Wednesday, July 6, 2011

Age Economic Survey: Is training the answer?

AUSTRALIA'S market economists are divided over whether the economy really is near full employment, as the Reserve Bank and Treasury claim with some saying the real problem is too little investment in skills training.

While Reserve Bank governor Glenn Stevens and senior officials are making a case for interest rate rises to prevent competition for skilled workers driving up wages and prices, economists in the private sector say there are other ways to solve the problem.

Economists in The Age survey argued for more resources to go into skills training, more initiatives to lift the country's low workforce participation rate, more skilled migrants to fill job gaps and more flexible working arrangements.

"Measures to alleviate skills shortages and otherwise encourage labour force participation are the best policy," said John Rothfield of Merrill Lynch. He and others were sceptical that higher migration was the solution, warning that we first need to build "enough supply of houses, utilities and transport systems to carry them".

NAB's chief economist, Alan Oster, warned that without "adequate skilled employees to meet burgeoning demand growth ... a consequence will be stronger wage growth and ... contractionary monetary policy".

Brian Redican of Macquarie ridiculed the official view that a 5 per cent unemployment rate means full employment. "Many other economies have been able to get unemployment below 4 per cent without generating higher inflation," he said. "Australia also achieved this in the '50s and '60s."

If it were true unemployment could not fall below 4.75 per cent without generating inflation, as officials imply, "it reflects a failure of policy to equip the unemployed with the skills demanded by the economy".

Greg Evans of ACCI was particularly trenchant. "The rate of labour force underutilisation stands at 12.2 per cent of the workforce, implying that roughly one in eight in the labour force, or 1.44 million people, are unable either to find work or sufficient hours of work," he said.

"There are a further 1.3 million people who want work, but are not classified as part of the labour force. It is difficult to reconcile supposed 'full employment' with the fact that the labour market is not meeting the needs of 2.7 million Australians."

There was widespread agreement on the panel that Australia needs to invest more resources in training its own workforce to meet its needs. Saul Eslake of the Grattan Institute argued for reducing effective marginal tax rates to improve incentives to work, and doing more to raise the "employability" of the unemployed and underemployed.

But Katie Dean of ANZ argued that training skilled workers takes time, and "in the short term", the best solution is to attract more skilled workers as permanent or temporary migrants.

Masters Builders economist Peter Jones warned that restricting entry of skilled workers would be "extremely damaging for the Australian economy", with skills shortages, project delays and bottlenecks inevitably leading to higher inflation, higher interest rates "and possibly recession".