How full employment can coexist with low inflation

Who could be opposed to full employment? No one. Not openly, anyway. But Treasurer Jim Chalmers’ white paper on employment has been badly received by the Business Council and other business lobby groups. And, of course, business’s media cheer squad.

At least since Karl Marx, the left has charged that business likes unemployment to stay high so there’s less upward pressure on wages and workers are more biddable. We know that when, during recessions or lockdowns, bosses announce they’re skipping the annual pay rise, the unions never dare to disagree. Forget the pay rise and keep my job secure.

So you don’t have to swallow all the Marxist claptrap to suspect there may be some truth to the idea that, though businesses hate recessions, they don’t mind a bit of healthy unemployment.

If so, don’t expect them to be greatly enamoured of Labor’s latest resolve to pay more than lip service to the goal of full employment. But, by the same token, don’t be surprised if business happens to find in the full-employment package something they can profess to be terribly worried about.

Talk about speed reading. As is the practice in lobbyist-ridden Canberra, within minutes of the release of the white paper last Monday, the Business Council – like a lot of other business lobby groups – issued a full-page press release singing its agreement with the government’s move. It was all wonderful, and, in fact, just what the council had been calling for in its own recent voluminous report.

Until, suddenly, in the third-last paragraph, we discover the government had got it a bit wrong. Unfortunately, “we believe the federal government’s workplace relations reforms will undermine the objectives set out in the white paper.

“They will return the workplace relations system to an outdated model, unable to meet the expectations of both employees and businesses in the ways they seek to work today. It will risk fossilising industry structures and work practices when we know technology is going to change and people and workplaces need to adapt quickly,” the council says.

“If the government is to achieve the task it has set itself in this white paper, we encourage it to halt the current workplace relations changes and work constructively with business to identify challenges and find solutions that will deliver sustainable real wage increases for Australians.”

Ah, yes. Now we have it. And I’m sure all that would make perfect sense to every chief executive.

No, part of the opposition to the employment white paper comes from paper’s qualification to the definition of full employment as no one being jobless for long: “These should be decent jobs that are secure and fairly paid.”

But another part of the opposition has involved flying to the defence of the NAIRU – the “non-accelerating-inflation rate of unemployment” – which Chalmers now calls the “technical assumption” used by the Reserve Bank and Treasury in their forecasting, as opposed to the broader definition of full employment set out in the white paper.

The Australian Chamber of Commerce and Industry, the biggest employer group, said in its response to the white paper that the government “needs to make it clear that, contrary to trade union understandings, there will be zero impact on the Reserve Bank’s interest rate setting framework, and zero expectation that [it] will be more doveish on inflation”.

Well, not sure about that. Those who take the government’s recommitment to the goal of full employment to be a return to the post-World War II days when full employment was the only goal in the management of the macroeconomy are doomed to disappointment.

But those who happily imagine it will make zero difference are also kidding themselves. As the white paper makes clear, achieving sustained full employment involves “minimising volatility in economic cycles and keeping employment as close as possible to the current maximum level consistent with low and stable inflation”.

It doesn’t mean that, having fallen to about 3.5 per cent, the rate of unemployment must never be allowed to go any higher. No one has abolished the business cycle, nor the need for macro management to smooth the ups and downs in demand as the economy moves through that cycle.

So, the likelihood that, having greatly increased interest rates despite the fall in real wages, we’ll see some rise in unemployment in coming months, won’t prove the white paper was all hot air.

It’s also true, as more sensible business economists have realised, that the improvements in education and training that the white paper envisages could reduce “structural” unemployment, and thus the level of estimates of the NAIRU.

The truth is, economists make lots of calculations and the NAIRU is just one of them. While their calculations can tell them the NAIRU is now higher or lower than it was a few years ago, economists have never been able to tell you just why it’s changed.

The best they’ve ever been able to do is “ex-post” (after the fact) rationalisation. If the NAIRU has fallen, think of something that’s improved. If it’s risen, think of something that’s got worse.

The way the critics have rushed to the defence of the NAIRU, you’d think its magic number was written by God on tablets of stone. It’s just an estimate. And, like all estimates, it can be more reliable or less reliable.

No, what the government’s recommitment to full employment does is put full employment back up there as an economic objective equal in importance to low inflation. There’s always been scope for tension between the two objectives, and this increases that tension.

It says: if you’ve been erring on the side of low inflation, don’t. Try harder to find a better trade-off between the two.

It means the Reserve Bank and Treasury will now be less mindless and more mindful in the way they use the NAIRU to influence forecasts and judgements. But, unlike the critics, I think the Reserve and Treasury have already got that message.

As generator of magic numbers, the NAIRU has two glaring weaknesses. It was designed in an era when most jobs were full-time, so entirely ignores the spare capacity hidden in underemployment.

And, as the Reserve itself has acknowledged, it assumes all price rises are caused by excess demand, when we know that, in recent times, many price rises have come from disruptions to supply. And we know there’ll be more supply-driven pressure on prices from the transition to renewables and other things.

Have you noticed that whenever the Reserve and Treasury tell us their latest estimates of the magic number, they never tell us how much “judgment” they applied to the number that popped out of the model before they announced it?

But if that doesn’t convince you, try this one: the judgements the Reserve Bank makes will be better in future because, for the first time in a quarter of a century, Chalmers has appointed to its board someone who really knows how wages are set in the real world.

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Reach into your pocket, rise of the care economy will come at a cost

From even before the days early last century when people began leaving the farm to work in city factories, the industry structure of our economy has always been changing. In the ’80s, we saw the decline of manufacturing and the rise and rise of the service industries.

We’re probably kidding ourselves, but it seems the pace at which the economy is changing is faster than ever before. What’s certain is that change is occurring in several fields.

As explained in a part of this month’s budget papers I call Treasury’s sermon, it’s happening on at least three fronts. What gets the most attention is our transition from fossil fuels to renewable energy. Then there’s all the change coming from the digital revolution, which is working its way through many industries, with the use of artificial intelligence expected to bring much more change.

But the industry trend that’s doing the most to change how we live our lives is the rise of the “care economy”. On the surface we see childcare, disability care and aged care, but looking deeper we see nurses, allied health professionals, social workers and welfare workers. There are those who work directly with people receiving care, and an army of support workers in clinics, kitchens, laundries and cleaning stations.

By Treasury’s reckoning, the proportion of our workforce employed in the care economy has gone from 2 per cent in the ’60s to 10 per cent today. About 80 per cent of these workers are women, and more than 16 per cent of all working women work in the care economy.

Treasury offers three main reasons for this rise. Most obvious is the ageing of the population, which is greatly increasing the demand for healthcare and aged care.

Less obvious, but more significant, is what Treasury calls “a transition from informal to formal care”. In the old days, women stayed at home to look after young kids, aged parents and anyone with a disability.

But once girls became better educated, more of them wanted to put their education to work in paid employment. So young children went to childcare, oldies went off to a home and, particularly since the advent of the National Disability Insurance Scheme a decade ago, people with disabilities got more professional care.

One of the simple truths of economics is that economies are circular. On the one hand, more women wanted to go out to paid employment. On the other, this created more paid jobs for women in childcare, aged care and disability care.

As medical science advanced, there were more jobs for women in hospitals and clinics, in the allied professions as well as medicine and nursing – which now requires a degree.

Our greater understanding of the way brains develop has prompted us to begin schooling one or two years earlier, and turn childcare into “early childhood education and care”. Play-based learning became a thing. And more childcare workers needed teacher training.

Treasury’s final explanation for the inexorable rise of the care economy is “increased citizen expectations of government”. Just so. Our growing affluence has involved increased demand for services best paid for via the public purse.

All this has a lot further to go. A former government agency expected the demand for care economy workers to double over the next 25 years or so. Fine – but that says we’ll all be paying a lot more tax to cover it.

