Labour policies need more focus

Governments need to be more flexible in their use of migration to manage fluctuating labour demand.

Economics students traditionally learn that governments have two major levers at their disposal – fiscal policy and monetary policy – but increasingly there needs to be a focus on a third lever – labour market policy.

This is an area where the federal and state governments can have a big influence and need to work together constructively.

Up until a few years ago, labour market policies were seen as a tool for promoting long-term economic development, particularly through investment in education and training.

Similarly, migration policies were seen as a tool for influencing long-term population growth but were not considered particularly relevant to fine-tuning the economy.

That has changed in recent years, as resources boom mark-1 led to acute labour shortages, followed by the sharp GFC slowdown, and then another surge in labour demand on the back of big resources and infrastructure projects.

The federal government, like its counterparts around the world, has used fiscal policy to try and manage the economy through these changes.

In particular, it has lunged from fiscal prudence to unprecedented largesse – remember those cash handouts – and, slowly, moved back towards fiscal caution, as it seeks to achieve its goal of a budget surplus.

The Reserve Bank is also a key player, using its interest rate lever to try and sustain economic growth without allowing inflation to surge.

That has resulted in another interest rate reduction, which the banks are slowly passing on to their customers – or at least housing loan customers, who seem to be considered more deserving, or at least politically important, than business borrowers.

History tells us fiscal and monetary policies are imperfect tools. That is not a criticism of the government; that is just reality.

Education, training and migration policies are also imperfect tools for economic management, but they need to be used more than ever before.

That’s because the demand for labour can, and does, fluctuate widely.

Australia is a relatively small country in a global context and the pool of available labour is very small relative to the demand for skilled and experienced workers that is projected to arise, particularly on large projects.

Controlling the demand side of the equation is not possible, nor is it desirable.

The private sector needs to be given the freedom to pursue investment and growth opportunities. It’s not ideal when that leads to a flurry of very large projects, which can lead to an overheating of regional and even national economies.

That is exactly what is happening now in the Pilbara and in central Queensland, where a surge in iron ore, gas and coal developments are under way, with more planned.

Putting a brake on this investment is likely to create more problems than it solves.

Markets will help to resolve the supply-demand imbalance, as the price of labour and materials are bid up and businesses in other sectors defer their own growth projects.

Governments can help by improving the efficiency and effectiveness of training and migration programs.

The former is critical to meeting long-term goals.

The latter is critical to alleviating short-term pressure points, specifically by allowing more temporary migration of skilled and experienced workers.

There have been a number of positive reforms in this area, but it needs continued focus, particularly with disquiet in the business community about the practicality of enterprise migration agreements, which were seen as one of the major breakthroughs.

If governments don’t allow more workers into Australia, the entire adjustment mechanism will occur through the markets, and that will be even more painful.

The pressure on costs will be more extreme, the number of projects being deferred will be even larger and the volume of work that will flow offshore – to fabrication and construction yards in Asia that already have a supply of experienced workers – will also be higher.