Structural problems require welfare, tax, regulatory and IR reform

Then there is industrial relations reform, another impediment to business, and especially to the health of small business. The recent fiasco about the necessary import of foreign workers must be sheeted home to political leaders, but there is a vast disconnect in the facts about Australia's labour market that has not even been acknowledged by Treasury or other officials. Official (ABS) estimates of the rate of unemployment below 5 per cent are contradicted by more accurate private sector statistics (produced by Roy Morgan Research) showing a rate above 8 per cent. Furthermore, Roy Morgan estimates a further 9 per cent of the workforce currently working part-time would prefer to work longer hours.

When one looks into the ABS unemployment data, it quickly becomes obvious it is deliberately biased downward by the definition that anyone who works one hour in a given period is classed as employed.

Forcing owners of small business to employ young people for a minimum term of three hours discourages the work ethic of youngsters as well as handicapping the businesses. More generally, many owners of small businesses say the difficulty of getting rid of unsatisfactory workers makes them slow to hire people, another systemic weakness of the current IR law.

The need for sizeable numbers of foreign workers is partly due to the size of the projects currently being planned. But the shortage of Australian workers is surely in part due to the fact that our various forms of welfare are sufficiently generous that most unemployed east-coast Australians just will not consider moving west or north to do jobs in hot, relatively uncivilised conditions -- relative to life in Brisbane, Sydney or Melbourne, or glorious east coast towns.

Am I right about this, Dr Parkinson? It would be highly instructive to have your view on this and other structural weaknesses of Australia's current economic policy settings.

The immediate problem, of course, is to maximise economic performance within the constraints of current policy settings. The international news in the past month has all been negative. The eurozone crisis keeps getting worse, with Spanish bonds at an unsustainable 6.7 per cent and Spain's third-largest bank in need of bailing out. US jobs growth has been disappointing and points to a slower-than-expected recovery in the world's greatest economy.

China's slowdown is acknowledged by the Reserve Bank as being more serious than previously thought, and quite possibly will be sufficiently severe to cause mining projects to be delayed or cancelled. India has just announced its slowest growth for a decade, and even Brazil (another "miracle economy") is in the doldrums.

Commodity prices have fallen substantially, although the weekend news included a sharp hike in the price of gold. This is part of a further flight to defensive assets, including German, Japanese, US and even Australian bonds.

Domestically, many non-mining industries are clearly struggling, the labour market is nowhere near as strong as official numbers imply, and goods and services inflation is under control. We are seeing examples of large, indeed outrageous, wage demands, a trend that will be watched closely by the Reserve. Share prices have been falling sharply, and house prices also.

Australia's structural problems require welfare, tax, regulatory and IR reform. Further rate cuts are appropriate now, but there is a risk of putting the monetary policy cart before the structural reform horse. I fear it is up to Glenn Stevens and his board to provide easier monetary policy while politicians fight about who can best run the economy more generally.

Roll on the next election, and we must hope for a government seriously interested in economic reform. There is a mighty job ahead to be done.