Tag: The Conversation

Flexible work: how the gig economy benefits some more than others

From The Conversation.

Self-employment is on the rise in the UK. The latest government statistics put it at 4.79m, which represents 15% of all people in work. And, in recognition of this changing nature of employment, the prime minister has commissioned a review of workers’ rights. One of its chief tasks is to address concerns that millions are stuck in insecure and stressful work.

Flexible working and self-employment are inevitable solutions to the growing “gig economy”, in order to best manage projects and fluctuating work flows. A flexible lifestyle may be desirable for the highly paid IT consultant. But for the call centre worker on a zero-hours contract, it means a pension, mortgage and income protection are all illusory.

In Tim Ferriss’ book The 4-Hour Work Week, creative freelancers live the dream. They work anywhere, anytime, provided they deliver agreed outputs. And, as social scientist Richard Florida suggests in his view of the “Creative Class”, high-tech workers, artists and musicians typically gravitate to dynamic and open urban regions, with good schools, sporting and shopping facilities. These high-earning creative types then generate jobs for contingent workers whose rights must be protected from abuse. The challenge for urban planners is to attract such talent at both ends of the flexible working spectrum.

Creative class chill. shutterstock.com

Flexibility in self-employment, however, presents a quite different scenario for those with zero-hours contracts. These are increasingly common employment contracts where employers do not guarantee the individual any work and the individual is not obliged to accept any work offered. They are a hot topic for debate, with significant polarisation of views.

The recent investigation into Sports Direct’s use of zero-hours contracts showed them in a particularly negative light and there is talk of the company moving to fixed hours. New Zealand banned these types of contracts in April. And an employment tribunal in London recently ruled that Uber drivers should be classed as workers, rather than self-employed. Yet for some – students, for example – a zero-hours contract is better than no contract at all.

Despite the latest outrages over zero-hours contracts, theories of workplace flexibility have been around for many years. The academic John Atkinson put forward a well-known model for the “flexible firm” in 1984. It advocated that companies retain a core group of workers and use a flexible workforce that is determined by and responsive to business demand.

Julie Davies

The model also distinguishes between functional and numerical flexibility. This has long been the operating model in the entertainment industry where the supply of staff is driven by business demand. It is a continuing theme in discussions about employment trends in the fourth industrial revolution.

A business staple

The high-profile coverage of zero-hours contracts might give the impression that they are one of the dominant forms of employment contract in the UK. But, government statistics show that 903,000 people were employed on them during April to June 2016 – this is just 2.9% of all people in employment. They are most likely to be young, part-time, women, or in full-time education. Typically they work 25-hours per week and a third say they would prefer more hours in their current jobs.

Zero-hours contracts, however, are actually less prevalent than other forms of flexible and non-standard employment such as shift work, annualised hours and temporary contracts. And they are only slightly more common than agency work.

In effect, they can be seen as equivalent to the long-established position of a casual contract, something which has been the staple of the business model in the leisure, entertainment and culture industry for years. When work is seasonal, margins are narrow and covering the minimum wage is a challenge for employers, many of whom simply cannot afford surplus staff.

Juggling act

One sector that experiences significant fluctuation in demand is the entertainment business. Blackpool, a seaside resort on the north-west English coast, whose main industry is tourism, is a good example of how difficult it is to get this right. There is a seasonal and school holiday cycle, which introduces one level of fluctuation. Then there are other unpredictable factors that affects the need for staff.

Unpredictable weather in Blackpool. jremes84 / Shutterstock.com

The famously variable British weather affects the relative popularity of indoor and outdoor attractions. And the city is host to a number of events, ranging from major darts competitions, musical acts and theatre productions, to small weddings and functions. The skills required varies significantly too. Whether it’s the annual British Homing Pigeon World Show (January), the world ballroom dancing championships (May), or the annual Rebellion punk reunion festival (August). Flexibility is a daily challenge for many businesses in similar situations.

So, in a world of increasing flexibility and insecurity, we will watch with interest to see the outcome of the government’s review of modern employment. Matthew Taylor who is running it has a wide remit that includes security, pay and rights; progression and training; finding the appropriate balance of rights and responsibilities for new models; representation; opportunities for under-represented groups; new business models. Taylor has said that “most part-time workers, and even most zero-hours workers, say they have chosen to work this way”. Let’s see whether the evidence really bears this out.

Authors: Julie Davies, HR Subject Group Leader, University of Huddersfield; Mark Horan, Senior Lecturer Human Resource Management, University of Huddersfield

Should banks play a role in teaching kids about how to manage money effectively?

From The Conversation.

The Commonwealth Bank has long been active in the space of financial literacy – that is, educating young people about the importance of managing money effectively.

Just recently it announced an overhaul to its “Start Smart” financial literacy programs, which aim to teach children about money.

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The program reportedly includes showing children that “a man is not a plan” by discussing financial inequality and offering positive representations of women managing money.

The catch phrase seems progressive but is loaded with assumptions about women, men, their relationships, and their financial choices. This downplays the economic and social reasons why women’s financial opportunities and experiences tend to differ from men’s.