And there are other reasons the cost of care will be increasing. One is the weird notion that women should be paid as much as men. Another is that we can’t go on exploiting the motherly instincts of women by paying those in caring jobs less than those in uncaring jobs (so to speak).

One reason we can’t go on underpaying care economy workers is that they ain’t taking it any more. There are shortages of workers, and those who do sign up often don’t stay long once they see how tough the work is.

This budget includes the cost of a special, 15 per cent pay rise for aged care workers, awarded by the Fair Work Commission because their work had been undervalued. Nothing to do with the cost of living – that’s on top. Don’t think there won’t be more work-value cases elsewhere in the care economy.

Then there’s the fate of the theory that getting the care delivered by private businesses would be more efficient and so save money. Wrong. They made their profits by cutting quality.

As for the runaway cost of the NDIS, I think it’s more a matter of providers seeing the government as an easy mark. The government’s hoping to limit the cost growth to a mere 8 per cent a year – but we’ll see about that.

In recent times, much of the nationwide growth in jobs has come from the care economy. Which should be a comfort to those wondering where the jobs will come from in future. I don’t see our kids and oldies being left to the care of robots any time soon.

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Climate choice: cling to past glories or strive for prosperous future

The big question facing our political leaders is: are we content to allow climate change to turn us from winners into losers, or do we have the courage and foresight to transform our mining, energy and manufacturing industries into clean energy winners?

For most rich countries, playing their part in limiting global climate change is simply about switching from fossil fuels to renewable energy. For us, however, there’s a double challenge: as one of the world’s biggest exporters of fossil fuels, what do we do for an encore?

When it comes to deciding how we can earn a decent living, economists are always telling politicians to pursue our “comparative advantage” – concentrate on doing what we’re better at than other people, and they want to buy from us; then use the proceeds to buy from them what they’re better at than we are.

Turns out our “natural endowment” makes us better at farming and mining. Climate change will be bad for farming (not that the world will stop wanting to eat), and the only future for fossil fuel exports is down and out. It may take a decade or two to reach zero, but there’ll be no growth from now on.

Most economists have little to say about what you do when your natural endowment becomes a stranded asset and our comparative advantage evaporates. Except for Professor Ross Garnaut, who was the first to realise that nature has also endowed us with a bigger share of sun and wind.

If we tried hard enough and were quick enough, we could not only produce all the renewable energy we need for our own use, but find ways to export it to less well-endowed countries, probably embodied in green steel and aluminium.

This, of course, involves innovation and risks. We’re talking about technological advances that haven’t yet been shown to work, let alone commercialised. Doing things that have never been done before.

When it comes to technology, Australia is used to following the leader, not being the leader. Until now, this has been sensible for a smaller economy like ours. But we’re facing the impending loss of our biggest export earner. If we can’t find something just as big to sell, we’ll see our standard of living rapidly declining.

The threat we face isn’t quite existential. We’ll still be alive, just a lot poorer – and kicking ourselves for not seeing it coming and doing something about it.

The solution’s in two parts. First, the federal government must make clear to the coal and gas industries, the premiers, the mining unions and the affected regions that there’ll be no further support or encouragement for anyone pretending they haven’t seen the writing on the wall. Anyone trying to stop the clock and keep living in the past.

There’ll be plenty of support and encouragement, but only for those industries, workers and regions needing help to move from the old world to the new. As part of this, the government must do what now even the UN secretary-general says every country must do: end subsidies of fossil fuels and use the money to assist the move to renewables and green production.

Help coal miners relocate or retrain – whatever. Promise that, wherever it made sense, the new renewable and green industries would be set up near the old mines.

Ideally, the policy of ending the old and moving to the new should be bipartisan. No opposition should take the low road of courting the votes of those preferring to keep their head in the sand.

But if that’s too much to ask of a two-party duopoly, Anthony Albanese and the Labor premiers should take their lives in their hands and overcome their life-long fear of what the other side will say when you put the national interest first.

Second, pick winners. Econocrats spend their lives telling governments not to do that – not to subsidise new industries you hope will become profitable.

Trouble is, politicians being politicians, you can be sure they’ll be putting taxpayers’ money on some horse in the race. And if they’re not trying to pick winners, they’ll be doing what they’re doing now: backing losers. Which would you prefer?

More importantly, it’s a neoliberal delusion that new industries just spring up as profit-seeking entrepreneurs seek new ways to make their fortunes. Doing something never done before is high risk. The chance of failure is high. Banks won’t lend to you.

We don’t stand a chance of becoming a green superpower without a lot of government underwriting with, inevitably, some big losses. But I can think of many worse ways of wasting taxpayers’ money.

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Weakening competition is adding to our inflation woes

We’ve worried a lot about inflation and its causes this year, but in one important respect the economy’s managers have yet to join the dots. The most basic economics tells us that what stops prices rising more than they should is strong competition between firms. If competition has weakened, that will be part of our inflation problem.

But is there evidence that competition is less intense than it was? Yes, lots. It was outlined by Assistant Treasurer Dr Andrew Leigh in a recent speech.

The basic model of how markets work – the one lodged in the head of almost every economist – assumes “perfect competition”.

Markets are supposed to consist of a huge number of consumers and many producers, each of them too small to have any ability to influence the price of the products they’re selling. So the price is determined purely by the interaction of producers’ supply and consumers’ demand.

Competition between these small firms is so intense that, should any one of them be so foolish as to raise their price above what all the other firms are charging, consumers would immediately cease buying their product, and they’d go out backwards.

I doubt if that was ever an accurate description of any real-world market. But even if it approximated the truth at the time economists got it so firmly fixed in their minds – the late 19th century – all the years since then have seen firms getting bigger and bigger.

So much so that many key industries today have just a handful of firms – often no more than four – accounting for well over half the industry’s sales.

This has happened thanks to a century or two of firms using improvements in technology to pursue “economies of scale”. Up to a point, the more widgets you can produce from the same factory, the lower their average cost of production.

Firms do this in the hope of increasing their profits. But the magic of markets – when they’re working properly – is that your competitors also use the new technology to cut their production costs, then undercut your price to pinch some of your share of the market.

This is the competitive process by which the benefits of scale-economies end up mainly in the hands of consumers, in the form of lower prices. This is a big part of the reason we’re all so much richer than our great-grandparents were.

The digital revolution has moved scale-economies to a new stratosphere. It costs a lot to develop a new GPS navigation program, for instance, but once you’ve done it, you can produce a million or two million copies at negligible extra cost.

So, fundamentally, the move to fewer but much bigger firms is a good thing. Except for this: the bigger a firm’s share of the market, the greater its ability to influence the prices it charges. This is a key motivation for big firms to keep taking over smaller firms.

And when markets are dominated by three or four big firms, it’s easy for them to reach an unspoken agreement to use advertising, marketing and superficial product differentiation to compete with their rivals, while avoiding undermining existing prices and profit margins by starting a price war.

Similarly, when all the big firms in an industry are hit by similar big increases the costs of their imported inputs – caused, say, by pandemic or war-related shortages of supply – it’s easy for them to reach an unspoken understanding that they will use this opportunity to fatten their profit margins by raising their prices by more than the rise in input costs justifies.

Which is just what seems to have been contributing to the huge rise in consumer prices this year – though it’s far too soon for economic researchers to have hard evidence this is happening.

What we do have, according to Leigh, is a “growing body of evidence that suggests excessive market concentration can lead to economic problems”.

“Dominant firms in a market may have less incentive to carry out research and development. They may have less incentive to produce new products. And in some cases, they may have less incentive to pay their employees fairly.

“As you can imagine, the drag on the economy only becomes stronger and deeper with each and every concentrated market,” Leigh says.

In the past decade, there has been a huge increase in the number of studies – covering the US and many other countries – confirming that markets have become more concentrated. That is, a higher share of the market held by a few big firms.

But, Leigh says, “mark-ups” – the gap between firms’ costs of production and their selling prices – are one of the most reliable indicators of “market power”. That is, power to raise their prices by more than is justified by their increased costs of production.

