Labour Hoarding Detracting From Australia’s Economic Growth

By Nick Hurley, 8th July 2024.

Australia faces a unique challenge that impacts its economic growth: labour hoarding. ¹ This practice, whereby companies retain more staff than needed, can slow down productivity. ² Our article explores how this affects Australia’s economy and offers insights into improving the situation. Stay tuned for an enlightening read. ³

Understanding Labour Hoarding and Its Impact on Economic Growth

Labour hoarding slows down economic growth by keeping productivity in check. This practice, prevalent in Australia, leads companies to retain more workers than needed, directly affecting the nation’s economic health.

What is Labour Hoarding?

Firms commit to labour hoarding by retaining more employees than the current workload demands. This practice leads directly to underutilisation of labour and creates a drag on the growth of labour productivity. ¹ Specifically, it manifests through static or decreasing hours worked per employee, indicating that businesses are choosing not to align employment levels with immediate fluctuations in demand. ²

This reluctance to adjust staffing levels mirrors firms’ strategic decision-making aimed at workforce retention despite short-term downturns. As a result, while this approach may preserve jobs during periods of lower demand, it inadvertently hampers output per worker, affecting overall economic performance by limiting improvements in labor utilisation and productivity.

Effects of Labour Hoarding on Productivity

After defining labour hoarding and its characteristics, it becomes evident that its effects on productivity are profound and multifaceted. Labour productivity, a critical measure of economic efficiency, has witnessed fluctuations due to labour hoarding practices.

Despite a job-rich environment resulting from market tightness, the downside reveals itself in productivity levels that only returned to December 2019 figures after recording the steepest 12-month decline ever observed.

This stark drop underlines how retaining employees without effectively utilising their skills can detract from overall economic performance.

Business investment plays a significant role in this equation as well. The reluctance to invest or the weak business investment observed contributes greatly to below-trend growth in labour productivity.

Coupled with declining business dynamism since the mid-2000s, these factors have undermined efforts to improve productivity levels across industries. Such trends reflect on immediate economic outputs and pose long-term challenges for fostering an environment conducive to sustained growth and competitiveness on both domestic and global fronts.

Labour productivity returned to December 2019 levels after the steepest 12-month fall on record.

Reasons for Labour Hoarding Practices in Australia

Moving from the effects of labour hoarding on productivity, we now explore why Australian businesses engage in these practices. Labour hoarding is not just a random phenomenon; it stems from several strategic considerations by firms across different sectors.

1. Uncertain Hiring Prospects: In sectors where future market conditions are unclear, companies prefer to retain excess labour rather than face the challenge and cost of rehiring when circumstances improve. ⁵
2. Workforce Retention Strategy: Firms often engage in labour hoarding as a way to keep skilled employees from joining competitors, especially in industries where talent is scarce.
3. Economic Productivity Concerns: Although holding onto more workers than needed can dampen productivity levels, businesses might prioritise immediate operational readiness over longer-term productivity metrics.
4. Labour Market Tightness: With Australia experiencing tightness in its labour market, organisations hoard staff to ensure they are not left short-handed during peak demand periods or when the market tightens further.
5. Human Resource Management Strategies: Companies may adopt labour hoarding as part of their human resource management strategy, viewing it as an investment in employee retention and stability.
6. Underemployment Dynamics: By retaining workers in underemployment states, firms can quickly ramp up operations without the delay of hiring and training new staff, making this approach attractive despite its impact on economic growth. ⁶

Each of these reasons reflects the complex decision-making process behind labour hoarding practices in Australia.

Analysing the Impact of Labour Hoarding on Australia’s Economy

Labour hoarding in Australia reduces the country’s overall productivity. This practice stunts economic growth by keeping more workers than necessary, affecting both employment and business investments.

Productivity Trends and Economic Slowdown

Over the last 20 years, Australia has witnessed a significant shift in productivity trends, with the aggregate labour productivity growth declining to around 1.4% to 1.5%. ⁷ This marked decrease from a robust 3.0% growth rate recorded from the late 1980s through to the early 2000s highlights a clear economic deceleration.