Pay gap in the workplace

It’s a bold ambition when you consider the broader context. According to the Workplace Gender Equality Agency, the highest gender pay gap actually occurs in the financial and insurance services industry, where senior management positions continue to be male dominated and the difference between women’s and men’s earnings is 30.2%.

Further, when comparing Indigenous females to non-Indigenous male workers with median incomes, the reported superannuation gap is 39%.

Such programs, like the one Commonwealth Bank is offering, are based on the assumption that a combination of guest speakers visiting schools and downloadable resources hold the key to improving financial literacy teaching and learning.

Why are banks getting involved?

The federal government has invested millions of dollars and entrusted the Australian Securities and Investments Commission (ASIC) to lead initiatives intended to help children understand finance.

We have a National Consumer and Financial Literacy Framework, which foreshadowed the development of the Australian Curriculum.

We also have consecutive National Financial Literacy Strategies led by ASIC, that are intended to drive improvements in the way financial literacy is taught and learned in schools.

Consumer and financial literacy has an elevated status across the Australian curriculum, signalling opportunities for interdisciplinary approaches, particularly in mathematics and economics and business.

Financial literacy projects are big business for consultancies. And for banks, manoeuvring under the guises of corporate social responsibility serves to position brands favourably.

The ANZ bank, for example, conducts its Survey of Adult Financial Literacy every three years. This is considered the leading measure of adult financial literacy in Australia.

And the National Australia Bank (NAB) recently released research claiming to measure financial resilience – weaving socioeconomics and psychology.

These strategies are important to them since their houses are not in order. The recent parliamentary inquiry confirmed that the big four banks are troubled by bad behaviour and more effective regulation is needed.

How do children learn about money management?

Children tend to learn about money within their homes in different ways – and those teaching around this area need to be sensitively attuned to this learning.

Children become socialised and oriented to consumer, economic and financial issues through a series of conversations, observations, and experiences – consciously and unconsciously.

Even primary-aged students make surprising, insightful comments that show mature understandings about earning, spending, saving, and sharing money. This is particularly true in disadvantaged communities.

How is financial literacy taught?

Research into financial literacy education in schools – how it is taught and learned – is an emerging field, typically characterised by program trials and evaluations.

Program evaluations tell short term success stories – the rubber really hits the road when students need to apply their learning in the real world down the track.

In 2012, the OECD and Programme for International Student Assessment (PISA) included a Financial Literacy Assessment for 15-year-old students. Australia ranked fifth out of the 18 participating countries and economies.

The findings showed that students in city schools achieved higher scores than students in provincial and remote schools; and non-Indigenous students significantly outperformed their Indigenous counterparts.

Teaching kids about managing money is most effective when classroom tasks are tailored to meet students’ family backgrounds and interests, and occurs at the point of need.

Students enjoy financial problem solving and decision-making experiences that captivate their imagination, challenge them to think, and prepare them for the real world.

Devising financial literacy lessons that create connections between students’ financial literacy learning at home and at school is hard to do without really knowing the local context and students.

Because Australian classrooms are diverse, this stuff rarely comes together “off the shelf”.

Not reaching the most vulnerable communities

The uncomfortable truth is that workshops by so-called finance literacy experts and downloadable teaching and learning resources may not reach and resonate with Australia’s most vulnerable communities.

Planning for financial literacy learning requires an understanding of the school community, interdisciplinary navigation of the Australian Curriculum, and skilful inquiry approaches.

This is what teachers are trained to do, although they need and crave quality professional learning to hone their craft.

This is where funding and support are needed.

The Australian Qualifications Framework and Professional Standards for Teachers mean teachers have never been more scrutinised and accountable.

When it comes to meeting students’ academic, social and emotional needs on any issue, let’s invest in schools and trust teachers to do what they’re qualified to do.

Authors: Carly Sawatzki, Lecturer, Monash University; Levon Ellen Blue, Research fellow, Griffith University

ASIC report highlights a deep culture problem in Australia’s banks

From The Conversation.

In it’s latest report, the Australian Securities & Investments Commission (ASIC) found the big four banks sold products to some customers through their adviser network, with a fee for ongoing advice, but the advice was never given.

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None of this came to light until the banks were asked by ASIC to look at adviser compensation, following the introduction of the Future of Financial Advice (FOFA) legislation in 2013.

No wonder the banks were wary of their practices being investigated. Not only has it come to light that many customers (176,000 at the last count) were being charged for services they were not receiving but, in many cases, the banks didn’t have the data they needed to find out whether customers had been dudded or not.

And ASIC is pretty sure why such systemic issues emerge at regular intervals, stating:

Cultural factors in the banking and financial services institutions covered by this report may have contributed to the systemic failures we observed.

The ASIC report details the reason for the cultural failings it observed in the wealth management businesses of the major banks:

Some advice licensees prioritised advice revenue and fee generation over ensuring that they delivered the required services.

ASIC found that the IT systems in wealth management in the major banks were stone-aged at best. The banks appear to have no idea what they don’t know, but are all working to identify how many more customers need to be compensated.

ASIC also found that some banks failed to keep complete or accurate records to enable compliance to be analysed. And in some cases, authorised representatives had taken customers’ files with them when they left the firms, making it impossible to check whether or not advice was given.

It appears that every time a question is asked of the big banks, another example of bad behaviour is unearthed.

