Australian Government, 2011‑12 Budget
Budget

Statement 4: Opportunities and Challenges of an
Economy in Transition (Continued)

The Asian century and the changing structure of Australia's economy

The continuing economic re‑emergence of Asia has lifted global economic growth and is leading to a shift in the world's economic activity from west to east. Together, China and India accounted for less than a tenth of world gross domestic product (GDP) in 1990 and almost a fifth in 2010 (Chart 1). In 2020 they are projected to account for more than a quarter of world GDP — which will be equivalent to the combined share of US, Japan and ASEAN‑5. In 2030 they are projected to account for a third of world GDP.

Chart 1: World GDP projections

China and India accounted for almost a fifth of world GDP in 2010 and are projected to account for more than quarter of world GDP in 2020 — equivalent to the combined share of US, Japan and ASEAN 5. In 2030, they are projected to account for a third of world GDP — equivalent to the US, Japan and European Union combined.

Note: Purchasing power parity adjusted GDP. ASEAN-5 comprises Indonesia, Malaysia, The Philippines, Thailand and Vietnam.

Source: The Conference Board Total Economy Database, Maddison (2007), IMF World Economic Outlook Database, World Bank, OECD, United Nations Population Database and Treasury.

Asia's rise will bring great economic opportunities closer to Australia's doorstep. It will also require the economy to make a major transition, of a magnitude akin to those that have been traversed in the past.

While robust economic conditions in Australia's region are driving strong demand for Australia's mineral resources, the current transition that Australia faces is much broader than the mining boom. The growing cities of Asia will be populated by an increasingly wealthy and upwardly mobile middle class, and this will bring a broader range of opportunities and challenges for Australia that will become increasingly evident.

To take advantage of this global transition in economic geography, to be able to respond to inevitable shocks in the future and to ensure that the prosperity we enjoy today outlasts the current surge in the terms of trade, Australia needs to manage a transition in economic structure and build flexibility while providing the basis for future growth.

This is not the first time in our history when we have had to make major transitions. For Australia, change has been the norm rather than the exception. The critical determinant for success, past and future, is whether we embrace the need for change or attempt to resist the economic forces at work.

The movement towards a service‑based knowledge economy

While mining and agriculture continue to play a valuable role, Australia has become more than just a commodity economy. Over time, a wide variety of forces has seen Australia convert its natural advantages into a knowledge‑based, diversified and service‑oriented economy, and this transition has continued throughout the mining boom.

In the 19th century, pastoral and agricultural industries were the dominant contributors to economic growth in Australia. They established their dominance by taking advantage of a combination of factors, including developments in Europe, Australia's rich natural resource endowments and a number of 'learning by doing' innovations to improve productivity — including innovations that are today taken for granted, such as fencing (Sinclair 1976). At one point in the mid‑1830s, pastoral production alone may have contributed more than a quarter of Australian GDP (Butlin 1985).

Consistent with the experience of other advanced countries, agriculture's share of economic activity has declined. Through adopting new technologies and using scarce resources better, productivity growth in agriculture has been strong — producing more food and other basic rural goods that people demand while drawing on less labour.

Gradual industrialisation, arguably beginning in the middle of the 19th century, saw manufacturing grow in importance. As labour productivity and incomes grew, consumer tastes shifted towards new types of manufactured goods (like consumer durables) that were being brought onto the marketplace. The World Wars also provided further impetus for domestic industrial production.

A period of relative decline in the industrial base, as a share of both GDP and employment, has since followed and is continuing today — also a common phenomenon across developed countries. This relative decline has occurred as global barriers to trade fell and as the service industries expanded, reflecting consumer and business demand for an increasingly diverse range of services — including in the areas of recreation, education, professional services, finance, health and information and communication.

Over the past century or so, Australia's economic evolution has therefore followed an overall pattern similar to the world's most advanced economies (Chart 2), notwithstanding Australia's relatively large mining sector. Rather than standing still as an agrarian society dependent on the land for its economic outcomes, or as an economy characterised by low‑skilled jobs, Australia's economic development has seen the benefits of a rich natural resource endowment being transformed into a diverse economy that is service‑oriented yet maintains a core of technologically advanced sectors engaged in agricultural, mining and other industrial production.

