The dark side of Australia’s employment boom: Kohler

The dramatic fall in Australian productivity described by my colleague Robert Gottliebsen yesterday is the dark side of the strength of our labour market. It’s also the mirror image of what’s going on in the United States.

In America, productivity has jumped 4% versus Australia’s 3% decline. But in the US unemployment is 9.7% and in Australia it’s 5.3%.

In fact ‘Okun’s Law’ didn’t work in the US last year. This law is named after the 1960s economist Arthur Okun and states that unemployment will fall by half as much as the difference between the actual and potential growth rates of GDP – based on the long-term behaviour of the labour market and the economy .

GDP was stagnant in 2009 against potential output growth of 2.5%, so unemployment should have gone up by 1.25 percentage points. In fact it shot up by 3 percentage points. The result of this can be seen in collapsing consumer confidence: this morning we learned that the Conference Board index has slumped from 56.5 to 46 in February – a bad start to a year that is supposed to bring a US economic recovery.

In a fascinating speech yesterday, the President of the San Francisco Federal Reserve Bank, Janet Yellen, asked the question: “What would cause employment to dive and productivity to soar during such a severe recession?”

Her answer is that there has been a paradigm shift among US businesses, so that lower employment and higher productivity are here to stay.

“According to this perspective, the recession has forced businesses to re-examine just about everything they do with an eye toward restraining costs and boosting efficiency.

“Strapped by tight credit and plummeting sales, businesses have overhauled the way they manage supply chains, inventory, production practices, and staffing.

“Stores don’t order merchandise unless they think they can sell it right away. Manufacturers and builders don’t produce unless they have buyers lined up.”

So something snapped in the minds of American CEOs last year that was the reverse of what Robert Gottliebsen described in Australia, on the basis of a Telstra report on productivity. Telstra found that 58% of Australian CEOs don’t how to measure productivity and have no identifiable target – up from 51% just one year before.

In the US Janet Yellen believes the process of implementing new efficiency gains in American business may have only just begun: “We may be in store for further efficiency improvements and high productivity growth for some time.”

Yellen was looking at this in the context of job creation, which she thinks will be “frustratingly slow” in the US.

Her broad view of the US economy is that it will operate well below its potential through this year and next. She doesn’t expect the output gap to completely vanish until 2013 and unemployment to remain “painfully high” for years.

Australia, on the other hand, is facing renewed labour shortages, especially after the cutbacks in immigration that have been made by the Rudd government. Job shedding was kept to a minimum during the recession and the slack taken up by reducing hours worked. There is no labour pool here and many resource projects are now being held up by the lack of skilled workers.

As a direct result of low and falling unemployment we have relatively strong consumer confidence and domestic demand, but weak exports due to falling productivity and poor competitiveness.

The result of this will be a persistent current account deficit and high private debt.

It is, surely, Australia’s dilemma of the new decade: strong domestic employment and confidence or national competitiveness?

No prizes for guessing which of these the government will go for in an election year.

This article first appeared on Business Spectator.