Australia’s big four banks (CEOs pictured) are facing further criticism from regulatory bodies. Lukas Coch/AAP

In the recent questioning of bank CEOs by the House Economics Committee, questions were raised with all CEOs about systemic issues. The answers were generally evasive and short on specifics.

For example, when talking about a different but related, financial planning scandal, Andrew Thorburn, NAB CEO, said:

“We did a review and we had an independent party come and do that review with us, and we concluded and we stand by that, that it was not a systemic issue.”

What Mr Thorburn and other CEOs neglected to mention was that the banks had, as revealed in ASIC’s report, all already been in the middle of deep discussions about so-called “fee-for-services failures” . The regulator wrote:

Of particular concern is that many of the banking and financial services institutions covered by this review publicly state that their core values include being customer focused, “doing what is right” for customers, and acting with integrity. We encourage the institutions reviewed in this report to consider how their culture may have supported these systemic failures, and why their stated commitment to providing excellent service to customers is not translating into good outcomes for customers in the many instances we identified in this report.

At long last, ASIC has highlighted cultural issues across the industry that the boards and management of the largest banks have long refused to acknowledge.

The regulator has done its job and found compelling evidence that the culture of the banks is rotten.

It’s over to the politicians now.

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

New APRA guidance on lending will hurt home owners when it should be the banks

From The Conversation.

The Australian Prudential Regulation Authority (APRA) has moved away from its non-prescriptive “principles based” regulatory approach to a one size fits all explicit guidance but it doesn’t appear to be encouraging lenders to be more prudent.

The housing market may be getting away from APRA and the Reserve Bank of Australia (RBA). In late 2015, both regulators voiced concerns about the “horribly low” standards of the mortgage lending sector and the risks to financial stability. Even bankers are getting jittery.

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There has also been well-publicised problems with brokers originating dodgy mortgages that lenders have not picked up. In its existing guidance (which has not been changed in the latest version), APRA requires lenders to have all sorts of procedures to catch dodgy mortgage applications from brokers including procedures to verify the accuracy and completeness of provided information.

But APRA has not named and shamed the lenders who failed to catch dodgy mortgage applications, not imposed capital sanctions or reprimanded directors and management. It hasn’t required that lenders change their broker process.

What APRA is asking is that banks slug first time buyers even more. In the new rules, home buyers are now required to prove they can service a 7% mortgage interest rate on a loan to value ratio of less than 90% with less income being taken into account. This is on top of trying to save a deposit that is disappearing every day as house prices boom.

It is going to take a lot more than forgoing a few smashed avocado toasts to make up for the additional burden imposed by APRA.

There are a few important questions raised by APRA’s sudden conversion to pragmatic rather than purely principled regulation.

First, the numbers. Where did the 7% come from? APRA doesn’t disclose this, but in an era of almost zero interest rates, it’s big. And maybe in time, when the RBA announces its changes to interest rates, the 7% may be changed in-line and economists will begin to bet on whether it will go to 6.5% or 7.5%.

In looking at a borrower’s income, APRA notes that it is “prudent practice is to apply discounts of at least 20% on most types of non-salary income”. No explanation also on why this particular percent. It’s also not specific on what “most” means.

If banks are indeed lending imprudently surely the banks themselves should suffer. First by naming and shaming, then if necessary, requiring additional capital buffers, thus driving down dividends – a real market based solution.

APRA is changing the way it regulates

Throughout the turmoil of the global financial crisis and the regulatory mayhem that followed, APRA held fast to its “principles based” approach to regulation:

To be principles-based is to give emphasis to the achievement of sound prudential outcomes in setting regulatory requirements and expectations, without necessarily seeking to specify or prescribe the exact manner in which those outcomes must be achieved

In short, APRA lays out the high-level principles that it will use to supervise the banks and insurance companies that is responsible for, and then will check that those principles are being adhered to. It did not believe in a “one size fits all” approach.

But this week, there appears to have been a back-flip. In a consultation paper for an update to APRA’s guidance on mortgage lending, the regulator has been very specific indeed. It notes:

“Prudent serviceability policies should incorporate a minimum floor assessment interest rate of at least seven per cent.”

This very specific guidance replaces an earlier guidance that was more general. From a regulatory perspective, an important question is why abandon principles-based regulation? If it hasn’t worked in the past, then a rethink of the role and approach of prudential regulation is needed.

This has happened overseas, where the UK Financial Conduct Authority, while retaining 11 principles that firms should adhere to, has become much more intrusive. Unlike our regulators, the authority has even going so far as to impose massive fines for misconduct. It states:

“We also adopt a markets-focused approach to regulation, both in our work as a competition regulator and more broadly to deliver regulation that works with the market to improve consumer outcomes. Interventions at the market level are an effective and powerful way of tackling and mitigating problems across a large number of firms, which in turn benefits a large number of consumers.”

Rather than APRA slipping in such a major change like this latest one into a consultation paper, it might be appropriate to have a transparent debate about such a potentially significant change in prudential regulation in Australia.

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

 

Will Germany flout Europe’s bail-in rules if Deutsche Bank needs rescuing?

From The UK Conversation.

