Wednesday, July 27, 2011

Strange Salary Surveys

So, here we go again:

"ALMOST two-thirds of large companies are considering hiring staff from overseas to overcome skills shortages, according to a recent national salary survey by the Australian Institute of Management." (See here)

It may be just a detail, but doesn't it sound unusual to the reader that a salary survey should reveal hiring intentions, discriminated by origin? More on this at the end.

Anyway, the idea is that Australian labour demand exceeds supply for construction and engineering, sales and marketing and manufacturing/trades, nurses, childcare workers, cooks, hairdressers and butchers, at the professional and technical level.

If demand exceeds supply, one is told, prices should rise as a matter of course, until markets clear. In the labour market, employers compete with each other, via higher wages/salaries, to attract scarce workers. That's the way of the market, isn't it?

Not in the Australian labour market, it seems, according to Mr. Garry Brack, CEO of the Australian Federation of Employers and Industries (formerly known by the more apt name of Employers First):

" 'As the resources sector continued to expand, the construction industry in particular would suffer increased difficulties in filling jobs because of the higher wages offered by mining companies', he said".

That is, the construction industry cannot compete against the higher wages offered by the mining industry, and so wages cannot go up: bring up extra workers. Isn't that a curious statement for a free-market devotee?

First a little detour: how many additional workers will the mining industry require?

"Wilhelm Harnisch, the chief executive of Master Builders Australia, agreed [my comment: with Mr. Brack], calculating that in the next five to 10 years, the mining sector would recruit an extra 60,000 to 80,000 workers, and those from the construction industry were a natural fit."

In other words: the mining industry would require between 6,000 and 16,000 additional workers a year to fill new positions, plus an unspecified number to replace retiring baby boomers, as Mr. Harnisch mentions somewhere else.

The astute reader might have a question, partially answered by Mr. Harnisch: what kind of impact that labour demand would have on the building industry?

" 'With a building workforce of a million, it will certainly hit us hard,' Mr Harnisch said. 'It will not be as catastrophic as some are saying, but [it] is a concern'."

I don't know how hard it would hit them or how much of a concern it should be, as Mr. Harnisch seems to be talking about 0.6% to 1.6% of the building industry's workforce. But I certainly agree that it shouldn't be much of a catastrophe at all.

Now, back to the main theme: with an underutilization rate of 12% (as of May 2011, according to ABS 6202.0), shouldn't employers find more profitable to increase labour supply, through traineeships and apprenticeships?

This is what Mr. Malcolm Tulloch, state secretary of the CFMEU, believes:

" 'Companies don't commit to providing resources to train Australian school leavers,' he said. 'There has been a neglect in this [area] for well over a decade and now Australia is feeling the pinch'."

But, the reader might object, a trade unionist would say that, wouldn't he?

And the reader would be right, of course. However, interestingly, in this Mr. Harnisch agrees with Mr. Tulloch:

"Of equal concern was the structural shortage within the industry, he [my comment: Mr. Harnisch] said, as (...) the dropout rate among apprentices continues to be as high as 50%.
"Mr Harnisch said low starting wages, unmet expectations of school leavers and poor training were behind the dropout rate."
[Emphasis added]

So, let's gather the scattered pieces:
  1. Demand exceeds supply for construction and engineering.
  2. Building industry cannot compete with mining on wages.
  3. Building industry concerned about labour shortage.
But apprentice and trainee wages didn't increase... Is it me or something isn't right?

And there you have it: the Australian labour market does not clear by prices/wages rising until scarce supply increases to match an elevated but decreasing demand.

The Australian labour market, it seems, clears by supply matching demand, while prices/wages remain low: supply increases until it matches demand. And the additional supply does not come from within Australia.

This explains why a salary survey shows that Australian employers intend to hire overseas workers.

Update:

30-07-11. The lines written in blue were suggested by reader K-PUT and greatly improve the understanding of the text. Thanks K-PUT!

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