Key drivers behind this economic slowdown include decreased business dynamism and structural changes within the economy, contributing to an overall downturn.

Multifactor productivity growth turning negative in the most recent complete productivity cycles further exemplifies challenges facing workforce efficiency and industrial output. ⁴ These shifts suggest critical implications for future employment productivity and business vitality amidst ongoing structural adjustments.

Implications for Employment and Job Market Dynamics

Labour hoarding in Australia’s economy suggests a shift in the job market dynamics, forecasting a cooling labour market with reduced job vacancies signalling lower demand for labour.

Deloitte Access Economics predicts that national employment growth will decelerate to just 0.5% in 2024, with an anticipated increase in the unemployment rate to 4.5% by the end of June.

This downturn particularly impacts the blue-collar workforce within the manufacturing sector, expected to experience significant challenges amidst this slowdown. ⁸

The alteration in employment trends and job market dynamics underscores a critical turning point for economic stakeholders and policymakers as they confront these emerging challenges.

Next, attention must turn to understanding how labour hoarding influences business investments across various sectors. ³

Labour Hoarding and Its Effect on Business Investments

Weak business investment in Australia has a direct link to labour hoarding, creating a cycle that dampens economic growth. By holding onto more staff than necessary, companies limit their capacity for capital investment, crucial for modernising and expanding operations.

This reluctance to invest not only stagnates the development of new capabilities but also contributes significantly to slower growth in the country’s capital stock per worker. ²

This trend towards lower business investments leads to diminished labour productivity growth, further exacerbating the challenge of achieving strong economic dynamism. Since the mid-2000s, Australia has witnessed a decline in economic vibrancy, partly due to these practices.

As firms focus on workforce retention over making bold investments in technology or infrastructure, they inadvertently place constraints on their own potential for innovation and sectoral expansion. ⁹

Investigating Key Factors Driving Labour Hoarding in Australia

Exploring the root causes of labour hoarding in Australia reveals critical insights into its economic and employment landscape.

Business Investment Weaknesses and Economic Implications

Business investment weaknesses in Australia are contributing to the country’s below-trend labour productivity growth. The nation’s innovation investment as a share of GDP stands at only 1.9%, lagging behind the European average of 2.9%.

• Decline in productivity growth has been observed across Australia’s market sector, reflecting on the nation’s economic health. ⁴
• Slowing regulatory and economic reforms are part of the reasons for this stagnation, suggesting a need for renewed focus on governance frameworks.
• Reduction in competition has been identified as another contributor to the slowdown, highlighting issues with market dynamics.
• Investment stagnation is closely tied to these business investment weaknesses, indicating hesitation among businesses to commit capital.
• Labour retention strategies have become a focus for companies aiming to maintain stability but have inadvertently contributed to labour hoarding.
• Regulatory challenges complicate the situation further by adding layers of complexity to business operations and investments.
• Market competition issues stem from both domestic and international pressures, requiring strategic responses from businesses and policymakers alike.
• Innovation shortfall presents a significant barrier to business growth limitations and economic development. ¹²
• Economic reforms aimed at stimulating business investment and innovation could reverse these trends if implemented effectively.

These elements collectively depict a scenario where strengthening business investment and addressing accompanying economic implications could significantly impact Australia’s productivity metrics and overall growth trajectory.

Strategies to Mitigate Labour Hoarding and Foster Economic Growth

Addressing labour hoarding necessitates innovative solutions that boost productivity and economic growth. Encouraging businesses to invest in new technologies and streamline operations can break the cycle of labour underutilisation, fostering a more vibrant and resilient economy.

Enhancing Productivity through Innovation

Innovation is the key driver of productivity growth. Australian businesses can leverage innovation to overcome the drawbacks of labour hoarding and stimulate economic development.