Will Deutsche Bank need rescuing? It’s a question that is being asked as a big beast of global banking gears up to announce its third quarter results on October 27. With losses expected to be north of €600m (£534m), the backdrop is dismal: Deutsche Bank is in talks with the US Department of Justice (DoJ) about a massive fine following an investigation into mis-selling toxic assets by the bank’s US division in the run up to the financial crisis of 2007-08.

The DoJ requested US$14 billion (£11.4 billion) from Deutsche Bank to settle the case last month. The final settlement, which is due any time, may come in somewhere around half that. But that would still be more than the €5.5 billion Deutsche Bank has set aside as a litigation reserve, and there are further losses still expected.

With shares down by close to half since the start of the year, albeit recovered a bit recently, there have been reports that the German government is planning a rescue by buying a stake if the DoJ fine is too onerous. The government denied this, but it raised an interesting question about what will happen if Deutsche Bank does fail.

Under EU rules that came into effect in January, there can be no government bailouts of banks until there has been a bail-in – meaning other creditors to the bank such as bondholders and large depositors taking a share of the pain. The rules are highly controversial and I suspect the Germans will not want to impose them. If so, it will set the scene for an almighty row about double standards.

Bailouts and bail-ins

The new bail-in rules, known as the Bank Recovery and Resolution Directive, are a response to the 2007-08 banking collapses. They were inspired by the UK’s Banking Act 2009, which was passed in the wake of the bailouts of the likes of RBS and Northern Rock.

Britain had previously been shamefully lacking in legislation to cope with bank insolvencies. The new act gave the Bank of England draconian powers to cope with future crises, including the right to modify the amounts owed to creditors on a struggling bank’s balance sheet. This was designed to avoid the need to inject public money in future by making others foot the bill instead.

Who rescues who? Lisa S.

Under the EU’s 2014 directive, there can be no government bailout of a bank until at least 8% of its liabilities have been absorbed. This is a complete break from the past. It means that if a bank becomes insolvent and can’t raise fresh funds from its shareholders, certain liabilities may be reduced by the management in consultation with the country’s financial authority.

One of the main ways in which banks and other businesses raise capital is to issue bonds. Saving vehicles such as pension funds buy these in the expectation they will get the full amount back with interest at the maturity date. But not any more. Now even in a better scenario, the right of these most cautious of savers to be repaid might merely be downgraded to rank the same as all the ordinary creditors waiting to get their money back. The only bank liabilities that cannot now be modified are customer deposits up to roughly £90,000 and a few untouchable exceptions such as employee salaries.

Double standards?

Bailouts essentially protect bondholders to the detriment of the taxpayer, whereas bail-ins do the opposite. Before the new rules were introduced, several test cases showed how divisive bail-ins can be. Cypriot depositors were furious to lose savings en masse when Brussels insisted on a bail-in as a condition of bailing out Cyprus in 2013. There was similar uproar and threats of lawsuits when bondholders of Novo Banco of Portugal had their assets written down last year.

Italians do it different. Niyazz

And while it might make sense from a northern European legal perspective that taxpayer interests should prevail over bondholders, not all countries see it that way. In my native Italy, for instance, public saving has been heralded as a fundamental value for decades. Italy’s banking association questioned whether the EU bail-in mechanism is consistent with the country’s constitution.

There is also the feeling in southern Europe that there are double standards at play with the new rules. Where German and British banks needed bailed out after 2007-08, goes the narrative, the likes of the Italian banks weathered the crisis. They caught a different virus from 2011 onwards after being forced to buy toxic sovereign bonds issued by their governments to stay solvent during the eurozone crisis.

The sense is that British and German politicians and their respective bankers cleaned their respective “houses” with bailouts and promoted the bail-in once the job was done, thinking their banks wouldn’t have to deal with it.

Yet as Deutsche Bank is finding out, you never know what is around the corner. If the worst comes to the worst, I doubt the Germans will follow these Anglo-Saxon rules. It is more likely that there will be a German exception.

If so, it will be a classic example of how hard it is to make rules for the whole of the EU. I can hear the objections from the south of Europe already. Had it been an Italian or Spanish bank, they will say, it would have sparked the traditional tantrum against the peculiar Mediterranean way of interpreting rules and ultimately circumventing them. Unfortunately it will be hard not to agree with them.

Author: Pierre Sinclair de Gioia Carabellese, Associate Professor of Business Law, Heriot-Watt University

Piketty challenges us to consider if we need to rein in wealth inequality

From The Conversation.

French economist Thomas Piketty, currently in Australia, is known for his focus in on the inequality of wealth. His book on the topic has sold two and a half million copies worldwide, which is quite amazing for a book full of economic statistics and graphs.

Piketty concludes, optimistically, by saying that we don’t have to accept the inevitability of wealth inequality. If there were the political will we could, as a society, reduce inequality. This includes his argument for an inheritance tax.

Piketty spends less time explaining why excessive wealth inequality matters. This requires more attention because we cannot presume that there is sufficiently widespread public knowledge about the importance of the issue.

Some people evidently think wealth inequality is a good thing, because they believe it creates stronger economic incentives. It is that sort of reasoning that leads them to favour the Turnbull government’s proposed cuts to company tax rates, even though it would create yet more economic inequalities.