Australian research led by Treasury’s Jonathan Hambur finds that industry average mark-ups increased by about 6 percentage points between 2003 and 2016. This fits with figures for the advanced economies estimated in a study by the International Monetary Fund over the same period.

Hambur finds that mark-ups for the most digitally intensive firms increased by 12 percentage points, compared with 4 percentage points for all other firms.

And also that industries experiencing greater annual increase in concentration had greater annual increases in their mark-ups.

Of course, none of this should come as a great surprise to those few economists who specialise in the study of IO – industrial organisation – the way the real-world behaviour of monopolies and oligopolies differs from the way simple textbook models of perfect competition would lead us to expect.

Institutionally, the responsibility for seeking to ensure “effective competition” in our highly oligopolised economy rests with the Australian Competition and Consumer Commission. But its efforts to tighten scrutiny of company takeovers and other ways of increasing a firm’s market power have met stiff resistance from the big business lobby.

This new evidence of increasing mark-ups suggests the econocrats responsible for limiting inflation should be giving the ACCC more support.

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If higher productivity comes from new ideas, it's time we had some

Economists and business people talk unceasingly about the crying need to improve the economy’s productivity, but most of what they say is self-serving and much of it’s just silly. Fortunately, this week’s five-yearly report on the subject from the Productivity Commission, The Key to Prosperity, is far from silly, and might just stand a chance of getting us somewhere.

It’s the first of several reports and, unlike the tosh we usually get, it’s not selling any magic answers. Business people mention productivity only when they’re “rent-seeking” – asking the government for changes that will make it easier to increase their profits without them trying any harder.

Their favourite magic answer is to say that if only the government would cut the tax paid by companies and senior executives, this would do wonders for productivity.

As for the econocrats, too often they see it as a chance to advertise the product they’re selling: “microeconomic reform” – by which they usually mean reducing government intervention in markets.

A lot of people think wanting higher “productivity” is just a flash way of saying you want production to increase. Wrong. The report makes it clear that improving productivity means producing more outputs, but with the same or fewer inputs.

It sounds like some sort of miracle, and it is pretty amazing to think about, but it happens all the time.

Another mistake is to think that wanting to increase productivity is the bosses’ way of saying they’re going to make us work harder. No, no, no. As the report repeats, productivity comes from working smarter, not harder or longer.

In response to the scientist-types who keep repeating that unending economic growth is physically impossible, and then wondering what bit of this the economist-types don’t get, the report says that “while economic growth based solely on [increased] physical inputs cannot go on forever, human ingenuity is inexhaustible”.

Get it? Economic growth doesn’t come primarily from cutting down trees and digging stuff out of the ground – and the scientists are right in telling us we must do less despoiling of the environment, our “natural capital” – it comes overwhelmingly from using human ingenuity to think of ways to produce more with less.

That’s why the report says improved productivity is “the key to prosperity” and is based on “the spread of new, useful ideas”.

To be more concrete, productivity is improved by people thinking of ways to improve the goods and services we produce, ways to make the production process less wasteful – more efficient – and thinking up goods and services that are entirely new.

This gives us a mixture of novel products, improved quality and reduced cost.

Over the past 200 years, since the start of the Industrial Revolution, the productivity of all the developed economies has improved by a few per cent almost every year. In our case, over the past 120 years the economic output of the average Australian is up seven-fold, while hours worked has consistently fallen.

Trouble is, the miracle of productivity improvement has been a lot less miraculous in recent times. Over the past 60 years, our productivity improved at an average rate of 1.7 per cent a year. Over the decade to 2020, it “slowed significantly” to 1.1 per cent a year.

The report is quick to point out that much the same has been happening in all the rich countries. (It does note, however, that the level of our productivity is now lower than it was compared with the levels the other rich countries have achieved.)

This is significant. It suggests that whatever factors have caused our productivity performance to fall off are probably the same as those in the other rich economies. But as yet, none of them has put their finger on the main causes of the problem.

If they’re still working on the answers, so are we. So the report focuses on thinking about what may be causing the problem and where we should be looking for answers. Remember, this is just first of several reports.

So, unlike the rent-seekers and econocrats, it’s offering no magic answers. But it does come up with a good explanation for at least part of the productivity slowdown: for most of the past two centuries, one of the main ways we’ve produced more with less is by using newly invented “labour-saving equipment” to replace workers with machines in farming, mining and then manufacturing.

The quantity of goods we produce in those industries has never been greater, but the number of people employed to produce it all is a fraction of what it once was. And this accounts for a huge proportion of the productivity improvement we’ve achieved since Federation.

Because producing more with less makes us richer, not poorer – increases our real income – total employment has gone up rather than down as we’ve spent that extra income employing more people to perform all manner of services – from menial to hugely skilled.

So successful have we (and all the rich economies) been at shifting workers from making goods to delivering services that the service industries now account for about 80 per cent of all we produce and about 90 per cent of all employment.

See the problem? In the main, services are delivered by people. So the economy’s now almost completely composed of industries where it’s much harder to improve productivity simply by using machines to replace workers. It’s far from impossible, but it’s much harder than on a farm, mine site or factory.

That’s the more so when you remember that two of the biggest service industries are health and social assistance, and education and training.

It’s pretty clear that, if we’re going to get back to higher rates of productivity improvement, we’ll have come up with some new ideas on how to make the service industries more productive, without diminishing quality. That’s what comes next in the Productivity Commission’s series of reports.

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Treasury chief warns big changes are on the way

When finally the pandemic has become just a bad memory, we’ll see it has left big changes in the way the macro economy is managed and the way we work and spend. Whether that leaves us better or worse off we’ve yet to discover.

That’s the conclusion I draw from Treasury Secretary Dr Steven Kennedy’s (online) post-budget speech to the Australian Business Economists on Thursday, the restoration of a tradition going back to the 1990s.

Kennedy observes that, although “fiscal policy” (changes in government spending and taxing) has always responded to large shocks such as recessions, for the past 30 years the accepted wisdom in advanced economies has been that the preferred tool for stabilising the ups and downs in demand is “monetary policy” (changes in interest rates by the central bank), leaving fiscal policy to focus on structural and sustainability (levels of public debt) issues.

This mix of policy roles was preferred because central banks could make timely decisions, using an appropriately nimble instrument – the official interest rate. Interest rates, it was considered, could help manage demand without having much effect on the allocation of resources (the shape of the economy) in the long-run, Kennedy says.

In previous downturns, monetary policy played a major part in helping to get the economy moving. In response to the 1990s recession, Kennedy reminds us, the Reserve Bank cut the official interest rate by more than 10 percentage points. In response to the global financial crisis of 2008-09, it cut rates by more than 4 percentage points.

By now, however, the Reserve has run out of room. In its response to the coronacession, it cut the rate by 0.5 percentage points to 0.25 per cent. This week it squeezed out another cut of 0.15 percentage points and went further in “unconventional” monetary policy measures. That is, printing money.

Why so little room? Interest rates are down to unprecedented lows partly because, as I wrote last week, the rate of inflation has been falling for the past 30 years.

But Kennedy explains the other reason: the “natural” or “neutral” interest rate has been “steadily falling globally over the past 40 years”. The neutral interest rate is the real official rate when monetary policy is neither expansionary nor contractionary.

(Note that word “real”. Conceptually, nominal interest rates have two parts: the bit that’s just the lenders’ compensation for expected inflation, and the “real” bit that’s the lenders’ reward for giving borrowers the temporary use of their money.)

“The declining neutral rate is due to [global] structural developments that drive up savings relative to the willingness of households and firms to borrow and invest,” Kennedy says.

“While the academic research is not settled on the relative importance of different structural drivers, it is likely due to some combination of population ageing, the productivity slowdown and lower preferences for risk among investors,” he says.

Because this is a “structural” (long-term) rather than “cyclical” (short-term) development, “a number of central banks have suggested that interest rates will not rise for many years”.