Chart 2: Employment share by activity

Australia

In 1900, agriculture had a large share of employment in Australia and in the G7 but has subsequently declined over the course of the 20th century. The share of employment in industry, which includes manufacturing, construction and mining, rose over the first half of the 20th century but has relatively declined. The services sectors have risen secularly.

G7

In 1900, agriculture had a large share of employment in Australia and in the G7 but has subsequently declined over the course of the 20th century. The share of employment in industry, which includes manufacturing, construction and mining, rose over the first half of the 20th century but has relatively declined. The services sectors have risen secularly.

Note: Identifies broad changes and does not fully account for definitional or technical changes in data. Industry includes mining, manufacturing, construction, gas, electricity and water. Agriculture includes forestry and fishery. See also Withers et al. (1985) for similar historical estimates for Australia. Withers et al. (1985) estimated that Australian employment in agriculture and industry in 1900 was around a quarter and third respectively.

Source: Feinstein (1999), OECD Statistics and Treasury.

The relative decline in low‑skilled jobs has been accompanied by a shift towards a better educated workforce and higher skilled occupations (Chart 3). As in other economies, the educational outcomes of the labour force improved significantly over the latter half of the 20th century. Retention rates to Year 12 in Australia, for example, have more than trebled between 1968 and 2010 — from 23 to 78 per cent (ABS 2001 and 2010a).

Chart 3: Occupations and education in Australia

Share of employment by occupation

The share of employment in professions and managerial positions have increased over time - from around 10 per cent in 1911 to around 20 per cent in 1981. Occupations that are typically more intensive in manual labour have declined as a share of employment over time.

Average formal education, aged 15‑64(a)

Since 1950, the average years of formal education for people in Australia and the G7 countries (aged 15-64) have increased - from around 9  to 12 years in Australia and from around 7 to 12 years in the G7.

  1. Years of primary, secondary and tertiary education for all people aged 15‑64.

Source: Withers et al. (1985), World Bank EdStats, Barro and Lee (2010) and Treasury.

Australia has also avoided the levels of inequality seen in some other advanced countries (OECD 2008), achieving a better spread of the gains of economic progress. Australia has high levels of intergenerational income mobility that have not changed significantly in recent decades (Leigh 2007), a reflection of the relatively high standard of minimum education outcomes in Australia (Wilkie 2007).

Recent patterns: developments over the first phase of the mining boom

Mining boom mark I, which began in 2003‑04 and continued until the global financial crisis, gave rise to an unprecedented and ongoing rise in mining investment. But despite the growth of the mining sector, the overall long‑term trend of an ongoing shift towards service industries and stronger relative growth in skilled over unskilled jobs has continued.

The period of the mining boom to date has also demonstrated the flexibility of the Australian economy in dealing with significant structural change.

A mining investment boom

Strong demand for Australia's mineral commodities has led to strong growth in mining investment over the last decade (Chart 4), reaching its highest level in history (RBA 2010a). At its peak in 2008‑09, mining investment was above 4 per cent of GDP — around eight times its share 50 years ago and matching levels of manufacturing investment in the 1960s.

Chart 4: Investment as a share of GDP

Mining

At its peak in 2008-09, mining investment was above 4 per cent of GDP — around eight times its share 50 years ago and matching levels of manufacturing investment in the 1960s. The boom in mining investment, together with a lift in general government investment, has contributed to a lift in total investment. Investment as a share of GDP in 2009-10 had risen to match the levels of the 1960s and 1980s.

Other industries

At its peak in 2008-09, mining investment was above 4 per cent of GDP — around eight times its share 50 years ago and matching levels of manufacturing investment in the 1960s. The boom in mining investment, together with a lift in general government investment, has contributed to a lift in total investment. Investment as a share of GDP in 2009-10 had risen to match the levels of the 1960s and 1980s.

Source: ABS 5204.0 and Treasury.

