A quick refresher course in how to create jobs

Some of Australia’s best public policy minds meet in Brisbane this week for the Queensland Jobs Growth Summit.

The summit comes at a time when Queensland’s and Australia’s unemployment rate seems stuck at around 6%, about 2% above the lows achieved during the mining boom.

Politicians like to think they ‘create jobs’.

For instance, Queensland’s Minister for Training and Skills Yvette D’Ath claims there will be a ‘jobs jackpot’ with the ‘job-generating’ Queen’s Wharf development because it “will significantly stimulate the construction, tourism and hospitality sectors and open new markets and opportunities in this great state.”

Indeed, Premier Palaszczuk last week took her Working Queensland Cabinet Committee to Charters Towers to sniff out “job creating opportunities” that would merit taxpayer support.

This entrenched idea that governments create new jobs by stimulating demand using taxpayer funds is flawed. This is not to say that governments should not invest in worthwhile public infrastructure projects – but the benefits of those investments are higher incomes not more jobs.  

Here’s why.

First, all government expenditure is funded by the taxpayer. When a government invests in a new road, it means that the taxpayer has less money to spend on goods and services or save and invest, so fewer jobs are created in the private sector.

The second problem is that, outside of deep recessions, the labour force is always very close to being fully utilised. That can’t be right you say – Australia’s unemployment rate is 5.8%.  This brings us to the most important concept in the jobs debate and what should be the focus of the Queensland jobs summit - the ‘natural rate’ of unemployment.

The natural rate of unemployment is determined by the characteristics of the labour market – i.e. the Fair Work Act, state industrial relations regulations, how well we match jobs to job seekers, including how good our transport networks are and the costs of moving house.

Many of the labour market characteristics that determine the level of the natural rate of unemployment are “politician made”. Former Federal Treasury Secretary Ted Evans famously said that Australia’s unemployment rate is a social choice as opposed to an economic choice that we make through the political system. 

Both the Federal Treasury and the IMF recently estimated Australia’s natural rate of unemployment at 5.75%. The most recent ABS figure has Australia’s current trend rate of unemployment at 5.8%, so basically at its lowest possible level outside of a boom. Our economy is growing at the ‘new normal’ post mining-boom/population-boom trend of 2.75%. It is therefore highly likely that any additional ‘job creating’ infrastructure stimulus measures governments might undertake will be counterproductive in terms of jobs growth.