Record job vacancies and employment alongside a limited and ageing labour supply and potential immigration constraints make increased productivity a significant challenge, writes AICD chief economist Mark Thirlwell MAICD.

    At the time of writing, the federal government was finalising preparations for its Jobs and Skills Summit, held at the beginning of September. The aim was to consider five broad themes — maintaining full employment and growing productivity; boosting job security and wages; lifting participation and reducing barriers to employment; delivering a high-quality labour force through skills, training and migration; and maximising opportunities in the industries of the future. At the same time, arguably the most notable feature of the employment landscape that served as a backdrop to the summit was the unusual tightness of the Australian labour market and the consequent business concern about endemic labour and skill shortages. (The continuing absence of a significant aggregate wage response under those same circumstances — possibly due to lags reflecting Australia’s labour market institutions — was a close runner-up.)

    The most obvious evidence of the disappearance of spare labour market capacity was that the unemployment rate stood at just 3.4 per cent as of July 2022, the lowest reading in the history of the monthly series and the lowest overall since August 1974. With the underemployment rate at six per cent, the combined underutilisation rate for the month was 9.4 per cent, the lowest rate recorded since April 1982. Similarly, although July’s participation rate at 66.4 per cent and employment-to-population ratio at 64.2 per cent had slipped to below their June 2022 record highs (of 66.8 per cent and 64.4 per cent, respectively), both remained considerably above pre-pandemic levels.

    Job vacancies told a similar story. The Australian Bureau of Statistics (ABS) had estimated 480,000 vacancies in May 2022 — a record high, as well as more than double the pre-pandemic total. It also exceeded the total number of unemployed people (474,000) reported in July 2022, in a sharp contrast to the pre-pandemic situation, when the ratio of unemployed people to vacant jobs had stood at more than three to one. Likewise, while the pre-pandemic share of businesses with at least one vacancy was only 11 per cent, by July 2022 this had more than doubled to just over 25 per cent.

    Labour market woes

    These conditions were the product of significant changes in the demand for and supply of labour. Substantial fiscal stimulus plus extremely low interest rates had fuelled household spending, encouraging businesses to take on more employees. At the same time, the labour supply response was constrained by the closure of Australia’s international borders and the resulting sudden stop in temporary and permanent migration flows. According to the ABS, in the year ending 30 June 2021, overseas migration contributed a net loss of about 89,000. That was the first annual net loss since the end of WWII. It was also the second largest net outflow ever, exceeded only during WWI. In contrast, between 2007–20, the average annual net population gain to Australia from overseas migration had been 226,000.

    Immigration dropped 71 per cent in 2020–21, with a 91 per cent plunge in arrivals of temporary visa holders and a 48 per cent decline for permanent visa holders. The number of international student arrivals collapsed, plummeting 99 per cent, and arrivals for working holiday makers slumped 98 per cent. That deprived industries such as food and accommodation services and agriculture of many of the workers on which they traditionally relied. The simultaneous disruption to flows of permanent and temporary skilled migrants (down 47 and 60 per cent, respectively) similarly interrupted the supply of skilled labour.

    Granted, in the long run, large swings in migration should have an ambiguous impact on overall employment conditions, since new migrants represent not only an additional source of labour supply, but also an important source of additional demand. However, in the short run, the disequilibrium impact is likely to be much more substantial.

    Labour supply has also been affected by hours lost due to the direct impact of the pandemic, with the share of people working reduced hours due to illness over the first seven months of 2022 running significantly above the levels of recent pre-pandemic years. The relatively sluggish response to date of wages to tight labour market conditions could also have dampened the labour supply response, although the near-record participation rate and employment-to-population ratio might argue otherwise.

    There is also the possibility of changes in the labour market matching process. The relationship between unemployment and vacancy rates — the Beveridge Curve — has shifted outwards, such that a given unemployment rate is now associated with a higher vacancy rate. That could indicate the labour market has become less efficient at matching workers with jobs, perhaps because it is struggling to deal with the rapid pace of employment growth post-lockdown. Another potential explanation is that the skills offered by workers no longer map so closely with those demanded by employers, possibly due to structural shifts — a “reallocation shock” — triggered by the pandemic.

    Demographic reversal

    All of this suggests that near-term fixes for labour and skills shortages are likely to involve some mix of renewed and perhaps expanded migration flows, increased skill development through enhanced education and training, targeted moves to further lift the participation rate, and efforts to improve the efficiency of labour market matching. It’s also possible that a pickup in the pace of wage growth will call forth additional labour supply. All of which maps reasonably well onto much of the summit agenda.

    Still, it’s worth considering two further points. First, there may be some challenges in restoring and/or ramping up temporary and permanent overseas arrivals, due to a combination of disrupted international transport links, higher travel costs, increased international competition for skilled labour, post-pandemic changes in worker preferences, and geopolitical shifts.

    Second, sitting alongside the disruptions to labour supply triggered by the pandemic is a longer-term demographic shift. The Australian and global populations are both ageing, with adverse consequences for the future labour supply in the form of a decline in the share of the working age population. The share of Australia’s working age population peaked around 2008–09, for example, and is projected to fall steadily over coming decades. The story is broadly the same for high-income countries as a group, although the forecast fall is steeper. Based on these trends, some economists have warned that the world economy is facing a “great demographic reversal” that will transform global labour markets. If they are right — and provided technology does not fundamentally transform the picture — the current bout of labour market tightness may be a foretaste of a more fundamental shift in the supply of labour to come.

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