What happened to Dutch disease?

While anecdotal evidence appears to support the argument that 'Dutch disease' is ravaging the non-resource states' economies, recent jobs data is telling a quite different story.

The slow-down in jobs growth seen in this week's employment data may have surprised financial markets – causing the Australian dollar to plummet before slowly recovering during Thursday afternoon and Friday trade – but its cause remains something of a mystery.

As Adam Carr outlined during the week, the most shocking thing about the 22,000 decline in full-time jobs was that it followed such a strong period of job creation in the second half of 2010.

The most obvious explanation for the slowdown is to link this data to the wealth of anecdotal evidence circulating that 'Dutch disease' is ravaging the non-resource states.

The logic is powerful -- the soaring dollar hits exporters, education, tourism and hospitality, while the labour drain to the resource states forces up labour prices in the capital cities, and excess demand pushes interest rates ever higher.

It makes a lot of sense, and I've shared some of the anecdotal evidence with readers, as well as more firm research such as ASIC data showing a spike in company wind-up requests by creditors in March (see: Abbott has let Labor off the hook, May 13).

I've also argued that any boom-induced slowdown in non-resources areas, when added to the end of the housing wealth effect, would spell doom for any incumbent government, let alone one riding as low in the polls as the Gillard government.

Labor's mining resources rent tax is supposed to help balance the fast and slow economies, by feeding billions into Canberra's coffers to pay for services that would otherwise come out of voters' taxes. Some, particularly the Greens, argue that the MRRT doesn't take nearly enough of a cut of mining profits, and something like double the effective 23.5 per cent take would be required to help bail-out the non-resources states.

After seeing the jobs data, I spoke with Peter Gleeson, executive general manager for recruitment at workforce consultants Chandler McLeod. He sees the data as being consistent with two kinds of skills shortages in Australia.

Firstly, the WA mining boom is providing an insatiable demand for fly-in fly-out workers. His firm is supplying workers as fast as it can, but many jobs go unfilled producing wages across the board "50 per cent higher than commercial rates elsewhere".

So not only are there inflationary pressures building in regions such as the Pilbara, but thousand of jobs that should be created fail to find appropriate workers -- were the labour market not so tight, jobs growth in WA would be faster.

The pattern is less clear in Queensland, says Gleeson, mainly because of the huge labour market upheaval caused by last summer's floods and cyclones. He expects the market to stabilise into a pattern closer to WA's, but says the data is 'flaky' at the moment.

The second skills shortage is producing more interesting results. In the non-resources-related sectors, particularly in the south-east, Gleeson is seeing a spike in part-time work. He see this as a "try before you buy" mentality, reflecting that fact that businesses are taking on underqualified staff in the hope that they'll be good enough to fill a permanent or full-time role.

Importantly, he sees this trend as separate to the increase in the prevalence of contracting in areas such as IT, accounting, engineering and administration.

While all of these skills areas have used contractors for years, Gleeson says his firm is placing burgeoning numbers of workers for take-home pay that is 40 per cent higher on average than similar staff roles – that's after statutory requirements such as superannuation and insurance have been paid.

Overall, then, jobs growth is being hampered in the resource states by a lack of labour, both skilled and unskilled, and jobs growth in the non-resources areas is being slowed by a lack of qualified staff, leading employers to 'experiment' with part-time or temporary workers to see if they have what it takes to fill the jobs anyway.

Again, the argument is convincing.

But is it really Dutch disease? After speaking with Gleeson, I spent some time sifting and re-basing the ABS jobs data to see how clearly these trends were evident. I focused on WA/Queensland and Victoria/NSW to see if the 'part time' trend was there. The results were confounding (see charts below).


Starting with the workforce at the time of Rudd's 2007 election win, it's clear that Victoria and WA have since done best for full-time job creation, while Queensland and NSW have done pretty badly. In this case, then, the resources/non-resources dichotomy doesn't seem to work.

The same is true when we look at the divergence in part-time and full-time jobs growth rates. NSW and Queensland have seen the biggest surge in part-time job creation in the past four years (against fairly flat full-time job creation), while Victoria and WA have grown full- and part-time jobs at more consistent rates.

The two important parameters these charts fail to capture are hours worked and the pay rates at which workers are remunerated. On the former, WA workers put in 143 hours a month compared to an national average of 129, and average 'ordinary hours' weekly earnings for a full-time worker in WA is $1446 vs $1241 in Victoria.

That means that WA workers are putting in longer hours at higher rates than Victorians, and that in itself could be considered a 'Dutch disease' phenomenon – but it's not enough to cause Canberra policy makers, or the Gillard government, too many sleepless nights over 'ravaged' south-eastern states. They watch 'jobs' numbers more than 'overtime hours'.

That fact that NSW looks so different from both Victoria and WA probably has a lot more to do with mismanagement of the economy under the rapid-change leaderships of Morris Iemma, Nathan Rees and Kristina Keneally than any mining-induced slowdown.

The charts above seem to cut the economic pie at 90 degrees to the line sketched out by commentators, including myself, that have favoured the Dutch disease explanation in the past couple of years. We'll know more as clearer jobs trends emerge, and business failures should be watched carefully. But, for the time being, the federal government should probably be helping Barry O'Farrell deal with 'basket-case-state disease' rather than worrying about 'non-resources' states in general.


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