Meanwhile the International Monetary Fund has published research showing that more equality is also conducive to superior macroeconomic performance. Coming from such a usually conservative source, that should shake the belief that inequality is good for the economy.

There is also lots of other social science research showing the social problems that result from widening inequality. This includes the important research work reported by Wilkinson and Pickett in their book The Spirit Level, which explains “why more equal societies almost always do better”. It shows that more equal societies are generally happier and have a lower incidence of social problems, such as physical and mental illness, obesity, crime and violence and low levels of educational attainment. Other studies show that more equality is conducive to more sustainable and peaceful social arrangements.

More equal societies have healthier democracies too, as US economist Joseph Stiglitz has argued, because there is less tendency for wealthy elites to corrupt political institutions.

Why Australia should care

These concerns are currently of great significance for Australia. And we now have the data necessary to understand the dimensions of the challenge.

A new Australian report on wealth inequality by the Evatt Foundation, drawing on the best data available, shows Australia is not the egalitarian nation that many people think it is. Rather, in terms of wealth inequalities, we’re mid-ranking on the international league table. And we’re becoming more unequal.

Currently, the wealthiest 10% of Australian households have approximately half of the total private wealth in the country. The top 1% of households alone have 15% of the total wealth.

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At the other end of the spectrum, 40% of households have effectively no wealth. Most of them have modest current incomes, whether from wages or welfare, and they spend it all (and sometimes more, going into debt). Nothing is accumulated over time. Struggling to pay for housing is a big factor keeping them out of the wealth accumulation process enjoyed by those who have more substantial wealth.

Two wealth gaps are widening. One is between the top 10% of Australian households and the next 40% of “middle Australia”. The other is between those two groups and the bottom 40% who are effectively “out of the loop,” as far as sharing in economic prosperity.

These are the hallmarks of an unequal society, not an egalitarian society, as my colleague Chris Sheil and I have argued previously.

I’ve also put the case for inheritance taxation as one of the policy measures that could be considered if we’re serious about reining in inequalities. Piketty’s presence here in Australia makes it timely to reconsider these issues and kickstart some policy action.

Slowing down the intergenerational transmission of inequality would be a good start to reversing the growing inequalities with which Piketty and the new Evatt Foundation report are concerned. That means having an inheritance tax.

Most other developed countries have taxes on inherited wealth. Australia used to have inheritance taxation too, until Queensland Premier Joh Bjelke-Petersen initiated the collapse of those arrangements in the late 1970s.

The case for an inheritance tax is well established. The last major review of the Australian tax system, chaired by former Treasury head Ken Henry, supported it in principle.

The exact form of the tax needs careful consideration. Should it be on the estate itself, or on the windfall incomes that it provides for the participants? What minimum wealth threshold should be set? And, above that threshold, what rate or rates of taxation should apply? Other countries vary in their treatment of these issues, so it is important that we develop a system that is appropriate for local circumstances.

Of course, any such tax would be opposed by the wealthy elite. You wouldn’t expect otherwise. But if the tax threshold were set at, say A$2 million, only a tiny proportion of households would be affected. And the rest of us would benefit directly from the extra revenues, which might then be used to pay for universal free tertiary education, for example, or a major increase in public housing.

We would also benefit indirectly from living in a more cohesive society with less of those problems that the social science researchers have shown to be correlated with extreme inequalities.

Author: Frank Stilwell, Emeritus Professor, Department of Political Economy, University of Sydney

Morrison targets state planning regulations as problem for housing affordability

From The Conversation.

The government will push states to remove unnecessary residential land use planning regulations that are impeding the supply of housing, Treasurer Scott Morrison will say in a major speech acknowledging the pressing issue of housing affordability.

Addressing the Urban Development Institute of Australia on Monday Morrison will say that improving affordability “right across the housing spectrum must … be a key policy goal for governments at all levels”.

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Developing a sensible policy requires separation of the forces that have caused prices to increase, he will argue. “Of all the determinants of house prices in Australia, whether cyclical or structural, the most important factor behind rising prices has been the long running impediments to the supply side of the market.

“This not only relates to the volume of supply but also the responsiveness, flexibility, diversity and composition of that supply, as housing needs becomes more complex.

“A period of weak residential construction in the mid to late 2000s left many markets undersupplied, especially in NSW.”

While a large volume of construction is now coming through and much more is anticipated, not all is in the right place or of the right type, Morrison will say.

“Whilst Sydney, Melbourne and Brisbane have record supply, most of this is in the inner city apartment market … Unfortunately, we are still seeing a muted supply of detached housing in other parts of our cities.”

Morrison will list supply side constraints as including “complex land planning and development regulation; insufficient land release; the planning, cost and availability of infrastructure provision; transaction and betterment taxes; public attitudes towards urban infill; and, for Sydney in particular, physical geographic constraints.”

State governments could do a lot to improve planning processes and the provision of infrastructure, he will say.

He will instance developers telling Treasury about increasing development times including one case on Melbourne’s outskirts where it took 12 years for a project to go from land acquisition to a new suburb.

“This is how long it took for the land to be rezoned and for the developer to meet the onerous hurdles required in construction.

