Where might the workers come from?

In  Parkinson's law of government and associated matters part 1, I referred to that excruciating press conference with General Campbell. Now the Australian Government has moved to split the border protection briefings into two, saying that it wants to protect the integrity of the Australian Defence Force. It should have thought that issue through from the beginning. Meantime, Mr Abbott finds himself in a degree of trouble over the refusal to allow an asylum seeker to stay with her premature baby.

Leaving these matters aside, in yesterday's post Why Australians aren't spending - the effects of growing casual and contract work on the consumption function I looked at the ways in which the growing proportion of casual and contract work affected the consumption function, making Australians less willing to spend.

Tonight's short post focuses on another aspect of the labour market. To set the scene, we need to distinguish first between actual and potential GDP. Actual GDP is what is produced, potential GDP is what might have been produced if the economy were operating at full capacity.

This spare capacity is quite important during upturns. As the economy expands, more labour is applied to existing capital stocks. Machines are worked harder, more people are employed, output expands and productivity increases. One of the interesting if depressing things flowing from this downturn is that there is some anecdotal evidence to suggest that in at least Europe and the US, potential GDP has actually declined because of lower previous capital investment as well as declines in work force capacities. This limits the scale and speed of recoveries compared with the past.

There is, I think, some evidence of this in Australia too. Outside mining, investment has been quite low. There has been something of an investment strike to go with the consumer strike, with business focused on cost cutting. Further, while the unemployment rate has stayed relatively stable, that has occurred because the participation rate (the proportion of working age people actually in the workforce) has declined.

There are a fair number of people around at the moment already engaged in or at least connected to the workforce who would like to work more hours. They aren't making enough to meet their needs. So as the general economy expands, they can either expand hours or enter jobs. Now we run up against basic constraints.

The first is the production constraint created by low investment. Firms will invest if they can see profits, but it will take time for capacity to expand. The second is people. If expansion is to continue, people will have to be drawn back into the workforce, and those people will have to come from three main groups:

• The young who are engaged in neither work nor study, who have been dropping out.
• Women, for the female participation rate has declined.
• Older men (50+) who are dropping out of the workforce at an increasing rate.

The difficulty is that none of the standard prescriptions that centre on mandated training actually see to work with any of these groups. A new way needs to be found.