Kennedy says the size and speed of the shock from the pandemic necessitated a large fiscal (budgetary) response. This would have been true even if a large response from conventional monetary policy had been available – which it no longer was.

Monetary policy is a one-trick pony. It can make it cheaper or dearer to borrow, and that’s it. As we saw with the early measures – particularly the JobKeeper wage subsidy and the temporary supplement to the JobSeeker dole payment – fiscal policy can be targeted to problem areas. “Monetary policy cannot replace incomes or tie workers to jobs,” he says.

So the move from monetary policy to the primacy of fiscal policy is not only unavoidable, it has advantages.

Since the onset of the pandemic, the federal government has provided $257 billion in direct economic support over several years, which is equivalent to 13 per cent of last financial year’s nominal gross domestic product. That compares with the $72 billion the feds provided in economic stimulus during the global financial crisis, or 6 per cent of GDP in 2008-09.

Kennedy notes that fiscal policy is about stabilising the economy’s rate of growth over the short term; it can’t increase economic growth over the medium to long-term. According to neo-classical theory, that’s determined by the Three Ps – growth in population, participation in the labour force, and productivity.

But whereas over the 10 years to 2004-05 our rate of improvement in “multi-factor” productivity averaged 1.4 per cent a year, over the five years prior to the pandemic it averaged half that, 0.7 per cent.

There are many suggested causes for this slowdown (which can also be observed in the rest of the rich world). Treasury research has highlighted signs of reduced “dynamism” (ability to change over time), such as low rates of new firms starting up, fewer workers switching jobs, slower adoption of the latest technology, and fewer workers moving from low-productivity to high-productivity firms.

Kennedy says it’s not clear how the pandemic will affect Australia’s long-run rate of improvement in productivity. But it has the potential to cause some large structural changes in the economy. We’ve seen the way it has forced businesses to innovate.

“Necessity is a great ramrod for breaking down the barriers to technological adoption,” he says.

Remote working is one example. In September, almost a third of workers worked from home most days. If this continues it could have “significant implications for transport infrastructure planning and for the functioning of CBDs”.

An official survey in September found that 36 per cent of businesses had changed the way products or services were provided to customers. The ability to pivot displayed by many firms indicates potential for innovation and adaptation.

On the other hand, there’s a risk that closures among smaller firms will lead to even more market concentration and slower productivity growth. Let’s hope not.

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Privatisation crusade is core business for tribal Libs

Critics of this year’s strange budget, which claims to be “all about jobs” but is really about helping some people and not helping others, accuse Scott Morrison and his faithful Treasurer of being “ideological”. That’s not a sensible criticism.

To accuse someone you disagree with of being “ideological” is dishonest and hypocritical. It misuses the word, turning it into a meaningless term of abuse. It implies that you’re being ideological, but I’m not.

To be ideological is to hold to a system of beliefs about how the world works and how it should work. So every adult who hasn’t wasted too much of their life watching reality television rather than thinking has an ideology — some better thought through than others.

When I accuse you of being “ideological”, what I’m really saying is that your ideology differs from my ideology and I think yours is wrong.

But I object to the term also because it’s an attempt to intellectualise and dignify a motivation far less noble: our deeply evolutionary instinct to form ourselves into tribes. My side, your side. Us and them. Good guys versus bad guys.

In politics, partisanship leads to polarisation and polarisation to policy gridlock and impotence. For example, look at the dis-United States. The richest, smartest big country in the world has been hopeless at coping with the pandemic, with many, many deaths. The Democrats and Republicans refuse to co-operate on anything. They’ve even turned mask wearing into a partisan issue.

It’s not so surprising that Morrison and Josh Frydenberg have been happy to justify their widely criticised budget choices by reference to their own ideology, saying the budget strategy “is consistent with the government’s core values of lower taxes and containing the size of government, guaranteeing the provision of essential services, and ensuring budget and balance sheet discipline”.

These “core values” are elaborated on the Liberal Party website. “We work towards a lean government that minimises interference in our daily lives, and maximises individual and private sector initiative.”

“We believe ... in government that nurtures and encourages its citizens through incentive, rather than putting limits on people through the punishing disincentives of burdensome taxes and the stifling structures of Labor’s corporate state and bureaucratic red tape.”

“We believe ... that businesses and individuals — not government — are the true creators of wealth and employment.”

To summarise, the individual is good, the collective is bad. Private good, public bad. Government is, at best, a necessary evil, to be kept to an absolute minimum.

Sorry, but this is just tribalism — the Liberal private tribe versus the Labor public tribe — masquerading as eternal truth. It’s phoney party-political product differentiation. Vote Liberal for low taxes; vote Labor for high taxes. Really? I hadn’t noticed much difference.

Private good/public bad makes no more sense than its left-wing opposite, public good/private bad. Both are a false dichotomy. It takes little thought to realise that the two sectors of the economy have different and complementary roles to play. One could not exist without the other, and we need a lot of both.

The individual and the collective. Competition and co-operation. Both sectors do much good; both can screw up. The hard part is finding the best combination of the two somewhere in the middle, not at either extreme.

As Frydenberg has often said, the budget’s strategy is to bring about a “business-led” recovery. This explains why most of the money it spends or gives up goes to business as tax breaks. Tax cuts and cash bonuses to individuals come a poor second and direct spending on job creation has largely been avoided.

Frydenberg justified this by saying that “eight out of every 10 jobs in Australia are in the private sector. It is the engine of the Australian economy.”

Surely he’s exaggerating, I thought on budget night. But I’ve checked and it’s true. Or rather, it is now. These days, 89 per cent of men and 81 per cent of women work in the private sector, leaving just 15 per cent of workers in the public sector.

In 1994, before the mania for privatisation and outsourcing took hold, 28 per cent of employees worked in the public sector (with two-thirds of those working for state governments).

The electricity, gas and water utilities used to be almost completely public sector. Now they’re 78 per cent private. Sale of the Commonwealth Bank, state banks and insurance companies mean the finance sector is almost totally private.

The sale of Qantas and Australian Airlines, ports and shipping, airports and much public transport means employment in the transport industry is 90 per cent private. Despite state government ownership of schools, TAFEs and universities, employment in education is now only 54 per cent public.

Despite health and community services being largely government-funded, three out of four workers are privately employed.

See what’s happened? With some help from their rivals, the Libs have worked tirelessly over the past 25 years moving workers from the Labor public tribe to the Liberal private tribe. Haven’t you noticed the big improvement?

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Technology is amazing, but human nature is unchanging

When momentous events such as the coronavirus pandemic occur, it's tempting to conclude they'll change our lives forever. Even if we don't think it, you can be sure there'll be some overexcited journalists saying it. Just as there were after the attack on the Twin Towers on 9/11 in 2001.

Even then I was too old to believe it would "change our lives forever" and – although it did have lasting effects on international relations and our fear of terrorism – it didn't really.

This time people are telling us we'll all be working from home (with city office blocks and streets turning into ghost towns), doing our shopping online, learning online, seeing doctors online, and no longer doing business travel.

Somehow, I doubt it will be that radical. But I don't doubt there'll be change in all those directions. Most of them were already happening as part of the continuing digital revolution, and this will accelerate those trends.

The revolution's usual pattern is to bring modest benefits – greater "functionality" (machines that do more and better tricks) and convenience – to an industry's customers, while turning the industry on its head, with considerable disruption to the lives of many of its workers.

There was a time when watching television meant seeing only what the few available channels happened to be showing at the time. These days, recorders and catch-up apps and a multitude of free-to-air and for-the-small-fee channels and streaming video have given us vastly more choice.

This has meant huge upheaval for the industry, but improved our lives only to a small extent – something we've soon come to take for granted.

Some people (and not just Victorians) are finding it hard to imagine the pandemic will ever be over. But, though we can't be sure when, it will end. And when it does, far more aspects of the way we live and work will go back to the way they were than will change forever.