1. Investing in productivity-enhancing digital technologies enables businesses to boost output efficiently. Such technologies streamline operations, allowing companies to produce more with the same number of employees. ¹⁴
2. Encouraging entrepreneurship fosters a culture of innovation, crucial for Australia’s future productivity. Entrepreneurs introduce new products and services, creating jobs and enhancing market competitiveness.
3. Optimising resource allocation helps firms maximise their use of both physical and human capital. Resources directed towards innovative projects yield higher returns, contributing to overall economic growth. ¹³
4. Improving efficiency through innovative processes reduces waste and enhances the quality of outputs. Companies that invest in innovative methods can achieve better results with fewer resources.
5. Stimulating innovation across all sectors promotes diversification in the economy, reducing over-reliance on traditional industries that may be prone to labour hoarding.
6. Investing in technology improves operational efficiency and provides businesses with competitive advantages in the global market.
7. Fostering entrepreneurship involves creating an ecosystem where startups can thrive, including access to funding, mentorship, and a supportive regulatory framework.
8. Enhancing human capital through training and development prepares employees for high-skilled jobs essential for operating advanced technologies and implementing innovative processes.
9. Encouraging productivity growth ensures that businesses continually seek ways to improve their operations, keeping them competitive and relevant in a rapidly changing business environment.

By focusing on these strategies, Australia can tackle labour hoarding effectively while laying down a solid foundation for sustained economic growth driven by innovation and productivity enhancements.

Conclusion

Labour hoarding significantly hampers economic growth in Australia, slowing down productivity and innovation. It stifles job market dynamism, making it harder for businesses to adjust to changing conditions.

Effective strategies must address this challenge, fostering a more competitive and productive economy. Encouraging investment and innovation becomes crucial in reversing the negative trends caused by labour hoarding.

Moving forward, policy reforms aimed at enhancing labour utilisation will play a key role in driving Australia’s economic advancement.

References

1. ^ https://www.ecb.europa.eu/pub/pdf/other/mb200307_focus04.en.pdf
2. ^ https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2003/assessing-the-extent-of-labour-hoarding.pdf
3. ^ https://www.bis.org/publ/qtrpdf/r_qt2312f.pdf
4. ^ https://www.rba.gov.au/publications/bulletin/2023/sep/recent-trends-in-australian-productivity.html
5. ^ https://www.afr.com/policy/economy/firms-hoarding-workers-could-be-to-blame-for-low-productivity-20230608-p5dezz
6. ^ https://www.researchgate.net/publication/4990063_Is_Under-Employment_Due_to_Labour_Hoarding_Evidence_from_the_Australian_Workplace_Industrial_Relations_Survey
7. ^https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Library/pubs/BriefingBook47p/AustraliasProductivitySlowdown
8. ^ https://www.rba.gov.au/publications/rdp/2016/pdf/rdp2016-06.pdf
9. ^https://www.researchgate.net/publication/341338353_Labor_hoarding_an_old_phenomena_in_modern_times_Case_study_for_EU_countries
10. ^ https://www.bis.org/publ/qtrpdf/r_qt2312f.htm
11. ^ https://www.rba.gov.au/publications/bulletin/2012/dec/pdf/bu-1212-1.pdf
12. ^ https://www.pc.gov.au/research/supporting/living-standards/mrrag.pdf
13. ^ https://www.researchgate.net/publication/259544843_Innovation_and_Productivity (2021-08-29)
14. ^ https://treasury.gov.au/sites/default/files/2019-03/secondarticle.pdf
15. ^ https://www.ceda.com.au/newsandresources/opinion/economy/stimulating-business-innovation-investment(2020-02-26)
16. ^ https://www.industry.gov.au/sites/default/files/2020-02/stimulating-business-investment-in-innovation.pdf(2020-02-20)
17. ^https://www.mckinsey.com/~/media/McKinsey/Locations/Pacific/Australia%20and%20New%20Zealand/Our%20Insights/Compete%20to%20prosper%20Improving%20Australias%20global%20competitiveness/Compete%20to%20prosper%20Improving%20Australias%20global%20competitiveness.pdf

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