“While some construction standards are important for maintaining the safety and quality of newly constructed dwellings, some of these hurdles sounded almost farcical. For example the Melbourne developer wasn’t permitted to design the shopping precinct of the new suburb they had built because the Victorian government required that their own architects did the work (and at their own pace).

“So even though there have been some signs of a supply response in recent years, particularly in inner-city apartments, more needs to be done to ensure that supply increases more broadly – both in terms of location and type of dwelling – and that the roadblocks to this increased supply are removed.”

This will be a focus of Morrison’s discussions at the next Council on Federal Financial Relations in early December.

The proportion of Australian households owning or paying off their home has fallen from 71% to 67% over the past 20 years.

The proportion of home owners aged over 45 with a mortgage has increased significantly in that time.

“It’s taking longer for people to own their own home and be free of their mortgage. This trend has the potential to undermine retirement incomes, with superannuation cashed in on retirement to clear the mortgage or having mortgage costs eating into retirement income or undermining their ability to save more as they approach retirement,” Morrison will say. Housing un-affordabilty thus has a “cascading impact”.

Morrison will point to the “real pinch point” – being able to get into the market in the first place.

“As house prices have risen relative to incomes, this is making it more difficult for first home buyers to keep up and save an adequate deposit,” he will say.

“The proportion of home loans that are being provided to first home buyers was 13.4% in August 2016, the lowest point since February 2004 and well below its long term average of 19.4%.

“In aggregate, across the country, a 20% deposit on the nationwide median home loan is more than 100% of annual household disposable income. This is slightly above the decade average, but well above the 60% levels that were the norm prior to 2000,” Morrison will say.

“The market is getting away from people. No matter how hard they work or save or even earn, they are finding it harder and harder to get into the market.”

But “the key to addressing housing affordability is not to crash the housing market. Rather the objective is to have housing policies that mitigate the artificial inflation of asset prices, ensure that supply is not restricted from responding to genuine demand and that enable homebuyers, through their own efforts, to make more rapid progress to being able to enter the market”.

On the issue of the looming glut in inner city apartments, Morrison will say that “notwithstanding some regional risks, the current construction cycle would likely have to run-up faster and continue for longer before over-supply became a nationwide macroeconomic risk.

“That is not to say that the size and length of the current construction boom won’t warrant attention in the coming months and years. Policy makers are very cognisant of the risks and have been doing something about it.”

Australia is at risk of losing migrants who are vital to the health of our economy

From The Conversation.

Australia’s immigration system is at risk of losing public confidence, undermining its long running success. The government needs to make policy changes to put migrant workers and employers back on equal footing.

The successful “Brexit” campaign to leave the European Union illustrates the consequences of failing to properly manage public perception of immigration. Changes to the United Kingdom’s immigration policy were producing economic benefits and helping to plug gaps in the UK labour market. However, opponents successfully blamed the EU’s free movement of labour for increased immigration and various social and economic problems.

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Australia’s situation is different, but there is weak regulation of the employers who hire migrant workers, especially temporary visa holders who are often susceptible to being mistreated. This is serving to marginalise migrants in the labour market and broader society.

Large intakes of economic immigrants have not led to major political upheaval in Australia. Aside from occasional spikes in support for Pauline Hanson’s One Nation, anti-immigration parties have failed to establish ongoing influence. Labor and the Coalition have supported expansive economic immigration policies for much of the post-war era.

The impact of economic immigration on Australia’s population, economy, and labour market is virtually unmatched. Since 1945, immigrants and their immediate descendants have accounted for over half of the nation’s population growth.

More than one in four workers in Australia were born in another country. The foreign-born population as a share of total population is higher in Australia than in any other OECD country, except for Luxembourg and Switzerland.

Australia’s immigration policies have changed significantly in recent years. They have shifted increasingly towards temporary immigration, focused on skilled, working holiday and international student visas.

While this marks a departure from Australia’s legacy of encouraging immigrants to settle on a permanent basis, benefits of these changes are evident.

Economic immigrants have offset an ageing population, improved labour productivity, helped businesses to source skills that are difficult to find at short notice and addressed the needs of regional areas and industries.Unemployment among skilled immigrants is negligible because they tend to be employed in high-income occupations and contribute more to government revenue through taxation than they take through public services and benefits.

Just as a steady inflow of immigrants has eased Australia’s shift from a manufacturing to a services economy, they will play an important role in helping our businesses to innovate in the face of intensified global competition and technological change.

However reforms are needed to maintain public support for sustained immigration intakes. Most importantly, widespread underpayment and mistreatment of working holidaymakers and international students in the workplace must be addressed urgently.

Such issues have been exposed internationally. They may negatively impact Australia’s competitive standing in industries such as education and horticulture that rely heavily on temporary migrant workers.

Recent media reports, government inquiries and academic studies show that mistreatment of temporary migrant workers is not limited to 7-Eleven. Policy changes particularly through strong enforcement of regulations are needed to restore level playing fields for business and the workforce.

Some visa arrangements can cause temporary migrant workers to become dependent on their employers. For example, international students are required to work no more than 40 hours per fortnight.