Truth be told, and unless we do a lot more to correct it, the biggest and baddest continuing effect of the pandemic will be on the careers of young people leaving education during the recession and what looks like being a long and weak recovery.

Staying serious, we can expect more concern about problems in health than in education. More concern about physical health than mental health. More concern about the problems of the old than those of the young.

Nothing new about any of that – except that Scott Morrison's heroic condemnation of those on his own side of politics suggesting that the lives of the elderly should have been "offered up" in the interests of the economy sits oddly with his and all federal politicians' tolerance of decades-long neglect and misregulation of aged care.

(As economists make themselves unpopular by pointing out, every time politicians decide to spare taxpayers the expense of fixing a level-crossing or in some other way saving "just one person" they are implicitly putting a dollar value on human life. They do so on our behalf and we rarely tell them to stop doing it. The term "cognitive dissonance" comes to mind.)

But I'm determined to keep it light this week, so on with happy chat about the pros and cons of new technology.

It's worth remembering that advances in digital technology have made the lockdown and social distancing tolerable – indeed, doable – in a way that wouldn't have been possible 20 years ago. Far more of us work as "symbolic analysts" (people who spend all day making changes on a screen) these days. Get access to all the office's programs on your laptop at home? Easy. Zoom to endless and unending meetings? Feel free.

The virus is likely to hasten technology-driven change because the crisis has broken through our fear of the new and unfamiliar. Both workers and bosses now understand both the pros and the cons of working from home relative to working from work.

We've tried buying groceries online. Doctors, departments of finance and patients have overcome their hang-ups about telemedicine. Online learning suits uni students better than school pupils.

But all these things do have their advantages and disadvantages. And most of the disadvantages are social. For the human animal, social distancing is a deeply unnatural act. We get a lot of our emotional gratification from face-to-face contact.

We communicate more efficiently and we learn things we wouldn't otherwise learn that help us do our job better. Relationships with suppliers, customers and consultants work better when we come to know and like each other.

So I think we'll do more digital remote working, but not turn our working lives over to it. Surveys show most people would like to work from home some days a week, but not all week. Business people may do less travel between capital cities – it could easily become the latest business cost-cutting fad – but it would be amazing if executives stopped wanting to shake hands with the people they deal with.

Technology can change what we do, but it won't change human nature.

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Don't forget those the pandemic leaves out in the cold

After a fortnight's patriotic duty swanning round the backblocks of the state dispensing modest monetary good cheer – and discovering we were far from the only cityslickers doing it – it's back to a city plunged into renewed foreboding. The greatest concern is the pandemic's returning risk to our lives but, for me, this worsens rather than detracts attention from the great economic cost: protracted unemployment. A second wave of the virus would bring a double-dip recession.

When Treasurer Josh Frydenberg – a man so committed to looking on the bright side he's positively Pythonesque – feels it his duty to advise that the official unemployment rate of 7.1 per cent is actually an effective rate of 13.3 per cent once you allow for the peculiarities of the lockdown, you know we must be in deep trouble.

He wouldn't be issuing such a warning if he didn't need to prepare us for next week's mini-budget, which the setbacks in Melbourne and Sydney will have caused to be a lot less penny-pinching than earlier planned.

Where before Scott Morrison might have told himself the worst was over and it was time to start limiting the damage to his precious budget, now he must keep the money flowing so as to limit the damage to the livelihoods of many workers and their families.

Back in March, many of the government's initial measures to limit the economic damage caused by his harsh but unavoidable efforts to stop the spread of the virus – including the innovative JobKeeper wage subsidy scheme and JobSeeker's doubling of the rate of unemployment benefits – were timed to last six months and so end in late September.

The mini-budget's main purpose is to announce what will happen after that. A point to remember is that these measures don't just directly relieve the financial pressure on people who've lost their jobs, they benefit all of us indirectly by injecting additional money into the economy, which then flows through many hands – shopkeepers and workers alike – keeping the economy moving and thus limiting the further rise in joblessness.

A further thing to remember is that the unemployed don't only need money to help them keep body and soul together and feed their families (not to mention money to keep their mobile working, travel to job interviews and be appropriately dressed), they also need help finding another job.

The terrible thing about recessions is that they throw the economy up in the air, so to speak, and what eventually comes down is different to what went up. Recessions accelerate the changing structure of the economy. The industries and occupations change, with some contracting and others expanding.

So the jobs move, and employers' demand for particular occupations changes. Even with assistance from the wonders of the internet, many workers need help to locate a new job, need guidance to give up on industry A and try industry B, or even help to retrain for a job in another occupation where demand is greater.

After a severe recession, it can take a year or more before the quantity of goods and services produced each quarter has returned to where it was before it started falling, and several years before it gets back to where it would have been had the recession not happened.

But it takes longer for employment to return to where it was and far longer for unemployment to fall. After the last recession, the number of people on unemployment benefits fell by almost half, from a peak of 890,000 in 1993 to 464,000. But get this: it took 14 years.

If that wasn't bad enough, in that time, the number of recipients who'd been on the dole for more than a year fell by only 20 per cent to 276,000.

One lesson from this is that it's the unemployed who'll bear most of the economic cost of this pandemic, however long it lasts. It will take longer than you may think for people who lose their jobs to find another. While they're out in the cold, we who've kept our jobs have a moral obligation to ensure they're given a reasonable sum to live on, as well as a lot of help finding a new berth.

Many will find a job within a month or two, but some will take much longer. And the longer it takes, the less likely it becomes. These are people who deserve extra help to avoid getting stuck in the mud at the bottom of the unemployment pool, and we should give it.

Last week the Australian Council of Social Service called for JobKeeper to be phased down only gradually, and for the JobSeeker payment to be increased permanently by at least $185 a week, which would lift it to the rate of the age and other pensions.

The focus of Centrelink and the Job Network should be switched from penalising the jobless for concocted infringements to actually helping them find jobs and retrain. It's the least we should do.

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Services are taking over the economy – despite the politicians

One test of whether our political leaders are looking to the economy’s future or clinging to its past is whether they show an understanding that most of our future lies in the services economy.

Whether they hanker for an economy where most people earn their living by growing things, digging things out of the ground or making things.

Probably only the dearly departed Malcolm Turnbull passes this test, with his early enthusiasm for innovation and agility. Kevin Rudd said he didn’t want to be the leader of a country that didn’t make things. Scott Morrison took a lump of coal into the Parliament to show where his allegiances lay.

But as the Organisation for Economic Co-operation and Development reminds us in its latest report, the shift from producing goods to performing services is fundamental to the process of economic development.

Every country’s economy starts on the economic development journey with most people working on the land, and others in mines. That’s where we were in the 19th century. About a hundred years ago, the great migration from the country began, with more and more people moving to the city to work in factories.

By 1971, employment in manufacturing had reached 1.4 million workers. Manufacturing’s share of total employment in Australia reached 25.5 per cent a little earlier in 1966.

But from that period on, employment in manufacturing began to decline, both in absolute numbers and as a share of the total.

It – and employment in the other goods industries: agriculture and mining – declined as a share of the total simply because employment in the services sector grew much faster.

So, for at least for the past 50 years, it’s services that have been going up while goods industries have been going down. That’s true whether you look at shares of total employment or shares of total production (gross domestic product).

When you turn to the absolute numbers of workers, they’ve been declining in agriculture for more than a century. Today, just 325,000 people work on the land.

In manufacturing, they’ve been falling since 1971, to be down to 980,000 today.

Mining employment got a fillip from the resources boom, but even its job numbers have resumed their decline since 2013, and are now down to 245,000 – or just 2 per cent of our total employment of 12.6 million.

There’s nothing peculiarly Australian about this move from farming to manufacturing to services. You can see just the same progression in other rich economies and in “emerging” (that is, rapidly developing) economies.