Investment in the other sectors as a share of GDP, however, has broadly remained flat. While manufacturing investment has experienced a gradual decline over the longer term — reflecting the declining output share of manufacturing common to developed countries — it has remained broadly stable as a share of GDP in the 2000s. The boom in mining investment, together with a lift in general government investment, has been a key driver behind the lift in total investment. In 2009‑10, total investment as a share of GDP had risen to match the high levels seen in the 1960s and 1980s.

Trends in industry production have continued

The strong terms of trade has placed pressure on manufacturing and other trade‑exposed sectors through a strong appreciation in the real exchange rate.

The expected result of an appreciation in the real exchange rate is for output in mining industries to grow faster than other sectors that face foreign competition but which are not enjoying the benefits of the high terms of trade. Sectors not exposed to international trade, such as some parts of services, would be expected to grow at a rate somewhere in between.

While Australia has also been faced with other significant economic events since the mining boom began, such as persistent periods of drought and the global financial crisis, the long-term trends towards services and the relative decline of manufacturing have continued (Chart 5). Unlike mining and construction, manufacturing did not experience real output growth during the boom — despite an average growth rate of 2 per cent per annum in the six‑year period prior to mining boom mark I.

Chart 5: Growth by industry, before and during the mining boom

Real output in the services and construction industries have all grown strongly in the 6 year period before the mining boom and during the mining boom.  Real output growth in mining has picked up since the beginning of the mining boom. Manufacturing did not experience real output growth during the boom — despite an average growth rate of 2 per cent per annum in the 6 year period prior to the boom.

Note: Gross value added, 2008‑09 dollars. Services exclude construction and utilities. A point close to the diagonal line indicates that the industry grew during the boom at a similar rate to the six years prior to the boom. A point north (south) of the diagonal indicates that the industry grew slower (faster) during the boom. The further a point is away from the origin, the faster the rate of growth or contraction.

Source: ABS 5206.0 and Treasury.

There has been a long‑term shift away from the parts of manufacturing characterised by low profit margins and low‑skilled jobs paying relatively low wages. However, broad industry level trends are not givens for underlying sub‑industries and firms. While the relative decline in some sub‑industries (such as textiles and clothing) accelerated, others linked to the mining sector (such as metal and mineral products and to a lesser degree machinery and equipment) have fared better.

A responsive, diversified and increasingly skilled labour market

Labour market developments over the mining boom to date demonstrated the economy's flexibility and continued the shift to a diversified, highly skilled workforce.

Responsiveness of earnings growth

As non‑rural commodity export prices have risen sharply, the prices received for mining outputs have grown at a much faster rate than the returns to those working in the mining sector.

Box 1: How fast is the composition of the economy changing?

The composition of the economy is constantly changing, with around 300,000 businesses entering and exiting and half a million workers changing industries in a typical year (ABS 2010b and 2010c). The recent pace of change, in some respects, is as big a change in the industry composition of the economy as seen in recent history. While there is no all encompassing measure available, structural change indices (SCIs) show the rate at which the economy's composition changes. While index construction methods differ (and hence their volatility and magnitudes), SCIs generally point to common themes.

Past periods of rapid structural change have broadly coincided with the rise of services, the relative decline of agriculture and manufacturing, downturns in the economic cycle and major reforms. The rate of structural change in recent years, using nominal output and investment shares, has been at historically high levels (Chart 6). These highs reflect a mining investment boom driven by high export prices. The pace of compositional change in investment can be expected to pick up further in light of the strong mining investment outlook.

The pace of compositional change in terms of real output and employment has been more in line with recent history. This reflects the capital intensity of the mining sector and lags in production constraining the pace of change in the composition of real output.

Chart 6: Structural change between industries

Output

This chart shows the rate of change in the industry composition of the economy since the 1970s. The rate of compositional change in investment and nominal output (compared to real output and employment) has been particularly strong in recent years.

Employment and investment

This chart shows the rate of change in the industry composition of the economy since the 1970s. The rate of compositional change in investment and nominal output (compared to real output and employment) has been particularly strong in recent years.