A small transgression exposes international students to potential visa cancellation and removal. Their resident rights, enrolment in education, and employment are then dependent on employers not sharing any breaches of their visa conditions with the Department of Immigration and Border Protection. Unless these and other arrangements the create dependence on employers are fixed, temporary migrants will remain fearful of seeking redress.

Weak enforcement of employment laws fails to deter unscrupulous employers from underpaying and mistreating temporary migrants and puts honest employers at a competitive disadvantage.

The Fair Work Ombudsman has only 250 inspectors for 2.1 million workplaces and 11.6 million workers. It needs more resources to ensure that our employment laws are enforced in industries with large numbers of temporary migrant workers such as food services, hospitality, retail, and horticulture.

Allocation of temporary skilled 457 visas must reflect genuine skills shortages rather than recruitment problemssome employers experience, which are often the result of the low wages and poor conditions they offer to prospective employees.

The policies governing 457 visas must take greater account of objective longer-term labour market needs. This includes providing opportunities for decent employment and attractive career paths for workers, rather than serving subjective short-term employer interests.

Economic immigration in Australia has been managed remarkably successfully. But for the good of the country we must address current challenges that have the potential to undermine public confidence in existing immigration policies.

Authors: Chris F. Wright, Postdoctoral Research Fellow, University of Sydney;  Stephen Clibbor, Associate Lecturer, The University of Sydney Business School, University of Sydney

This is an edited extract of a new report published by the Lowy Institute for International Policy.

Collapse of Australian car manufacturing will harm R&D in other sectors: study

From The Conversation.

By the end of next year, car manufacturers Mitsubishi, Ford, Holden and Toyota will all have largely exited Australian manufacturing, taking their assembly lines overseas where the cost of production is significantly lower. This will create a vacuum for 260 businesses that supply accessories and components to the Australian automotive sector.

But beyond the direct impact to suppliers, our research shows there will be a significant impact on output and tens of thousands of job losses in downstream and upstream industries, and in particular, the Professional, Scientific and Technical Services (PSTS) sector. This sector, defined by the Australian Bureau of Statistics, currently employs more than one million people, or around 8.5% of the total workforce.

There are several reasons for the closure of Australia’s car manufacturing industry. The Australian market is too small and the industry cannot fully exploit economies of scale. To remain solvent they have no choice but to use cheaper foreign production inputs including both labour and parts. The domestic market conditions in Australia has become untenable with a) the lowering of import tariffs and the signing of Free Trade Agreements; b) higher wages and better work conditions demanded by the unions; and c) the appreciation of the Australian dollar. It is very difficult to compete when labour costs in some Asian countries are only one-fourth of that of Australia.

But the car manufacturing industry does not operate in isolation. In 2009-2010 there were approximately 73,772 full-time employees in the motor vehicle industry (which includes the production of other transport equipment as well as parts), producing a total gross output of approximately A$20 billion. The output and employment multipliers in this industry are two and seven respectively, suggesting that $1 million in additional final demand can directly and indirectly generate $2 million extra output and seven jobs in the economy.

Importantly, the collapse of the motor vehicle industry could adversely impact the viability of the PSTS industry. This industry provides services in scientific research, architecture, engineering, computer systems design, law, accounting, advertising, market research, management and other consultancy, veterinary science and professional photography. Scientists in this sector, including CSIRO staff, are mainly involved in R&D activities.

Depending on the extent of sectoral linkages, the number of resulting full-time job losses varies across industries. Assuming the closure of the entire car industry, Figure 1 shows the number of job losses in ten of the hardest-hit sectors. Many of these workers may have already found employment in other related industries, but this data serves to illustrate the way different sectors are impacted.


Source: Valadkhani and Smyth (2016, Table II, p.698-701).

The table shows the industries most likely to be impacted by the resulting R&D vacuum created through the absence of the motor vehicle industry.

Previous studies have found car manufacturers provide technical support, transferable skills and employee training for the small suppliers of parts. There are extensive knowledge spillovers from the automotive sector to other industries. The 2008 Steve Bracks review of Australia’s automotive industry found:

“these spillovers support the contention that the automotive sector is an important component of Australia’s machinery and equipment capability”.

Our results indicate that the collapse of the motor vehicle industry could severely disturb the PSTS industry by creating a vacuum in both upstream and downstream industries. Similar results were also obtained in 1998 and 2012 studies, suggesting that R&D-intensive manufacturing industries, such as the motor vehicle industry, play an important role in the process of technology diffusion. These findings are consistent with the argument in the Bracks report that R&D is a linchpin of the Australian automotive sector and that there are important knowledge spillovers to other industries.

What is going to happen after the closure of this industry? Public comment from the car companies on this point has been patchy and is inconclusive.

Ford has stated that it will retain its production development centre and testing facility after it ceases manufacturing operations in 2016. Holden has hinted that it will retain its global design studio after it ceases manufacturing in 2017, but has not commented on the fate of its product engineering work. Toyota has stated “that it is considering reducing the scale of its Australian design base”.

However, there are fears that Ford and Holden, as well as Toyota, will move their R&D activities closer to manufacturing centres after shutting down their Australian plants. In particular, it is feared that Australia’s car components industry will not survive and its engineering capability will be adversely affected.

It seems inevitable that the collapse of the motor vehicle industry in Australia will create a large dent in the PSTS industry.

