Australia: dithering into a downturn
Australia is starting to feel the effects of an economic slowdown, seven whole years after the rest of the world looked on in envy at the shallowness and brevity of the recession it experienced during the global financial crisis.
Productivity growth has declined in the past 12 months, living standards have decreased for the past three years, and the drying up of the rivers of gold flooding into Australia in exchange for its raw materials has meant that wage growth fell in the first quarter of this year for the first time since records began. While the Australian dollar has lost significant value, and interest rates remain very low, Australia’s productivity level, another key determining factor of a nation’s standard of living, remains reluctant to move in the right direction. While nothing can be done about falling commodity prices forcing well-paid mining jobs to disappear, productivity can be boosted if there is sufficient political will to do so. Unfortunately, in Australia as in Britain, productivity inertia pervades.
There are two key contributing factors to Australia’s dip in productivity and living standards. The first is that a huge number of well-paid jobs that were in relative abundance during the resources boom are not being replaced with equally well-paid jobs in sectors outside of mining. The second, and more crucial, element is underemployment. During the recession, the UK’s unemployment rate reached a peak of eight per cent in 2009. This was not the case in Australia, where unemployment peaked at just shy of six per cent before plateauing. What Australia did experience, however, was a huge spike in underemployment – that is, people had jobs but were unable to secure the amount of hours they wanted.
The cause of this was Australian employers, who, instead of making employees redundant and cutting back the number of workers on their payroll, merely cut back the number of hours their employees worked. This made sure that the headline unemployment figure did not soar to the heights seen around the world, but all the while it contributed to a spike in latent capacity.
While this meant that the recession was shallower in Australia than in the rest of the world, it now means that those people who were in unproductive jobs before the recession stayed in those jobs instead of moving into more productive employment. It may seem like a harsh analysis, but restructuring is what keeps an economy productive and ensures long-term improvements in living standards – the attempt to keep these workers in underemployment, rather than lay them off, has actually done more harm than good.
It should be noted that Australia is not yet the ‘zombie economy’ Phil Mullan has argued that Britain has become. But without substantial increases in productivity, living standards will drop as incomes fall and unproductive jobs will soak up resources that could be better used elsewhere. The longer this drags on, the more difficult the adjustment will be when the next slowdown begins. Tough decisions must be made and acted upon now.
Like the employers during the recession who muddled through without making difficult decisions, governments across the world are covering up economic problems that will have long-term consequences. To ensure Australia does not endure a painful readjustment in the future, broad changes are necessary. Changes are needed in labour-market regulation, the level of government intervention in the economy and the way research and development (R&D) is fostered and encouraged. It’s not about picking winners and betting on where the next mining boom will come from. A long-term plan to create a highly productive economy will make gambling on ‘the next big thing’ unnecessary.
Charlie Pearson is a writer based in London.
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