It's the economy, stupid!

Campaigning on employment

This TV Ad touches on a number of interesting elements of the economic policy platform of the Coalition. One that has caught my attention and on which I would like to comment here is the promise “to generate 2 million new jobs over the next ten years”.

Almost any party engaged in any campaign I have had a chance to witness inevitably promises to increase employment. It is however a bit less common to come across an announcement that specifies how many jobs will be created and over what period of time. This is understandable: once you commit to a specific number, you become more accountable to voters for your future results. We can imagine that if the Coalition wins and then employment does not start to increase, the “2 million new jobs” promise will haunt Mr. Abbot for a long time.

While the promise of the Coalition is direct and clear, its underlying economics raise a few questions. I will consider two in particular: (i) is the creation of 2 million new jobs such a dramatic improvement relative to what the Labor governments have done in the last five years? (ii) in which sectors of the economy can these 2 million new jobs be generated?

Labor results vs. Coalition promises

To answer the first question, I will refer to some statistics from the OECD database. These are the same data I used for my previous Fact CheckFact Check on the loss of manufacturing jobs in Australia.

During the five and a half years of Labor governments, total employment in Australia increased by 969,150 units (data extend to the second quarter of 2013). This amounts to an average quarterly increase of 44052 units. If we take this number and project it over the next ten years (i.e. 40 quarters) we obtain a total increase in employment of 1,762,092 units.

The Coalition promises to create on average 50,000 jobs per quarter for the next ten years; that is, “only” approximately 6,000 jobs a quarter more than what was created by the Labor governments in the past five years.

I say “only” for two reasons. First, the cumulative difference between what the Coalition promises and what Labor delivered (projected over the next ten years) is approximately 238,000 units. This is equivalent to a mere 2% of total employment by 2024. Furthermore, in growth rate terms, the average quarterly increase in employment under the Labor governments between 2008 and 2013 was 0.41%. The promise of the Coalition would imply a quarterly increase in employment of 0.43%. This hardly qualifies as a drastic improvement.

Second, the expected improvement in global economic conditions over the next several years should strengthen domestic economic growth and therefore make labor market dynamics much more favourable than what they have been in the past five years. I think that this is an important, and sometimes neglected, point, so I wish to elaborate it a little bit.

The Labor governments have been in office during the most difficult economic time since the Great Depression. While Australia avoided the type of recession observed in Europe and the US, domestic growth significantly declined from an annual average of 3.4% between 2000 and 2007 (with a pick of 4.6% in 2007) to an annual average of 2.6% between 2008 and 2013 (with a trough of 1.4% in 2009). This in turn hampered labor market dynamics.

In the absence of a counter-factual, it is difficult to say by how much employment would have increased under the Labor governments if domestic economic growth between 2008 and 2013 had remained in line with its 2000-2007 trend. Yet, we can try some back of the envelope calculations based on a simple regression of quarterly employment creation on quarterly GDP growth.

For the full period 1967-2013, this regression yields an estimated slope coefficient of 6541, meaning that a 1 percentage point increase in quarterly growth would generate an extra 6541 jobs per quarter. So, if we artificially increased growth in 2008-2013 from 2.6% to 3.4%, then the expected increase in employment creation by quarter would be 0.8*6541 = 5232 units. This means that if growth had continued along its 2000-2007 trend, then the average quarterly increase in employment under the Labor governments in the period 2008-2013 would have been approximately 44052+5232 = 49282 units; that is, practically the same increase that the Coalition is now promising to deliver.

All in all, by promising to deliver 2 million new jobs in ten years, the Coalition is actually promising to maintain a rate of job creation similar to that achieved by the Labor governments in the past five years. Now, this does not necessarily mean that the promise of the Coalition is not ambitious enough. But, it does mean that the Coalition does not expect to be able to do much better than Labor in terms of job creation. To me this sounds as an implicit admission that the Labor governments did well in supporting the labour market.

Raising vs. Declining Sectors

In promising 2 million new jobs, the Coalition should probably clarify which sectors of the economy are expected to drive employment growth in the next ten years. This is an important question because Australia is undergoing a process of structural transformation and tertiarisation that needs to be accommodated with the adoption of appropriate labour market and economic policies.

The structural transformation is evident in the long-term data on employment by sector of economic activity available from the Australian Bureau of Statistics.

Looking at the last twenty years, the sectors that have generated most employment are: Health Care and Social Assistance (711,400 units), Professional, Scientific, and Technical Services (543,500 units), Construction (444,600 units), and Retail Trade (408,100). These four compartments together generated 1,176,500 jobs in the last ten years, which is equivalent to 54% of the total increase in employment since the second quarter of 2003. Adding Education and Training and Accommodation and Food services, where employment has increased by 228,400 units and 154,000 units respectively in the last ten years, one obtains a rather comprehensive picture of the raising stars of the Australian economy.

Conversely, Manufacturing and Agriculture have lost jobs, slowly but steadily (78,800 jobs lost in Manufacturing and 97,100 jobs lost in Agriculture since the second quarter of 1993). The Global Financial Crisis has hit Manufacturing quite hard and the loss of jobs in that sector has significantly accelerated since 2008. Yet, as documented in the Fact Check I previously mentioned, the contraction in manufacturing employment in Australia has been less dramatic than in most other industrial economies.

Employment growth in Mining has been remarkable. In the last twenty years, total employment in this sector has gone up by about 190% and most of this increase has occurred since the early 2000s. This trend has however flattened over the last few quarters. More importantly, in terms of numbers of people employed, Mining remains relatively small: it occupies a total of 261,100 individuals and the net increase over the past two decades has been just above 170,000 units. That is, there appears to be a structural limit to how much employment can be expected to be generated from Mining in the long-term.

I think that the key message which can be inferred from these trends is that any significant increase in employment in Australia will most likely come from selected compartments in the Services Sector, with possibly a marginal additional contribution from Mining. Agriculture and Manufacturing instead cannot be expected to be the main driver of future employment growth.

Now, all this does not imply that Agriculture and Manufacturing should not be supported. Policies to ensure that these sectors remain competitive through the adoption of new technologies and the formation of human capital are always welcome. However, given the ongoing structural transformation, what should be avoided is the adoption of policies that – in the attempt to increase employment in the declining sectors – prevent the mobility of labour across sectors and distort the incentives of workers and employers, thus causing an inefficient allocation of resources.

Hopefully, the five pillars plan of the Coalition recognises the constraints arising from the structural transformation process. Otherwise, it will be hard to generate 2 million new jobs in ten years, independently from whether we regard this as a significant improvement over the achievements of the Labor governments or not.