Derailing Australia's gravy train

Despite the mining boom, large parts of Australia are starting to look like Europe and the Reserve Bank's interest rate decisions mean the 'lucky country gravy train' is about to come to an abrupt stop.

It's too late. The Reserve Bank waited too long to reduce interest rates and its May-June reductions are not going to stop a big rise in unemployment in industrial and white collar areas, including in many regional areas.

Our mining investment boom will cushion the overall figures but suddenly large parts of Australia are looking like Europe, albeit not as bad. The Reserve Bank board got it wrong because they were too remote from what was really happening.

It is worth asking the question: What do Australian managers and workers share with those in Greece, Spain and Italy?

The answer is simple. We have all been living on a lucky country gravy train for too many years and our currency is now not being allowed to decline to reflect the lower productivity that comes with gravy trains.

In the case of Europe the euro holds value because of the remarkable productivity of Germany. In Australia the mining boom holds up our currency.

The mining boom generates jobs but we are seeing youth unemployment in many industrial suburbs now around 10 per cent. In Spain it is around 50 per cent. We will not reach that level but it is about to go much higher with grave social consequences. When that happens the industrial relations legislation will be changed to make it easier to hire.

So what do I mean by "gravy train” when applied to Australia? Morgan Stanley’s Gerard Minack shows what a gravy train is with a graph showing what has happened to Australia. The Minack graph compares US workers' productivity to Australian workers’ productivity. We have slumped.

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That productivity fall comes at a time when it’s much harder to pass on higher costs in prices, so as a result many local and international companies will shift service and manufacturing operations offshore.

The lower productivity is partly a result of bad decisions by governments, but it is also a result of bad mangers who signed inflexible employment agreements and kept lifting wages without measuring productivity.

It is very encouraging to see Toyota taking a tough line and getting rid of troublemakers. Eventually they will also have to tackle the bad worker agreements unless the threat of ultimate closure means that the managers and workers combine to lift productivity and overcome the bad agreements.

This lower productivity extends into white-collar service areas including governments.

Soon the industrial suburb nervousness will be joined by those who house government workers, particularly those on contract.

Many local councils are starting to realise that their long gravy train is over. They have been awarding pay rises for years without worrying about productivity and they have been taking on new projects and lifting staff numbers. The money is drying up, as it is in most state governments, and possibly the federal sphere, depending on Wayne Swan.

The Reserve Bank will lower interest rates but not all the rate falls will be passed on by the banks because of the higher cost of funds.

The RBA should have moved much earlier. We will now be forced to lift productivity the hard way.

Footnote: Alan Kohler and I have been helping many enterprises lift productivity. You can view today's video showcasing an Australian success story here.

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