The crisis in worker affordability

I have an opinion piece in The Age today commenting on the latest unemployment figures. Actually, I did so without mentioning them (the unemployment rate is 4.3 percent by the way). The piece is really about how economists view the world. (Just between you and me, the ‘outsourcing’ idea sounded OK at the time but this morning I could not tell you how it might actually work. Let’s just leave my view at the Homer-esk level of, “hmm, immigration goood.”)

Rhyme and reason in economists’ half-glass views

The Age, Friday, 13th July, 2007.

Neither either nor or, the glass is both half full and half empty; ask an economist, writes Joshua Gans.

ONE of my favourite Peanuts cartoons has Charlie Brown sitting watching the news. Each frame has a news report with a statement like this: “Skies were sunny today but economists warn that this could cause an increase in the price of sunglasses”.

Now, it’s funny because it’s true. Economists have a tendency to see two sides of any coin. Give them good news and they see the potential for bad.

You might think that somewhat dismal but it can go the other way. Give an economist bad news and they can look on the bright side.

We have seen both reactions in the past few days. Yesterday, the employment figures came out. Continued record low unemployment. Seemingly good news, right? Well, let me dampen your joy.

Low unemployment translates into higher wages as a result of a tight labour market. Again, good news, right? Not quite, because higher wages means higher incomes. Those incomes will be spent somewhere fuelling fears of inflation or, at the very least, that the Reserve Bank will raise rates to prevent inflation. But wait, there’s more. Those higher wages are not good news for business. That might cause them to curtail investment; something that will bite us in the future. Put simply, workers are becoming unaffordable.

Now let’s try the reverse approach. Last week we heard about the continued growth in house prices and now rents. People were finding it increasingly hard to afford accommodation. Seems to be bad news, right? Well, let me now brighten your day. If you happen to own a home, this means your wealth has gone up. That will be good news when you retire. What is more, the bank will probably lend you money for that extension or pool you want.

All this illustrates that, when you think about it, it is hard to get into a panic about long-term trends; whether in unemployment (and wages) or house prices. But politicians do worry about them. The reason is obvious. The people for whom a bit of economic news is bad are different from the people for whom it is good.

The good and bad-news divide vexes politicians because they would like the votes of each.

So they try to spin and gloss over one take or another to dig themselves away from ambiguity. But it often falls flat.

Now, with regard to housing, the direction politicians are trying to move us in is to resolve the “supply side” issue. Houses are not affordable, so if there were more of them, that would surely help. A very true statement. But it forgets the good news/bad news divide. Current home owners don’t want to make houses more affordable.

Indeed, if zoning and sub-division laws are at fault for the supply issues, just take a quick look at how those laws got there. From citizens living in local areas who were worried about their quality of life if too many people came in. All that adds up to a supply restriction. So the politicians are hitting the economically correct issue but its political sense is an open question.

This tension becomes even stronger when we consider the crisis in worker affordability. Once again, if costs are too high for business, we need to lower them. How is this done? By expanding supply. Now the Treasurer takes this to mean having more babies. But let’s face it, the impact of that on wages is going to be a long time coming and the immediate impact is to reduce the size of the workforce.

The correct supply response is to increase immigration. The last time Australia’s unemployment rate was so low was a high time for immigration. That happy mix gave a prolonged economic expansion. I wasn’t around then but many seem to be nostalgic for it. And business is, indeed, calling for more immigration. But you don’t see that getting the same play among politicians who are turning a blind eye to the worker affordability crisis.

This time, the reason for that is the same as the muted housing response: immigration will depress wages and workers do not want that.

So that political quagmire looks like bad news, doesn’t it? Well, let me come to the rescue.

There are ways of having our cake and eating it too. On the housing side, by encouraging innovative forms of housing finance such as shared equity schemes, you dilute the incentives for home owners to block supply expansions while at the same time offering an opportunity for new home buyers to get in to the market.

On the employment side, by encouraging (or at least not discouraging) companies to bring in overseas workers for services and jobs that they would otherwise outsource to other countries, you keep the employment and the spillovers from that go into local services in regional areas.

To get there you need to embrace the political tension and the economist’s half glass view of the world. Hopefully, that is easier than having Charlie Brown convinced he can kick that football each year.

Joshua Gans is a professor of economics at Melbourne Business School. He serves as an adviser to Rismark (a shared equity mortgage provider) and blogs on these issues at the website economics.com.au

3 thoughts on “The crisis in worker affordability”

  1. Joshua, I enjoyed the piece. Immigration this year is 144,000 through regular intake and 13,000 refugee humanitarian. This is quite large historically – despite his reputation, Howard has become a ‘high immigration’ PM.

    That we have low unemployment means that 2/3 of the regular intake is ‘skilled’. So not only are we taking in quite a lot we are getting big rewards in terms of skill externalities and rising complementary demands for less skilled workers.

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  2. “There are ways of having our cake and eating it too. On the housing side, by encouraging innovative forms of housing finance such as shared equity schemes, you dilute the incentives for home owners to block supply expansions while at the same time offering an opportunity for new home buyers to get in to the market.”

    I’m just trying to understand this comment. How do shared equity schemes reduce owner-occupier incentives to block supply expansion in a meaningful way?

    Existing home owners are unlikely to be the most significant market for shared equity schemes, are they? Why will those who have potential capital gains suddenly give up those gains?

    Any insight would be appreciated.

    Thanks, David.

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  3. David,

    The insight is all in an LSE paper that I referred to in a previous post.

    No housing capital gain is certain. It is a risky asset. So you would give up part of that in order to diversify risk. You would also do so if you couldn’t afford the house you wanted. Lots of reasons really.

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