Will Australia one day have too few workers? According to Reserve Bank of Australia Governor Glenn Stevens that is a very real possibility.
The media has been dominated in recent days and months by job losses from major Australian companies. Our car industry is ceasing production over the next few years, while Qantas is set to cut thousands of jobs. People have begun to ask: where will new jobs come from?
The answer is that we don’t really know but that isn’t necessarily a bad thing. Stevens said that the same issues were present during our last recession in the early 1990s. Then, as now, people wondered where future jobs would come from.
The result? Employment has increased by 4 million, the unemployment rate declined significantly and the participation rate climbed to new heights.
Our economy will lose some manufacturing jobs but we will gain jobs in mining and services, in health and professional services, and in industries that we do not currently understand or haven’t been invented yet.
It is incredibly unlikely that millions of Australians will be left without a job or that companies will let resources go to waste. An economy simply doesn’t work like that particularly when prices are free to adjust.
Job losses will be immensely painful for individuals and for families but those losses will be easily absorbed across the rest of the economy. Similarly the threat of international competition is problematic for specific businesses or for an industry but does not create a genuine threat for the entire economy.
First, a vast majority of Australia’s production is consumed by Australians and doesn’t face international competition.
Second, if Australian goods are uncompetitive en masse our currency will react via a severe depreciation that improves our competitiveness and helps the economy get back on track. That’s why we have a freely floating exchange rate.
But while Australia will continue to produce new jobs and the labour market will remain relatively tight, it is unlikely that the next twenty years will be as fruitful as those following our last recession.
Over the past two decades, Australia has experienced favourable demographics that have helped to boost growth. Until recently, Australia had a relatively young population, flush with working-age individuals. That combined with strong population growth and a once in a lifetime mining boom created an environment perfect for strong growth.
But in recent years, that process has begun to change and our demographics are beginning to work against the Australian economy. The first of the ‘Baby Boomer’ generation hit retirement age in 2011 and since then we have witnessed a sharp decline in the labour force participation rate.
This has some important implications for the labour market in the medium-term and suggests that the problem may not be so much that there isn’t enough jobs as it is that there won’t be enough workers.
“At present the number of new entrants to the labour force after finishing education each year exceeds the number retiring,” Stevens said. “Ten years from now those numbers could be roughly equal.”
Further out the Australian workforce will begin to contract. The ABS suggests that this could occur by around 2030 when there will be more Australians over the age of 65 than there are under the age of 15.
During this period there is likely to be a shortfall of labour supply and businesses will have more openings than there are available workers. The competition for labour could prove beneficial for Australian workers across a variety of industries.
But there will be a catch. The economy will be relying on increasingly few workers to generate higher amounts of output. If they don’t then the living standards of Australians will begin to decline even though working Australians are earning more.
Stevens says that the solution is higher productivity and he is completely correct. Higher productivity is the only way that we can continue to produce more with a declining workforce and the only way Australia can support the rising dependency of an ageing population.
A number of Australian companies are reporting job cuts but in the long-term this is unlikely to be a serious problem. Jobs in manufacturing will continue to decline but these will be more than offset by jobs in other sectors. The greater long-term issue is that eventually there may not be enough workers to fill the available jobs.