It’s been unfolding before our eyes in China since it began opening its economy to the world in the late 1970s. It was all the people leaving its farms to work in city factories that, a few years ago, took the proportion of the world’s population living in urban areas to more than half.

Returning to Oz, don’t get me wrong. Some of us will always be working in the goods part of the economy. That’s particularly true of Australia because, though we’ve never been great shakes at manufacturing, we have had, and will continue to have, a comparative advantage in agriculture and mining, relative to other countries.

Note this: though the number of people working in the three parts of the goods sector has been falling, that doesn’t mean we’re growing less food or digging fewer minerals. Our annual production of food and minerals and energy is greater than ever. Even in manufacturing, our annual production has been falling only since 2008.

How can production go up while employment goes down? Easy. Increased productivity of labour caused by automation – technological advance. The use of more and better machines has made farming, mining and manufacturing more “capital-intensive” and so less “labour-intensive”.

That’s the thing about the goods side of the economy: it’s relatively easy to use machines to replace men (and women). And this isn’t bad, it’s good – for two reasons. First, it’s helped make goods cheaper, thus making us more prosperous.

Second, it’s much harder to use machines to replace workers delivering services. Robots will change this to an extent, but by not nearly as much as the alarmists claim.

And it’s not hard to think of more services we’d like other people to do for us. That’s why total employment is higher than it’s ever been. And why further growth in services’ share of total employment and production is inevitable and inexorable.

Where will the new jobs be coming from? That's where.

The OECD report tells us that, in 2014, the goods sector’s share of production was down to 17 per cent (agriculture 3 per cent, mining 6 per cent, manufacturing 8 per cent), with the services sector’s share up to 83 per cent – about average for the OECD.

Within services, the biggest industries are: business services, 14 per cent of GDP; wholesale and retail trade, 10 per cent; financial services, 9 per cent; construction, 8 per cent; health and aged care, 7 per cent; education 5 per cent and defence and public administration, 5 per cent.

A favourite argument the goods industries use to exaggerate their importance to the economy is to point to their higher share of exports (a widget sold to a foreigner is more virtuous than one sold to a local, they claim).

A third of all our agricultural production is exported. For manufacturing it’s more than a quarter (bet you didn’t know that) and for mining it’s more than 90 per cent. For services it’s a mere 11 per cent.

This means that, as usually measured, agriculture contributes 8 per cent of total exports; mining, 40 per cent, manufacturing 26 per cent, and services, 26 per cent.

Education of overseas students is now our third biggest export, after iron ore and coal. Tourism is the other big one.

But the OECD points out that the goods we export have inputs of services embedded within them. Allow for this and agriculture’s share of total export “value-added” drops to 5 per cent, mining’s to 30 per cent and manufacturing’s to 13 per cent, while services’ share rises to an amazing 52 per cent.

Services are taking over the economy. Live with it.

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Retailers affecting the economy in ways we don’t see

As uncomprehending punters complain of the soaring cost of living, and the better-versed ponder the puzzle of exceptionally weak increases in prices and wages, don't forget to allow for the strange things happening in retailing.

It's a point the Reserve Bank's been making for months without it entering our collective consciousness the way it should have.

The debate over the cause of weak price and wage growth has been characterised as a choice between a "cyclical" (temporary) problem as we recover only slowly from the resources boom, and a "structural" (long-lasting) problem caused by the effects of globalisation and industrial relations "reform" that's robbed employees of their power to bargain collectively.

To the annoyance of protagonists on both sides, I've taken a bit-of-both position. But the Reserve has raised a different structural contributor to the problem: the consequences of greatly increased competition in a hugely significant sector of the economy, retailing.

The media have focused on the digital disruption aspect, with the arrival in Oz of the ultimate category killer, Amazon Marketplace.

But that happened only late last year and, although retailers may already have been tightening up on wage increases and other costs in anticipation of greater threat from online competitors, much of those consequences are yet to be felt.

Of greater significance to date is the arrival of new foreign bricks-and-mortar competitors such as Aldi and Costco.

As Dr Luci Ellis, an assistant governor of the Reserve, said last month, "Australia has seen a marked increase in the number of major retail players. Foreign retailers have entered the local market in recent years and continue to do so.

"This has also induced the existing players to reduce their costs to stay competitive, for example by improving inventory management. This has probably been a bit easier for larger or less-diversified retailers than for smaller firms.

"Whether through lower costs, narrower margins or a combination of both, this competitive dynamic has weighed on prices for consumer durables.

"And for staples such as food, competition and related changes in pricing strategies (such as 'everyday low price' strategies) have contributed" to keeping prices low.

If you doubt that adds up to much, try this. According to the consumer price index, prices of food and non-alcoholic beverages (including restaurant and take-away meals) were almost unchanged over 15 months to December, and rose only 3.6 per cent over the previous six and a half years.

Prices of clothing and footwear fell by 3.5 per cent over the 15 months to December, and fell by 4.6 per cent over the previous six and a half years.

Prices of furniture and household equipment fell by 1.5 per cent over the 15 months to December, and rose by just 4.5 per cent over the previous six and a half years.

As Reserve Bank governor Dr Philip Lowe has remarked, this is good news for consumers, although not for some retailers – nor their employees, for that matter.

Sometimes I think everyone would be a lot happier if prices and wages were growing by 4 per cent a year rather than 2 per cent. This would be a delusion, of course, but the beginning of behavioural economic wisdom is to realise that illusions abound in the economy.

Low inflation is not a bad thing to the extent that it's caused by increased competition forcing down businesses' profit margins – and goodness knows the two big supermarket chains have plenty of profitability to cut into.

Indeed, the benefit to consumers – who, remember, include all employees – makes competition-caused low inflation a good thing. (What's not a good thing is low inflation caused by weak demand.)

And particularly where increased competition involves innovation and digital disruption, it usually brings consumers greater choice and convenience, not just lower prices.

The downside of increased competition and digital disruption, however, is the adverse consequences for employees. Some may lose their jobs; many may find pay rises a lot harder to extract from bosses worried about whether their business has a viable future.

Retailing is our second biggest employer, with about 1.2 million full-time and part-time workers. And whereas the overall wage price index rose by 2.1 per cent over the year to December, in retailing it rose by only 1.6 per cent. This was lower than all other industries bar mining, on 1.4 per cent.

It's likely to be some years yet before the disruption of retailing has run its course, and this may mean structural change in the sector acts as a continuing drag on wage growth overall.

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Jobs in the services sector have smartened up

So much for our ailing economy. Did you see that 264,000 additional jobs have been created in the first eight months of this year, with 88 per cent of them full-time?

That's a remarkable increase of 2.2 per cent in total employment, according to trend figures issued by the Australian Bureau of Statistics this week.

Where did all those jobs come from? We won't know for certain for a week or two, but I can tell you now: not from agriculture, the production of goods (mining, manufacturing, utilities and construction) or the distribution of goods (transport, postal and warehousing; wholesale and retail trade), but from household and business services.

How can I be sure all the net increase in jobs will have come from the services sector? Because that's been the case for about the past 40 years.

This isn't all that surprising. As the Reserve Bank's head of economic analysis, Dr Alexandra Heath, observed in a speech last week, one of the most pronounced changes in the structure of our economy [and all advanced economies] has been its move away from a goods-producing economy towards a more services-oriented economy.

This isn't because we're producing fewer goods – we aren't – but because the growth in our production of services has been much faster.

"Australians are producing more services, consuming more services and trading more services with other economies than ever before," Heath says.

One reason for the shift to a services-based economy is that Australian households have experienced remarkable growth in their real incomes, she says.

We've had uninterrupted growth for more than 25 years, and real income per household has more than doubled since the early 1960s.

"As incomes rise," she says, "households typically spend more of their income on household services – such as health, education and restaurant meals – than on goods."

But demand for business services – that is, businesses providing services to other businesses - has seen its share of gross value-added grow from less than 20 per cent in the early 1990s to more than 25 per cent today.

