Australian economy: why the jobs figures are dangerously misleading

Gerard Jackson
BrookesNews.Com
Monday 19 December 2005

In Jobs data a fine pointer (Herald-Sun, 14 December) Terry McCrann opined that employment evidence from the “Seek index on job adds and the official ABS employment report”, both for November, strongly suggests that the Australian economy is about to pick up. “Seek headed its press release: NSW leads tightening of the Australian labour market”, which McCrann found “telling”

He concluded that the current situation is one “of employers looking for staff, and not too many people out there looking for a job. Indeed, Seek said the ratio between job seekers and new jobs was at its lowest since the start of the year”. Furthermore, figures suggest a large number of news jobs “have yet to ‘turn up’ in the statistics”.

I have no doubt that quite a few economic commentators share McCrann’s guarded optimism. However, rising demand for labour and tightening labour markets are not always indicative of economic growth. That McCrann thinks otherwise is typical of our economic commentariat, despite the fact that classical economists knew better.

Stating the classical view (it really should be called the pre-Keynesian view) James Stuart Mill explained why the demand for commodities (consumer goods) is not a demand for labour, if by that we mean an increase in the productivity of labour. The old school never lost sight of the fact that what raised living standards was capital accumulation. Any policy that diverted savings from investment to consumption would retard living standards even though the demand for labour remained unchanged. What would change, however, would be the pattern of employment and real wage rates.

In his book Three Lectures on Commerce and one on Absenteeism (1835) Mountifort Longfield drew attention to the consequences of spending on consumption at the expense of capital goods, pointing out that this could bring about an unfavourable change in the structure of production.

He argued that if absentee landlords spent their rents on buying French dresses and lace for their girl friends instead of investing in their Irish farms this could alter the factorial terms of trade for Ireland.

This raises an interesting question. Could the same thing happen with changes in the money supply? The answer is yes, unless one believes, as do most of today’s economists, in the dangerous proposition that money is neutral. The realisation that money is not neutral ineluctably forces one to the conclusion that monetary expansion changes the pattern of production and hence employment.

America’s last recession is, I believe, an excellent example of this process. In late 1998 I was warning that even as the aggregate demand for labour was rising layoffs in manufacturing were pointing to an eventual recession. I had explained a number of times that the Keynesian policies used to stimulate the economy would inevitably expand demand for labour in the lower stages of production at the expense of manufacturing.

(The important thing to note is that rising manufacturing output at points close to consumption can hide the emergence of contraction production in capital goods industries if an index is being used. In other words, it would be better to examine output in various stages rather than total output).

By late 2000 this process had become even more marked. The National Association of Purchasing Management index for November 2000 had fallen from 48.3 to 47.7. Job losses in manufacturing were greatly offset by an increase in service industry jobs. January and February 2001 saw 364,000 service jobs created against a loss of about 190,000 jobs in manufacturing in the same period with the result that unemployment figures were at 4.3 per cent in March 2001.

With hindsight we can now see that US manufacturing employment peaked in March 1998 at 17,637,000, after which it fell by 19 per cent, even though aggregate employment peaked in March 2001. Given all of these figures I think I can confidently claim that the recession actually began in March 1998.

October revealed that while unemployment was still falling, along with productivity, manufacturing had shed about 50,000 jobs in the previous 12 months and that profits were diving. The situation was highlighted by the September quarter being the worst for a fall in manufacturing output since 1992.

A by PricewaterhouseCoopers survey found that inventories had been rising for 6 straight months. A continuing inventory build-up strongly suggests a continuing fall in output and further job losses.

I think 2006 will be an interesting year for the Australian economy.

Gerard Jackson is Brookes’ economics editor