Note: SCI = 1/2100│xi,t-xi,t-5│ where xi,t is the ith industry group's average share of output, employment or investment in 5‑years to time t for 9 industry groupings. The SCI shows the rate at which the economy's composition changes. SCIs take values between 0 and 100. For example, where the share of one industry group increases by one percentage point over a five year period, with a corresponding decrease in other groups, the SCI would have a value of 1. A large number represents a sharp change in industry composition. Real output in 2008‑09 dollars. See also RBA (2010b) and Productivity Commission (1998).

Source: ABS 5204.0, 5206.0 and 6291.0, RBA, Butlin (1985), Withers et al. (1985) and Treasury.

Hence, the real producer measure of average earnings in the mining sector (labour costs relative to producer prices) has declined sharply, halving during the mining boom (Chart 7).1 This is in effect the price signal to mining firms to hire more labour, driving strong employment growth in the mining sector. In contrast, the relative wage costs for firms in other industries like manufacturing have increased.

Chart 7: Real average earnings by industry
Index 2003‑04=100

Producer measure

These charts show the different growth rates of producer real wages and consumer real wages over the last 10 years in mining, construction, manufacturing and services. On average, consumer real wages have grown faster than producer real wages. Producer real wages in mining have fallen sharply due the increased price of non-rural commodity exports.

Consumer measure

These charts show the different growth rates of producer real wages and consumer real wages over the last 10 years in mining, construction, manufacturing and services. On average, consumer real wages have grown faster than producer real wages. Producer real wages in mining have fallen sharply due the increased price of non-rural commodity exports.

Source: ABS 6302.0, 6401.0, 6291.0.55.001, 5206.0 and Treasury.

Yet for workers, the incentives they face and their standard of living depend on how their earnings have fared relative to consumer prices, not producer prices. Average earnings in both nominal and real consumer terms (that is, the consumption power of earnings) have broadly risen across the board — albeit much more quickly in the mining and related sectors since the mid‑2000s.

Relatively strong growth in earnings in the booming sectors is a sign of the economy's flexibility. This reflects positively on past labour market reforms which have helped moderate across the board wage inflation pressures.

The rise in the consumer purchasing power of earnings can also be seen in the growth in real incomes across households. From 2000‑01 to 2007‑08, real disposable household incomes (including transfers and adjusted for household size) rose by 42 per cent for all households and rose by 36 per cent for the low income earner group — that is, those in the second and third income deciles (ABS 2010d).

Broad‑based, skill‑focused employment growth

Since the beginning of the boom, strong incentives to work in the mining and construction industries have contributed to strong growth in employment in those industries in states with large mining sectors (Chart 8). Employment growth in the construction sector across states has also benefited from general government investment.

Chart 8: Employment change by selected State and industry, 2003‑04 to 2009‑10

Since the beginning of the boom, strong incentives to work in the mining and construction industries have contributed to strong growth in employment in those industries in States with large mining sectors. Employment in manufacturing in New South Wales, Victoria and South Australia — states where traditional manufacturing is dominant — has fallen. By contrast, Western Australia and Queensland have seen moderate increases in employment in manufacturing.

Note: Average annual growth in parentheses.

Source: ABS 6291.0.55.003 and Treasury.

Between 2003‑04 and 2009‑10, the geographic distribution of manufacturing employment growth has been mixed. Employment in manufacturing in New South Wales, Victoria and South Australia — states where traditional manufacturing is dominant — has fallen. By contrast, Western Australia and Queensland — where metal product manufacturing is a greater share of the manufacturing sector — have seen moderate increases in employment in manufacturing. While these state differences are illustrative of shifts in activity across states, local or regional outcomes have not become more disparate (Box 2).

Overlaying these mining and investment boom related trends is continued strong growth in service sector employment, reflecting the ongoing diversity of the Australian workforce. Despite strong annual rate of employment growth of around 10 per cent, mining only contributed around 77,000 of the 1.5 million increase in total employment between 2003‑04 and 2009‑10 (Chart 10).

