Garnaut’s speech at the jobs summit on Thursday night. Read other articles from The Conversation series about the summit here.
I grew up in the 1940s, in a world of full employment. Workers could leave jobs that didn’t suit them and quickly find new ones, often moving from lower-productivity activities to higher-productivity ones.
Employers spend a great deal of effort training and retaining workers. Earnings from work were secure and could support a loan to buy a house. Labor was scarce and valuable and should not be wasted on unproductive tasks.
Firms that could not afford to raise wages closed and freed their workers for more productive jobs. The constant increase in real wages encouraged the economy of labor, which raised productivity.
The 1945 full employment white paper discussed the risks of inflation, but the average unemployment rate was lower, below 2% for two decades, without the high or accelerating inflation the authors had in mind.
Employment keeps people employable
As The Conversation recently noted, low unemployment creates opportunities for people that long-term unemployment has made unattractive. Employment makes them employable.
Full employment encourages women who have spent long periods out of the workforce, the sick and elderly, those with little education, and those with little established commitment to the wage economy.
It’s hard work for employers. Many employers prefer unemployment, with easy hiring at lower wages. However, full employment has advantages for employers.
Full employment creates a higher and more stable demand for the products of companies selling in Australia. And for employers who identify as Australian, it brings enjoyment of a more cohesive and successful society.
We can reduce unemployment
How far can unemployment go without accelerating inflation? During the decade before COVID, our authorities acted as if the lower limit was 5% or more.
In my book Reset: Restoring Australia After the Pandemic Recession, I said it was possible for Australian unemployment to fall to 3.5% without triggering an acceleration in inflation, the pre-pandemic rate in the United States.
The lowest absolute unemployment can fall without inflation accelerating, it can be lower or higher. No need to guess. We’ll know when it has fallen to the point where labor market pressures cause inflation to pick up.
Why don’t real wages increase? There is no puzzle. It is because we still do not have full employment. The Reserve Bank abandoned its quest for full employment before we knew how low the unemployment rate could go without becoming the source of accelerating inflation.
A spiral of wages and prices is unlikely
Will we see further increases in nominal wages if global energy and other prices continue to rise strongly? Probably. Would that tell us that we have achieved full employment? Probably not. If wages are rising faster but slower than average prices, they are not a source of accelerating inflation.
The specter of a virulent spiral of wages and prices comes from our memories, and not from current conditions.
If immigration increases every time labor is scarce, real wages will not increase no matter how much productivity increases.
However, immigration can help. It is much more likely to raise, rather than lower, average real wages if it focuses on people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian output and cannot be provided by training Australians.
Immigration can hurt and help
Which immigrants are scarce and valuable? At Reset, I suggested a test: admit skilled immigrants only when they earn wages above the Australian average.
Ignoring the links between migration and wages can have unpleasant consequences.
When our Prime Minister was in Fiji talking about recruiting nurses, the Premier of Western Australia was trying to recruit nurses in Ireland.
The prime minister sought a meeting with the Irish health minister, unsuccessfully, because the minister was in Perth recruiting nurses.
Low wages made Australia a promising recruiting ground. Australian nurses would be great for Ireland. But replacing Australians with Fijian nurses may not be in Australia’s or Fiji’s best interest.
The combination of labor issues
It matters how we get the jobs that lead to full employment. The increase in employment comes from both domestic and trade-exposed industries.
Employment in domestic industries expands with higher government spending, lower taxes, and lower interest rates. Employment in export or import-competing industries is driven by competitiveness, by currency exchange rates and Australian productivity and wages relative to overseas.
Too much domestic demand and too little export growth can lead to full employment with unsustainable levels of debt. The strong growth of export industries depends on access to international markets for goods and services, as well as competitiveness.
Australia’s advantages in a zero-carbon world
Here we face barriers stemming from the collapse of the global trading system and our relationship with our largest trading partner, China, and the coming climate change-induced decline in coal and gas.
Fortunately, we have advantages:
the best combinations of solar and wind resources in the developed world, which with good policies and management can give us the lowest energy costs in the post-carbon world
an abundance of the critical minerals needed globally to build the machines and infrastructure of the carbon-free world
the largest endowments per person of land suitable and available for the sustainable production of biomass as a zero-carbon industrial input and for carbon sequestration in plants and soils
human skills and infrastructure of established mining, mineral processing, forestry and agriculture industries, which have high value in zero emission industries and processes.
Australian industry derives little competitive advantage from Australia being richly endowed with gas and coal. With the exception of gas from Western Australia, these resources are made available to domestic industry at prices close to international prices.
Our low-cost renewable energy is different. Transport costs mean that Australia’s renewable electricity and green hydrogen will be at least twice as expensive in the countries that import them as it is in Australia. It will make sense to use Australian electricity and hydrogen to process resources here.
Read more: Jobs summit must think big: here are 3 priorities to prepare Australia for the future
Productivity growth does not always have to come from improvements in individual industries and companies. It may come from greater specialization in activities where Australia has a natural advantage: putting a greater proportion of our labor and capital into activities where we have exceptional strengths.
A long period of steady expansion of zero-carbon industries will drive costs down and strengthen Australia’s comparative advantage. Restructuring the economy to focus more on them may be the source of sustained growth in productivity, wages, and employment.