IR reform should have same priority as tax reform

Jessica Irvine has a great piece in the News Limited media today on how Tony Abbott must act now to reverse Australia’s economic demise. I agree with her that reforming the tax system is extremely important, but I’m surprised she doesn’t see industrial relations reform as equally relevant. The Business Council of Australia, which has been pushing hard for IR reform (see Unions defiant on IR reform), will be unhappy with Jessica’s criticism that their prescriptions for growth fall short of the mark.

IR reform needs to focus on three main issues:

  • Australia’s minimum wage is high relative to average wages;
  • it’s difficult to dismiss poorly performing employees; and
  • penalty rates make it unviable for many businesses to extend their opening hours, which has been a major issue in the restaurant industry – although a recent Fair Work Commission ruling has provided some relief regarding penalty rates, a ruling which Unions appear to be contesting in the Federal Court (Hospitality union to take fight over weekend penalty rates to court).

I expect IR reform would benefit the economy through lower unemployment and improved productivity. I have no doubt WorkChoices partly contributed to the low rates of unemployment we saw prior to the financial crisis, including a Queensland unemployment rate between 3-4%, although the mining boom and the construction boom were obviously major influences. On productivity impacts, I’d refer to the excellent 2005 article Comparing Australian and US Productivity written by my former Treasury colleague Jyoti Rahman (N.B. MFP stands for multi-factor productivity):

Scarpetta and Tressel (2002) consider the impact of employment protection legislation on MFP. They find that a substantial liberalising of employment protection legislation would reduce Australia’s MFP gap with ‘the frontier economy’ by 10.8 per cent. This implies that, subject to the above caveats, reforming Australia’s employment protection legislation may reduce the productivity gap by about 2 percentage points, with likely significant beneficial impacts on living standards…

That would imply a productivity benefit per worker of around $1,000 per annum. Certainly IR reform would allow greater flexibility for businesses and would allow them to more readily replace poorly performing employees, so I expect productivity gains of this magnitude are plausible.

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Good news for regional Qld if Carmichael mine goes ahead – jobs market weaker than in SEQ

The big news for the Queensland economy today is the Federal Government’s approval, subject to meeting environmental conditions, of Adani’s massive Carmichael Coal and Rail Project. There are, however, doubts about whether the project remains economically viable given the downturn in coal prices (Adani coal mine approved amid weaker prices). Let’s hope the project still stacks up, because regional Queensland outside of SEQ has faced challenging economic conditions recently, partly due to the slowdown in the mining sector.

The challenging conditions in regional Queensland were clearly evident in the regional employment data released by the ABS the week before last. Smoothed, trend estimates of the data by the Queensland Government Statistician’s Office showed that, broadly speaking, all the jobs growth in Queensland in the 12 months to June 2014 occurred in SEQ (see the June 2014 information brief). Employment declined in regional Queensland by 2,000 employed persons over that period, compared with growth of 42,600 employed persons in SEQ. (N.B. I’ve defined SEQ as Greater Brisbane, Gold Coast and Sunshine Coast.)

The Government Statistician’s Office’s estimates rely on a 12-month moving average, which is a pretty basic smoothing technique and arguably could be improved upon. One effort to produce better trend estimates of regional employment data has been made by Pete Faulkner of Conus Consulting. Pete’s trend estimates (available at this link) are a by-product of an advanced seasonal adjustment routine. Based on Pete’s trend estimates, non-SEQ Queensland is no longer subtracting jobs from the Queensland economy, but jobs growth is much weaker than in SEQ (see the chart below).



I have some doubts about whether the ABS regional employment data are suitable for the seasonal adjustment procedure that Pete applies, given the huge degree of noise in the data, so I’ll withhold judgment for now on whether the Conus or Government Statistician’s trend estimates are more useful. However, I will applaud Pete for making the effort to better understand what is occurring in our regional economies. The ABS’s noisy, regional employment data cause a lot of confusion about the state of our regional economies, as a recent Townsville Bulletin article demonstrates:

TEL takes issue with reports Townsville has highest unemployment

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Productivity and Privatisation – panel discussion at Griffith University, Southbank

I was delighted to speak alongside productivity expert Dean Parham at a Griffith University panel discussion earlier tonight on productivity and privatisation. Thanks to Alex Robson of Griffith for organising the excellent, well-attended event. My prepared remarks are below. I varied them slightly in the delivery but the main points I made were the same as below.

Good evening. The issue of privatisation or asset sales is obviously very topical in Queensland, with the Government seeking to raise over $30 billion from a range of privatisation proposals. These include the sale of power generators CS Energy and Stanwell, the long-term leasing of Townsville and Gladstone ports, and private equity injections into Energex , Ergon and Powerlink. The Government, however, has appeared somewhat unprepared for the lively debate that has occurred and which I expect will continue right up to the election.

