11/09/2007 - 22:00

Inverse yield starting to bite

11/09/2007 - 22:00


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Inverse yield starting to bite

Inverse yields in the money market are a telltale sign of a future recession and are high on the watch list of US economists. An inverse yield might also be worth studying in the Western Australian employment market, where a curiously similar event is under way with people, rather than money.

What interests Briefcase is whether our inverse yield regarding pay, conditions, and future growth opportunities will be as damaging as a full-blown economic recession.

For non-followers of technical jargon, an inverse yield is when the interest rate on short-dated securities is higher than long-dated – such as a six-month deposit attracting an interest rate of 8 per cent, and a two-year deposit attracting 6 per cent.

In normal times it is the other way around, with money invested for longer periods generally providing a higher reward. At BankWest you can currently get 6.7 per cent for a three-month term deposit, or 7 per cent for 12 months – a tight, but normal yield structure.

But, Briefcase hears an alert reader ask, how can you apply economic lessons from the money market to the wider employment market?

Well, once upon a time, government jobs were seen as offering reasonable pay for heightened security. In other words, people working in government traded off some of the potential reward in a private sector job for the comfort of knowing their government employer would protect them in tough times.

No-one has ever worked out the value of that trade off, but let’s assume, for the sake of the argument, that a government person doing similar work to that in the private sector was paid 10 per cent less.

Today, in a boom, with labour in short supply, the gap has blown out. It is not unreasonable for Briefcase to suggest that government employees are being paid up to 30 per cent less than private sector employees doing similar work, and perhaps a lot when compared with jobs in remote locations.

Making matters worse is the removal of most job protection measures that government once offered. Rather than the assurance of a job for life, many government workers are on short-term contracts, made to re-apply for their own jobs when an internal shake-up takes place, and confined to workplace conditions that are inferior to those available in the private sector.


In other words, government workers are now not only being paid less, their conditions are generally worse than the private sector.

What Briefcase is suggesting is that we have developed an inverse yield in people, which is why government is struggling to attract teachers, police, nurses and general pen-wipers who occupy the space behind public counters in licensing, approvals, and fine-issuing departments.

Over time people, like money, flow to where they can get the best return. Only a mug would leave his cash earning 6 per cent in bank A when bank B is offering 8 per cent and identical levels of protection.

Just as the money flows out of bank A, so are competent people flowing out of government leaving, dare it be said, only those who would also leave their savings at 6 per cent in bank A – mugs.


Quickly now, before hordes of civil servants descend on WA Business News, let’s look at examples to prove the point.

Education is an obvious starting point. The government system is a disaster area being rapidly evacuated by parents (including senior government employees) for a better service available in the private sector – even if it means making personal sacrifices to ensure children get a decent education.

Government hospitals are the next target, and the police are always under staffed.

But, recently we’re started to see the inverse yield problems start to infect other departments, such as environmental protection and planning approvals.

Consider this for an intellectual challenge. At Esperance, a parliamentary inquiry has found that government officers were partly to blame for highly toxic lead pollution, which will lead to expensive compensation payments.

At the same time, we are watching people in the same area of government trot out spurious claims about subterranean spider-like creatures being so rare that Rio Tinto should not build a big new iron ore mine atop a hill called Mesa A, or that Chevron needs to spend an extra $60 million protecting a turtle breeding ground on Barrow Island because someone thinks, but can’t prove, that this is the only breeding ground in the region.

If the environmentalists in government were so horribly wrong at Esperance, why should we believe that they’re right at Mesa A, or at Barrow Island?

The correct answer is we don’t know, which is why we tolerate the occasional government blunder.

What then happens if government becomes a series of consistent blunders because all the good and competent people have fled to work in the private sector? All that we have left in government are crusaders for a cause who use government powers to achieve a political objective – such as shutting down an entire industry on spurious environmental protection grounds.

Briefcase might be stretching the point but the “inverse people yield” we’re watching today in the government versus private debate has the potential for doing considerable damage to WA.


The solution, and this is where it gets personally painful as the boom rumbles on, is that government will be forced to compete with the private sector on wages and conditions; and that means one thing – higher taxes.

It’s the tax bite that will be the sharp end of WA’s inverse people yield, and the equivalent to an inverse deposit yield pointing to a US recession.

In simple terms, when a market is disrupted by unexpected events such as the US sub-prime credit crisis, or WA’s resources boom, there are consequences, and a price to pay.


This week, in case you hadn’t noticed, has been an APEC free zone in Briefcase, for two reasons. Firstly, because everyone is tired of the Sydney circus, and secondly, because APEC is all about the Pacific area and we live on the Indian Ocean.

It was this second factor which lured Briefcase to the recent Africa Down Under mining conference. At the same time as Hu, Putin, Bush and the chaps from the ABC’s Chaser program were thrilling Sydney, 700 or so people rocked up to learn more about business opportunities in Africa.

By this time next year it would not surprise Briefcase if conference organisers are forced to move their conference to a bigger setting than the Sheraton, because Africa is becoming a very useful extension of WA’s mining services industry.

In terms of illustrating how Australia is developing a multi-dimensional economy, the APEC versus Africa conference was an excellent comparison. APEC was all about motorcades, set-piece speeches and the disruption of a city. Africa Down Under was all about business.


“Ambition is the last refuge of the failure.” Oscar Wilde


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