A further budget cut to organisations such as the CSIRO can only exacerbate the situation by lowering R&D activities in the long run. This is a serious issue, particularly when the collapse of the motor vehicle industry happens to coincide with CSIRO losing 10% of its staff during the next four years due to tight measures introduced in the 2014 federal budget.

With the absence of car manufacturing companies, we need more, not less investment into R&D and technological innovation. Otherwise, the lack of investment in these important areas will adversely influence the survival of the remaining industries, particularly technology-intensive industries. That’s not what we want in an “innovative and agile” economy.

Author: Abbas Valadkha, niProfessor of Economics, Swinburne University of Technology

Can the private rental sector provide a secure, affordable housing solution?

From The Conversation.

Despite a relatively healthy supply-side picture for the general housing market, the expected trickle down of housing opportunities to low-income households in Australia has failed to materialise.

The UK Department for Communities and Local Government boasted this year of a seven-year high in construction starting on new houses; in the 12 months to December 2015, there were a little over 143,500 housing starts. With a population of 54.3 million, the English housing sector is adding one new dwelling for every 380 persons.

Over the same period there were 231,411 housing approvals in Australia. With a population of 23.5 million in 2014, the Australian housing sector is adding one new dwelling for every 102 persons.

The supply of new housing has matched Australian population growth in recent times. The figure below profiles growth of the housing stock between 2006 and 2014, and compares it to population growth over the same period Australia-wide, as well as across the state capitals, Canberra and Darwin.

Growth in the national housing stock has kept pace with population growth for almost a decade.

However, the picture differs across state and territory capitals. In Perth and Sydney, increases in the housing stock are insufficient to match the increase in these state capitals’ populations. But there are different patterns underlying this common outcome.

In Perth, population growth was exceptionally strong. It was faster than any other city: its population soared (by 2014) to more than 28% above 2006 levels. Such rapid growth would stretch the capacity of most housing construction sectors, even in the absence of any supply-side impediments.

Sydney’s population growth (at 14%) is below the average across all cities (17%). Despite this relatively low increase in its population, housing supply failed to produce a matching increase in the housing stock.

A housing system under pressure

The balance between growth in population and expansion in housing stock through new housing supply is thought to be relevant to an understanding of housing affordability pressures. New housing construction that matches population growth should ease price and rent pressures, where all else is equal.

Although most new housing is built and sold in the higher price ranges and therefore purchased by higher-income groups, the housing they vacate will fall in price. It therefore becomes accessible to middle-income groups. And, as they shift upmarket, the housing they move out of falls in price and becomes accessible to lower-income households.

Eventually, this filtering process opens up new opportunities for the homeless.

Housing affordability is generally thought to be worsening, especially for low-income households. Homelessness numbers remain stubbornly high. And official figures for June 2015 reveal there were 154,000 households on state housing authority waiting lists for public housing.

It is likely that the length of these waiting lists underestimates the need for public housing. We have modelled the income rules determining eligibility for public housing, and estimate that there are nearly 900,000 households satisfying these income eligibility criteria.

More than two-thirds of these households (650,000) contain one or more persons who:

  • are aged 65 and over;
  • have a long-term health condition or disability; or
  • have children aged under 15.

These are people who value the security of tenure that has typically been offered by public housing, but who are unlikely to be able to buy their own homes. There are nearly 1 million individuals in these households – a group that is currently ill-served by Australia’s housing system.

Housing solutions through private-public partnerships

The need for new housing solutions for these low-income groups is clearly a pressing requirement. However, raising the capital funding to expand public or social housing to meet their housing needs seems improbable.

Secure leasing is a private-public partnership option that offers a rent premium to those private landlords willing to offer long-term leases to those satisfying the income tests for public housing. They would also be either of pension age, disabled or caring for children.

In the unregulated Australian rental housing market, leases are almost always short term. This gives landlords the option to realise investments in the near term. Hence, a long-term lease proposal requires Australian governments to offer landlords a rent premium to compensate them for the money sacrificed when they enter into a long-term arrangement.

Consider a reform scenario in which landlords are given an incentive to offer five-year secure leases to households eligible for public housing who are now living in the private rental sector, with rent increases capped at increases in the consumer price index over the secure lease period.

We estimate that, over five years, the budgetary cost to the government to house these 650,000 households in secure lease arrangements is A$13.4 billion.

The uneven distribution of these households across states and territories means the program’s cost varies across the five most-populous states. Our estimates are $4.7 billion in New South Wales, $3 billion in Victoria, $2.5 billion in Queensland, $1 billion in South Australia, and $1.8 billion in Western Australia – with the remainder borne by Tasmania and the territories.

This cost is much more affordable than the capital funding required to expand the social housing stock through the construction of new social housing dwellings.

The Australian tax system currently provides indirect support for the supply of private rental housing through tax concessions such as negative gearing and capital gains tax discounts. Is it now time to harness some of the private investment stimulated by these concessions to help improve the supply of affordable and secure housing opportunities for low-income households.

Authors: Gavin Wood, Professor of Housing, RMIT University; Rachel Ong, Deputy Director, Bankwest Curtin Economics Centre, Curtin University