The category includes professional and technical services; information, media and telecoms; rental, hiring and real estate; and financial and insurance services.

Part of this growth is just the reclassification of existing activity from goods to services as businesses that produce and distribute goods have increasingly outsourced non-core activities to specialist providers in the services sector.

The trend to outsourcing has been encouraged by technological advance that's lowered the cost of communication and logistics (moving things around) and meant that the scope and complexity of what can be outsourced have increased over time.

(Though, in my humble opinion, firms that outsource their telephone answering to overseas call centres where people you can't understand repeat scripted lines regardless of the context, and have little power to fix your problem because the firm back in Oz doesn't really trust them, will one day reap the customer revenge they so richly deserve.)

It should involve cost savings to outsourcing firms because specialist providers are able to achieve greater economies of scale and pass some of the benefits on to their customers.

So outsourcing is an example of one of the key building blocks of our modern prosperity: ever-greater specialisation and exchange, leading to ever-greater productivity. (This ought to be true when profit-driven businesses do it; it's not always true when governments do it badly or with ulterior motives.)

But outsourcing doesn't explain all the growth in business services. Some of those services are totally new.

And Heath says there's evidence that the nature of the work being done in the business services sector is generally changing faster than in other sectors. "This all suggest that business services are at the centre of how technological change is transforming the Australian economy," she says.

Traditional business services, such as accounting and legal, have been joined by management consulting, internet providers and computer system design.

The growth in outsourcing of business services, and the increasing integration of business services with other sectors of the economy, fit with evidence that "supply chains" are getting longer. That is, there's an increasing number of stages through which goods and services pass.

Not surprisingly, the goods production sector is the most fragmented – has the longest supply chain – because it uses the most "intermediate" inputs to produce its final products.

Research suggests that the reorganisation of production associated with the lengthening of supply chains has led to a shift towards more high-skilled labour, Heath says.

There's growing evidence that advances in computer technology have helped drive a shift from routine to non-routine jobs, creating new jobs as well as making others obsolete.

The share of people employed in the business services sector has almost doubled over the past 50 years, to be about 20 per cent of the workforce. Most of this growth has been in "non-routine cognitive" jobs, as you'd expect when computerisation is an important driver.

(Similar forces are working in the household services sector – all those extra doctors, teachers and academics – although it has also seen a significant increase in demand for non-routine manual jobs.)

If you look more directly at the types of skills and abilities required in the business services sector you see that, since the mid-1990s, there's been a shift towards occupations requiring higher-level cognitive skills such as systems analysis, persuasion, originality, written expression, complex problem solving and critical thinking.

Heath concludes that the business services sector "has played a key role in the way the economy has responded to technological progress.

"In the process, business services have become more important, more specialised and more integrated with other sectors. There is some evidence that this has been associated with higher productivity growth."

Figures from the labour market "also support the idea that business services industries are at the heart of how technological change is transforming the structure of the economy".

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The way wages are set is changing

Since we've all got so excited about the weak growth in wages, let me ask you a personal question: How much do you know about how wages are set?

For instance, how many workers are affected by the 3.3 per cent increase in the federal minimum wage, announced by the Fair Work Commission in June?

Some people say the weak wages growth is explained by the efforts to discourage collective bargaining under John Howard's Work Choices and neo-liberalism more generally. Any signs of this?

Wages can be set in different ways. So what are they, and how many workers are affected by each?

These questions are answered by a box on the minimum wage decision in the Reserve Bank's latest statement on monetary policy, issued last week. Many of its figures came from the Australian Bureau of Statistics publication, employee earnings and hours, catalogue number 6306.0, for May 2016.

The bureau finds three main ways of setting the wages of employees: "award only", collective agreements and individual arrangements.

Industrial "awards" are legally enforceable determinations made mainly by the federal Fair Work Commission, which set the minimum pay and conditions for employees in a particular industry or occupation.

They form a safety net for the great majority of employees. Any employer paying less than the minimum wage specified in the relevant award is breaking the law and could be prosecuted.

Every year the commission reviews, and usually increases, the "national minimum wage", which is the lowest amount any adult employee may be paid. In this year's review, the national minimum was increased by 3.3 per cent to $18.29 an hour.

What's less well understood is that, at the same time it adjusts the national minimum wage – the minimum minimum, so to speak – the commission also adjusts all the various minimums for workers in different classifications set out in each of the many industrial awards.

Since 2011, the commission has increased the full set of award minimum wages by the same percentage as its increase in the national minimum wage.

According to the bureau's latest figures, for May last year, about 23 per cent of our 10.1 million employees were totally reliant on the relevant minimum wage set out in their award.

Next on the list of wage-setting methods is the 36 per cent of employees whose wages are set by "collective agreements".

Most of these agreements are "enterprise bargaining agreements" negotiated with employers by a union representing the workers at the enterprise.

Enterprise agreements – which should be registered with the commission – build on the provisions of the employees' award, usually involving wage rates and conditions (such as paid leave) that are more generous than provided for in the award.

That leaves 41 per cent of employees – the largest share – having their wages set by "individual arrangements". But this is a rag-bag group.

It may include some people still on formal "individual contracts" left over from the Work Choices era, and it certainly includes managers and employees in highly paid professions whose wages and conditions have always been set by direct negotiation with the boss.

But there's another, big and interesting group: all those ordinary workers whose "individual arrangement" is that they get the award wage plus $X a week, or plus Y per cent.

This means a lot more workers' pay is protected by the award system than a quick look at the figures would suggest. Similarly, the commission's annual increase in award wage rates has a bigger effect on overall wage growth than you'd think.

So how have the proportions of employees in the three wage-setting categories been changing?

Over the 14 years to the start of 2016, the share of employees covered by collective agreements has fallen by 1.8 percentage points to 36 per cent, while the share of individual agreements has fallen by 0.4 points to 41 per cent, meaning the share of award-only employees has increased by 2.2 points to 23 per cent.

But before you take this as proof that a campaign against collective bargaining has forced more workers back to mere reliance on their award, remember there are other possible explanations.

Changes in the composition of the workforce, for instance. Since most part-time employees are award-only, the slowly increasing proportion of part-time jobs could explain much of the increase in the award-only share.

And remember this: some industries are growing faster than others, but different industries have different degrees of reliance on particular wage-setting methods.

For instance, collective bargaining is most common in public administration (covering 78 per cent of employees), education and training (63 per cent), utilities (60 per cent), and health care (55 per cent). That is, industries dominated by the public sector.

Individual arrangements are most common in professional and technical services (80 per cent), wholesale trade (70 per cent), rental and real estate services (63 per cent), construction (58 per cent) and – get this – manufacturing (55 per cent).

That leaves the award-only method most common in hospitality (43 per cent), admin services (42 per cent) and retailing (34 per cent).

It's true that hourly rates of pay are highest for employees with collective bargaining ($39.60), with individual arrangements next on $38.50, and award-only last on $29.60.

But the gap has been narrowing, with the average hourly rate under collective bargaining growing by 89 per cent in nominal terms over the 16 years to May 2016, while award-only grew by 97 per cent and individual arrangements by 109 per cent.

Again, however, this is likely to be explained more by the changing structure of industries and occupations – for instance, a higher proportion of high-paid managers and professionals in the individual arrangements category – than by campaigning against collective bargaining.

Statistics – especially these broad averages – can be misleading. But ignoring the stats and listening only to anecdotes will leave you with a much more distorted picture of reality.

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Let's do our sums on mining's economic contribution

With Malcolm Turnbull desperate to keep burning coal for electricity, just how important is the mining industry to our economy? Short answer: not nearly as much as it wants us to believe, and has conned our politicians into believing.

Because people like me have spent so much time over the past decade and more banging on about the resources boom, we've probably left many people with an exaggerated impression of the sector's importance.

It's true that, thanks to a quadrupling in the value of its physical capital, mining now accounts for about 7 per cent of our total production of goods and services (gross domestic product), compared with less than 5 per cent in 2004, at the start of the boom.