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Unclear whether Qld Govt will have evidence needed to win asset sales debate

The Queensland Government is right to have begun advertising for advisers on asset sales, to ensure that assets such as CS Energy and Stanwell are sold in a timely fashion after the next election (Government advertises for asset sales advisors). The Government needs to get these assets ready for sale, and will no doubt benefit from advice from professional services firms and investment banks.

The Government, however, seems to have missed the important step of undertaking comprehensive cost-benefit studies of the sale proposals. I’ve written before on the failure of the Strong Choices campaign to provide useful information to the public regarding the impacts of asset sales on the economy and community. I was disappointed the Government spent $6 million on the campaign which could have been better spent undertaking comprehensive studies of privatisation proposals and marshalling the evidence that could help convince the public these proposals are in the public interest (see my post Failure of Strong Choices now obvious – missed chance to persuade on asset sales).

As a supporter of asset sales, I’ve disagreed with a number of my fellow economists around town on the merits of assets sales, but one thing I think we can all agree on is the need to do the rigorous analysis of the costs and benefits to the community of proposed sales. This does not appear to have been done so far, and the Government is now highly exposed because it is basically signalling that it will sell assets after the election, but it may not have the evidence and arguments it needs to justify its actions.

For more on the issue of asset sales, please consider attending a panel discussion tomorrow night at Griffith, Southbank, at which I’m speaking:

Productivity and Privatisation panel discussion

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Qld has three of top five regional areas with most expensive residential lots

The Housing Industry Association released a very interesting note today on median lot prices in capital cities and regional Australia (i.e. non-Capital City Australia): Land price pressures signal policy failure. The data should prompt a number of Queensland Councils to review their planning policies, to see if they are unnecessarily constraining development. Given how important housing construction will be to the strength of the Queensland economy in coming years, it’s somewhat concerning to see three Queensland regions represented in the top five regional markets for most expensive residential lots (see chart below). Of course, these are all attractive regions to live in, but three Queensland regions in the top five seems excessive.


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Reality check for Townsville – no metropolis of 1 million before end of century

Judging by recent articles in the Townsville Bulletin, Townsville appears obsessed with the idea it will grow to 1 million people from its current population of just under 200,000. The Townsville Bulletin reported yesterday (Townsville tipped to hit 1 million people):

WHAT would Townsville look like if there were a million people living in the city?

That’s what Townsville Enterprise hopes to find out through a concept design competition it is running to find the best ideas for ensuring the city retains its great lifestyle as it grows.

Townsville Enterprise deserves some credit for being so forward-looking and visionary, especially given current Queensland Government population projections only have Townsville growing to around 300,000-350,000 people over the next couple of decades (see the chart below with projections for low, medium and high population growth scenarios). If you (crudely) extrapolate from these projections, Townsville wouldn’t reach 1 million people until around 2081 at the earliest and most likely not until around 2101.

So Townsville Enterprise is being very visionary indeed. As well as thinking about the very long-term, I hope Townsville Enterprise is also focussing on the pressing need to promote business development in a city that is over-reliant on Government and defence jobs.


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Wise words from the PC on capital/asset recycling

I’ve been a strong supporter of the Queensland Government’s privatisation agenda, but have been unimpressed by the Strong Choices campaign promoting the agenda, which is uninformative and based on questionable logic. In its just-released Public Infrastructure Inquiry Report, the Productivity Commission nicely explains the logical problems with the capital/asset recycling argument that partly underpins the Strong Choices campaign (p. 262):

Capital recycling involves the linking of two separate decisions; the decision to privatise state-owned assets, and the decision to invest in a new infrastructure project or set of projects. While the linking of the two decisions may be a useful mechanism to alleviate community resistance to privatisation, this should not replace the need to undertake these sets of analyses separately. Ideally, both sets of decisions would be made within a transparent decision-making environment, where a robust cost–benefit analysis is undertaken…

The main risk from the capital recycling model is the potential for it to distort either of these decisions. In particular, an arrangement where the proceeds of sale are automatically hypothecated to investment in new infrastructure projects may create risks for over-investment in new greenfields infrastructure…

…A further potential risk with capital recycling is that the availability of funds from privatisation may mute the incentives for state governments to properly consider the extent to which user charges can be used to ‘fund’ the new infrastructure…

…A final problem with capital recycling is that it might cement in the public a view that the only time an asset should be privatised is if there is some new infrastructure project in which to invest — that is, that privatisation is not of benefit in and of itself.

This is what I’ve been saying all along. Privatisation is potentially good because it improves the efficiency of privatised businesses and the productivity of the economy overall. Budgetary impacts should be considered, but are not necessarily of primary importance.

I’ll say more on these issues at an upcoming panel discussion in Brisbane at Griffith’s Southbank campus Wednesday night next week:

Productivity and privatisation – panel discussion

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