Box 2: Regional unemployment disparities in recent years

Since at least 1998, regional disparities in unemployment rates have declined as unemployment in aggregate declined (Chart 9). The onset of the mining boom has not yet changed this relationship — although areas of disadvantage remain. When the economy has strengthened, the regional distribution of unemployment has become more compressed — with a smaller proportion of regions experiencing high unemployment.

Around half of the (unweighted) standard small local areas (Statistical Local Areas or SLAs) had unemployment rates of less than 5 per cent in September 2010. Around 90 per cent faced unemployment rates of less than 10 per cent. Twelve years before, in September 1998, less than 15 per cent had unemployment rates less than 5 per cent and around 70 per cent had unemployment rates of less than 10 per cent.

The fall in the regional dispersion of unemployment as the national unemployment rate falls is evidence that to date, despite different rates of growth in some industries and regions, the material gains of the nation's economic success are being spread broadly to people across Australia through (among other mechanisms) improved labour market outcomes.

Chart 9: Regional unemployment over time

Regional distribution of unemployment(a)

As the economy strengthened, the regional distribution of unemployment became more compressed — reflecting that a smaller proportion of regions were experiencing high unemployment. The global financial crisis temporarily increased unemployment and its dispersion across regions.

Average and dispersion(b)

This chart shows that as the aggregate unemployment rate declined since September 1998, is dispersion across regions have also declined. The global financial crisis temporarily increased unemployment and its dispersion.

Note: Statistical Local Areas (SLAs) are standard small geographic regions in Australia. There are around 1,400 SLAs under current classifications. As the size of the labour force for SLAs varies from less than 100 to around 100,000, figures in the chart use employment outcomes weighted by labour force size.

  1. Regional distributions are smoothed using Gaussian kernel density estimation (see for example Wand and Jones 1995). For presentational clarity, distributions were deliberately over‑smoothed with windows of 1, 1, ½ and ½ selected for Sep‑1998, Sep‑2002, Sep‑2008 and Sep‑2010 respectively.
  2. Each point on the scatter plot represents the weighted average and weighted standard deviation of regional unemployment for a particular quarter between Sep‑1998 and Sep‑2010. The weighted average unemployment rates for all SLAs differ slightly from those estimated in ABS 6202.0.

Source: DEEWR Small Area Labour Market database and Treasury.

Looking at standard intermediate‑sized regions (Statistical Subdivisions or SSDs, which are one level of aggregation above SLAs), between the September 2003 and September 2010 quarters, two-thirds of all SSDs experienced a decline in unemployment rates. This includes all SSDs in Tasmania and the Northern Territory and around 80 per cent of Queensland regions.

However, outcomes remain patchy for some regions (Table 1). Unemployment rates in some regions rose over the period — including regions in Western Australia and Victoria, outer areas of Melbourne, Far North Queensland and Central Western Sydney. Many of these regions had unemployment rates in September 2010 well above the national average despite being below average in September 2003.

This highlights the importance of policy to manage the regional effects of transition.

Table 1: Change in unemployment rate since September quarter 2003 by
selected region

Table 1: Change in unemployment rate since September quarter 2003 by selected region

Note: Table 1 presents the top and bottom 10 Statistical Subdivisions (SSDs), with a labour force size greater than 5,000 in September quarter 2010, ranked by the size of the change in the unemployment rate between the September 2003 and September 2010 quarters. There are around 200 SSDs.

  1. SSDs are standard intermediate sized geographic regions, one level of aggregation above SLAs. SSDs are defined under Australian Standard Geographical Classification (ASGC) 2001 unless otherwise stated. Where possible, adjustments have been made to accommodate ASGC changes.
  2. September quarter 2010 unemployment figures relate to the ASGC 2006 definition of these SSDs.
  3. Statistical Divisions are a level of aggregation above SSDs. For example, the Far North Statistical Division comprises two SSDs: Far North (Statistical Division Balance) and Cairns City Part A.
  4. Weighted average unemployment rates for SSDs differ slightly from those estimated in ABS 6202.0.

Source: DEEWR Small Area Labour Market database and Treasury.

