I could attempt to explain to you why the Bureau of Statistics is having
such embarrassing trouble with its monthly estimate of employment, but I
won't bother. It's horribly complicated and at a level of statistical
intricacy no normal person needs to worry about.
What this week's
labour force figures now tell us is that, though the rate of
unemployment has been slowly drifting up since mid-2011 - when it was 5
per cent - it seems to have steadied this year and, using the smoothed
figures, has stayed stuck at 6 per cent for the past three months.
This
is reasonably consistent with what we know about other labour-market
indicators, such as job advertisements and vacancies, claims for
unemployment benefits and employers' answers to questions about hiring
in the National Australia Bank's survey of business confidence.
It
also fits roughly with what the national accounts have been telling us
about the strength of growth in the economy. We know that when the
economy is growing at its trend rate of about 3 per cent a year, this
should be sufficient to hold the rate of unemployment steady.
The
accounts told us real gross domestic product grew by 3.4 per cent over
the year to March, and by 3.1 per cent over the year to June.
But
now let me tell you something that, while a bit technical, is much more
worth knowing than the gruesome details of the bureau's problem with the
labour force survey.
One of our smartest business
economists, Saul Eslake, of Bank of America Merrill Lynch, has reminded
us that GDP is only one of various summary indicators of overall
economic activity provided by the national accounts. And the economy's
peculiar circumstances over the past decade and for some years to come
mean GDP is not the least misleading of the various measures.
Eslake
says real GDP measures the volume (quantity) of goods and services
produced within a country's borders during a particular period.
(Actually, it doesn't include the many goods and services produced
within households, which never change hands in a market.)
To
estimate real GDP the bureau takes the nominal, dollar value of the
goods and services produced, then "deflates" this figure by the prices
of those goods and services relative to what those prices were in the
base period.
We commonly take the value of the goods and services
we produce during a period to be equivalent to the nation's income
during that period. This easy assumption works for most developed
economies most of the time.
But Eslake reminds us that "for an
economy like Australia's, the prices of whose exports are much more
volatile than those of other 'advanced' economies, abstracting from
swings in the prices of exports (and imports) obscures a significant
source of fluctuations in real incomes".
We've experienced a
series of sharp swings in our "terms of trade" - export prices relative
to import prices - over the past decade of the resources boom, which was
interrupted by the global financial crisis in 2008-09. For the past three years, of course, mining commodity prices have been falling.
Trouble is, real GDP doesn't capture the effects of these swings. So
the values of our production and our income have parted company, as
they do every time our terms of trade change significantly. An
improvement in our terms of trade causes our income to grow faster than
our production, whereas a deterioration has the opposite effect.
This
matters because of the chicken-and-egg relationship between production
and income: we use the income we earn from our part in the production
process to buy things and thus induce more production.
So if our real income slows or falls, soon enough this dampens our production.
However,
the national accounts include a measure of overall economic activity
that does capture the effects of movements in our terms of trade: real
gross domestic income, GDI. It grew a lot faster than real GDP for most
of the time between 2002 and 2011, but since then has grown much more
slowly than real GDP (a big reason for our slowly rising unemployment).
Next
Eslake says that as the resources boom moves into its third and final
phase - with mining investment winding down and exports ramping up -
real GDP growth will be an even less useful guide to what's happening to
domestic income and employment.
This is because maybe 80 per cent
of the income generated by resources exports will be paid to the
foreigners who own most of our mining companies and who financed most of the
new investment.
It's also because the depreciation of Australia's
greatly enlarged stock of capital equipment and structures as a result
of all the mining investment spending will now absorb a greater share of
our gross income.
(A separate issue Eslake doesn't mention is
that the highly capital-intensive nature of mining means the increased
production of mineral exports will create far fewer jobs than you'd
normally expect.)
If you've ever wondered about the difference
between gross national product and gross domestic product it's that the
former excludes all the income earned on Australian production that's
owed to the foreign suppliers of our debt and equity financial capital,
making it a more appropriate measure for us given our huge foreign debt
and foreign investment in our companies.
If you've ever wondered
what the "gross" in GDP, GNP, GNI etc means, it's short for "before
allowing for the depreciation of our stock of physical capital".
So
gross national income (GNI) is a better measure than gross domestic
income (GDI), and net national disposable income (NNDI) is a better
measure than GNI.
Which, by the way, explains why real NNDI is
used as the base for all the further non-national-accounts-based
modifications included in Fairfax Media's attempt to calculate a broader
measure of economic welfare, the Fairfax-Lateral Economics wellbeing
index, released each quarter soon after the publication of GDP.
