Australia's labour market is becoming like its housing market

I've written about last week's national account data from an inflationary perspective, but it's also an important series for productivity metrics. Now, productivity data are notoriously noisy in the sense that you shouldn't read too much into a single data point. But for Australia the long-run trend is clear: the economy is bifurcating.

Market sectors (excluding mining) have managed 0.7% annual productivity growth since 2015. Meanwhile, government-aligned sectors such as public administration, health, and education have gone backward, at around -0.2% per annum. All-important construction productivity is 5% lower than it was twenty years ago, gummed up as it is by land-use and labour regulations.

A recent piece from economist Brian Albrecht offers a useful framework for thinking about at least part of what's going wrong in Australia. Albrecht highlights how Europe's rigid labour markets have turned workers into a durable capital stock more akin to houses than software. That creates a couple of problems: one, even if you wanted to hire workers, you wouldn't because you can never fire them; and two, everyone is in the same boat so even if you did, there's no one to hire in the first place.

Essentially, the churn of workers that drives reallocation from less productive to more productive firms grinds to a halt. Big, unproductive firms hog resources and meander along, while productive start-ups never get off the ground.

That's not yet the situation in Australia, where more than half of the workforce have been with the same employer for fewer than five years. But the Albanese government's industrial relations reforms have been systematically tightening the margins on which labour adjusts.

Casual conversion is now employee-initiated. Labour hire must be paid the same as direct employees. Fixed-term contracts are capped. Gig workers get unfair dismissal protections. The "right to disconnect" adds compliance overhead. Each reform individually might seem modest, but collectively they're making Australia's labour market more like its housing market.

The last successful liberalisation of Australia's labour market was more than 30 years ago under a Labor government (Keating), and the last attempt under the Coalition was so politically catastrophic that they're unlikely to touch it again. So slowly but surely, the productive market sectors of Australia's economy have started to mirror the unproductive government-aligned sectors, where similar rules have been in place for many decades.

But you wouldn't know it from the headline numbers, because Australia's terms of trade have remained historically elevated the entire time. Basically, commodity prices are doing an enormous amount of work masking the underlying rot.

The real danger for Australia is when the commodity luck runs out. When the terms of trade normalises, firms locked into rigid employment relationships won't be able to adjust as easily as they might have hoped. Workers trapped in low-productivity sectors won't reallocate to higher-productivity ones. And the uncertainty created by the regime itself will suppress hiring even before the downturn arrives, as it does in Europe.

You can't un-build a house. Increasingly, you can't un-hire an Australian worker, either.