Chart 10: Employment change by industry, 2003‑04 to 2009‑10

This chart shows that, between 2003-04 and 2009-10, sectors like health and social services, construction, and professional services have recorded more moderate rates of employment growth of between 4 and 5 per cent. However, given their size, together they have contributed an additional 700,000 jobs to total employment. Despite strong annual rate of employment growth of around 10 per cent, mining only contributed 77,000 of the 1.5 million increase in total employment between 2003-04 and 2009-10.

Note: Average annual growth in parentheses.

Source: ABS 6291.0.55.003 and Treasury.

Sectors like health and social services, construction, and professional services have recorded more moderate rates of employment growth of between 4 and 5 per cent. However, given their size, together they have contributed around an additional 700,000 jobs to total employment. Large labour force growth in the services sectors reflects longer term general trends towards services and higher skilled occupations, driven by income growth, technological and demographic change and other factors. The general trend can also be seen in employment growth by occupation (Chart 11).

Chart 11: Employment change by occupation, 2003‑04 to 2009‑10

This chart shows that, between 2003-04 and 2009-10, the occupations that recorded the strongest rates of growth - professionals, managers and community and personal services - also recorded the strongest increases in the number of people employed - increasing by around 500,000, 300,000 and 200,000 respectively over the period.

Note: Average annual growth of total in parentheses.

Source: ABS 6291.0.55.003 and Treasury.

The number of high skill white collar professionals and managers (some of whom work in the mining and construction sectors) has increased by more than 800,000. The number of high skilled blue collar technicians and trades jobs has also increased significantly — by 170,000.

Box 3: How fast is Australia's economic geography changing?

Since the mining boom commenced, the pace of change in the distribution of economic activity between the different states and territories has been unprecedented in recent history, and even more marked than the pace of change in industry structure (Box 1).

The pace of the recent shift in the share of investment between states has been the biggest in the last four decades (Chart 12). The same can be said of nominal output. In terms of real output, and to a lesser extent employment, the recent pace of change has been among the fastest in recent history. In large part, the rapid increases in the relative economic power of some states reflect the increase in the value of mineral products from resource rich states and flow‑on effects for other activity in those states.

Chart 12: Structural change between states and territories

Output

This chart shows the rate of change in the industry composition of the States since the 1970s. The rate of compositional change in investment and nominal output (compared to real output and employment) has been particularly strong in recent years.

Employment and investment

This chart shows the rate of change in the industry composition of the States since the 1970s. The rate of compositional change in investment and nominal output (compared to real output and employment) has been particularly strong in recent years.

Note: SCI = 1/2100│xi,t-xi,t-5│ where xi,t is the ith state or territory's average share of output, employment or investment in the 5 years to time t. The SCI shows the rate at which the economy's composition changes. SCIs take values between 0 and 100. For example, where the share of one state increases by one percentage point over a five year period, with a corresponding decrease in others, the SCI would have a value of 1. A large number represents a sharp change in composition. Real output in 2008‑09 dollars. See Box 1, RBA (2010b) and Productivity Commission (1998).

Source: ABS 6204.0.55.001, 5220.0, Donovan (1981), Harris and Harris (1992) and Treasury.

Together, the number of professionals, managers, technicians and tradespeople has increased by around one million over this time. That is, two‑thirds of the 1.5 million added to total employment over 2003‑04 to 2009‑10 are highly skilled. In mining, employment has grown across all of its major occupations groups. In particular, more than half of the increase in mining employment was for highly skilled technicians, tradespeople, professionals and managers.


1 The real producer wage is given much attention in trade theory, in particular the Stolper-Samuelson theorem which suggests that an increase in commodity export prices will drive down the real producer wage in the capital intensive commodities sector — not just in absolute terms but also relative to returns to capital services (which rise).

If www.budget.gov.au responds slowly or you are having trouble downloading a document, try one of the Budget Website Mirrors

Note: Where possible, Budget documents are available in HTML and for downloading in Portable Document Format(PDF). If you require further information on any of the tables or charts on this website, please contact The Treasury.