But 7 per cent ain't all that much, and if you measure mining by how much of our workforce it employs, it's even less: 2 per cent.

That's just 230,000 people, about as many as are employed in the arts and recreation.

It compares with 300,000 workers in agriculture, 400,000 in financial services, 800,000 in accommodation and food services, 900,000 in manufacturing, almost a million in education, a million in construction, another million in professional services, 1.2 million in retailing and 1.5 million in healthcare.

Still think the economy revolves around mining?

How can an industry account for 7 per cent of our production but only 2 per cent of our jobs? Because it's so "capital intensive" - it uses a lot of expensive equipment, but not many humans.

Because it employs so few people directly, the industry is always paying "independent" economic consultants to estimate how many people it employs "indirectly" as dollars earned from mining are spent in other parts of the economy.

This is always a good way to impress judges - who know a lot about law, but little about economics - when you're trying to persuade them to let you despoil the environment.

It's true that money earned from mining has a "multiplier effect" when spent. But it's just as true of money earned from any other industry. Or money spent by the government.

Normally I'd be happy to defend an industry against the idea that it didn't contribute much because its capital intensity meant it directly employed few workers.

That's because what matters most is how much income the industry earns from its production. When that income is spent - by employees, suppliers, tax-receiving governments or profit-earning shareholders - jobs will be created somewhere in the economy.

In the case of mining, however, there's weakness in the argument. Our mining industry is about 80 per cent foreign-owned - mainly by BHP Billiton, Rio Tinto and Glencore - which, in econospeak, adds a huge "leakage" to the "circular flow of income" around our economy.

(Another leakage is that most of the heavy equipment the miners and natural gas producers use is imported.)

If most of the profits made by our (highly profitable) mining industry don't belong to us and end up being spent in some other economy, this greatly reduces the economic benefit we get.

Which makes it doubly important the mining companies are paying a fair rate of tax on their earnings in Oz.

Here, the industry often pays "independent" economic consultants to write reports showing what huge amounts of tax it pays.

But these usually rely on the legal fiction that the minerals royalties the miners pay to state governments are a tax. In economics, a tax is something you pay the government for nothing specific in return (if you are paying for something specific, it's a "user charge").

Royalties are a user charge. The miners are buying access to valuable mineral deposits owned by us. Royalties are levied on different bases but, overall, they're probably charging less than the minerals are worth.

So the miners shouldn't expect brownie points for paying for the minerals we hand over to them. The Rudd government did try to ensure we taxed their profits more fairly and adequately but, as you recall, the miners objected and so Tony Abbott abolished what was left of the tax.

But, whatever their profits, they're paying 30 per cent of them in company tax, right? Right in theory but, as we've realised, in practice not so much.

Our big foreign mining companies are heavily into minimising the tax they pay by moving profits offshore, claiming to do their "marketing" in Singapore, where the tax rate is lower.

All of which makes you wonder how well we do from our foreign-dominated mining industry, considering all the environmental and economic disruption we have to put up with.

But it's worse than that. Our politicians, state and federal, are so desperate to create the temporary appearance of progress and jobs that mining projects bring - and, no doubt, to say thanks for the generous political donations the miners make - that they often use the offer of hefty subsidies to attract them.

The subsidy comes in the form of governments building railways, ports and other infrastructure on the miners' behalf. (Not to mention the federal government's exemption of mining from paying the diesel fuel excise, worth billions a year.)

Take the Indian Adani company's proposed Carmichael coal mine in central Queensland, which is so huge it would lower the world price of coal, to the disadvantage all existing Australian coal miners.

Queensland's Newman government was so keen to use the project as proof of progress it offered Adani a "royalty holiday". Now the Turnbull government is offering a $1 billion-plus concessional loan in the name of developing Northern Australia.

Both the miners and the politicians indignantly deny the industry receives any subsidies. But that's not what the West Australian and Queensland treasuries say in their submissions to the Commonwealth Grants Commission, revealing how poor the mining companies keep them.

If the nation is ahead on the mining deal, it ain't by a lot.

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Social and economic case for helping women work

Surely the most momentous social change of our times began sometime in the 1960s or '70s when parents decided their daughters were just as entitled to an education as their sons. Girls embraced this opportunity with such diligence that today they leave schools and universities better educated than boys.

Fine. But this has required much change to social and economic institutions, which we've found quite painful and is far from complete. It's changed the way marriages and families operate - changed even the demands made on grandparents - greatly increased public and private spending on education, led to the rise of new classes of education and childcare, changed professions and changed the workplace.

It has led to greater "assortative mating", where people are more likely to marry those not just of similar social background, but of a similar level of education.

For centuries the labour market was built around the needs of men. Changing it to accommodate the needs of the child-bearing sex has met much resistance, and we have a lot further to go. This is evident from last week's report of the Human Rights Commission, which found much evidence to show "discrimination towards pregnant employees and working parents remains a widespread and systemic issue which inhibits the full and equal participation of working parents, and in particular, women, in the labour force".

You can see this from a largely social perspective - accommodating the rising aspirations of women and ensuring they get equal treatment - or, as is the custom in this more materialist age, you can see it from an economic perspective.

By now we - the taxpayer, parents and the young women themselves - have made a hugely expensive investment in the education of women. It accounts for a little over half our annual investment in education.

If we fail to make it reasonably easy for women to use their education in the paid workforce, we'll waste a lot of that money. Our neglect will cause us to be a lot less prosperous than we could be.

Of late, economists are worried our material standard of living will rise more slowly than we're used to, partly because mineral export prices have fallen but also because, with the ageing of the baby boomers, a smaller proportion of the population will be working.

They see increased female participation in the labour force - more women with paid work, more working women with full-time jobs - as a big part of the answer to this looming catastrophe (not).

But how? One way would be to impose more requirements on employers, but in an era where the interests of business are paramount, politicians are reluctant to do that. Make employers provide childcare or paid parental leave? Unthinkable.

So, for the most part, taxpayers have picked up the tab. Government funding of childcare has reached about $7 billion a year, covering almost two-thirds of the total cost. The cost of government-provided paid parental leave is on top of that.

Governments' goals in childcare have evolved over time. In the '70s and '80s, the focus was on increasing the number of places provided. In the '90s, the focus shifted to improving the affordability of care, with the introduction of, first, the means-tested childcare benefit, and then the unmeans-tested childcare rebate. Under the Howard government, the rebate covered 30 per cent of net cost, but Labor increased it to 50 per cent.

More recently, increased evidence of the impact of the early years of a child's life on their future wellbeing has shifted governments' objectives towards child development and higher-quality, more educationally informed, childcare. This includes getting all children to attend pre-school. Linked with this has been a push to raise the pay of childcare workers.

The federal government asked the Productivity Commission to inquire into childcare and early childhood learning. Last week it produced a draft report. I suspect the pollies were hoping the commission would find a way to reduce regulation of what they kept calling the childcare "market"; thus improving workforce participation and "flexibility" while achieving "fiscal sustainability".

If so, they wouldn't have been pleased with the results. The main proposal was that the childcare benefit and rebate be combined into one, means-tested subsidy payment paid direct to childcare providers.

This would involve low-income families getting more help while high-income families get less. There would be a small additional cost to the government, but this could be covered by diverting money from Tony Abbott's proposed changes to paid parental leave. It was "unclear" his changes would bring significant additional benefits to the community.

The commission wasn't able to claim its proposals would do much to raise participation in the labour force, mainly because our system of means-testing benefits - which works well in keeping taxes low, something that seems to be this government's overriding goal - means women face almost prohibitively high effective tax rates as their incomes rise, particularly moving from part-time to full-time jobs.

Like the Henry tax review before it, the commission just threw up its hands at this problem. And even the commission couldn't bring itself to propose major reductions in the quality of education and care. Sorry, no easy answers on childcare.

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