Employment participation is central to two critical problems presently facing Australia, according to a presentation by Michael Keating at the Monash University-ACER Centre for the Economics of Education and Training (CEET) Conference in Melbourne on 3 November. Michael Keating AC is from the ANU and is Chairman of the NSW Independent Pricing and Regulatory Tribunal.

The first problem is the severe structural mismatch in the labour market, with employers reporting that they cannot find workers with the skills they need, while at the same time many people of working age report that they cannot find work, or cannot find as much work as they would like, or are working in jobs for which they are over-qualified.

The second problem is the ageing of the population, which has been projected to result in a gap between government expenditure and revenue equivalent to 5% of GDP for the Commonwealth and another 4% of GDP for the States over the next 40 years.

In the last forty years, male workforce participation has fallen from 84% to 72%. Most of this drop was for males aged 35-54. The employment participation of older males has fallen even further, but this is less significant as there are few men in the older age group. While employment participation by women has been increasing over the last 40 years, it is still well below the rate for men, and lower than that in many other developed countries. Much of the job creation over the last 20 years has been part-time jobs. This suits many people, but many women and some men want more hours of work than they are currently being offered.

There is potential to achieve the necessary increase in the labour supply by reversing the decline in participation by men and further increasing participation for women to levels in other countries.

Improved incentives have been the focus of much past policy debate and initiatives to improve employment participation. Changes to superannuation arrangements are intended to encourage older workers to postpone their retirement, but there is doubt about whether these arrangements will make much difference to age of retirement.

Government has also sought to tighten eligibility requirements for some groups of social security recipients so that they are under more pressure to look for work. In principle this notion of mutual responsibility can be useful. However, Australia is short of skilled labour, not unskilled labour. The fall in employment participation is mainly concentrated among unskilled people whose job opportunities have declined, so the priority should be to improve their opportunities rather than spend huge amounts of money to improve incentives, most of often for people who are already fully employed.

There is also a longer-term need for continuing education so that people who are currently employed can adapt to the inevitable future changes in technology. As a preventative measure we will need to provide life-long learning for people so that we do not risk the next generation leaving the workforce prematurely as has happened over the last thirty years.

This additional training will need to focus principally on:

• Re-entrant training that targets people who are currently unemployed or not in the labour force;

• Continuing training (life-long learning) that targets people who are already employed, to enable them to maintain and upgrade their skills to meet the challenges posed by technical and structural change. This continuing training will help prevent a repetition of the experience of the last couple of decades, with falling employment participation being caused by older workers dropping out of the labour force as their skills became out-dated; and

• Refresher training that targets people who are not fully using their qualifications, to enable them to maintain their skills and move to jobs that make better use of their qualifications.

In the long run, because employment and GDP are so much higher, the additional training largely pays for itself. Thus Access Economics projects that GDP in real terms would be 2% higher by 2010 and 12% higher by 2025, if employment and GDP rose as projected as a result of the additional training. This in turn means that the cost of VET would then rise only slightly from 0.5% of GDP today to 0.6% of GDP in 2025, even after allowing for the cost of training to rise faster than prices in general. Most importantly this extra GDP should generate substantial extra tax revenue.

A very significant increase in education and training will be required. In addition, the type of training will need to change. Life-long learning will need to become the norm and not the exception. People need to be trained so that they can adapt to continuing change. Investing in peoples’ skills to increase employment participation is vital if we are to avoid the future budget problems that could otherwise result from an ageing society. It also offers the best hope of preserving Australia’s egalitarian traditions.

Michael Keating delivered the opening address at the Monash University-ACER Centre for the Economics of Education and Training (CEET) held in Melbourne on Friday 3 November. This year's theme was Australian Education and Training: New Policies. For further information, including Mr Keating's presentation, is available on the CEET website.

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