Monday, April 22, 2013

Really Rio? The judge who put its claims about jobs to the test

Thank heavens. Monday Column

If only judges thought about economics.

Rio Tinto lashed out at the NSW Land and Environment court last Monday after it overturned a government decision to approve a massive expansion of its Warkworth open cut coal mine in the Hunter Valley.

The decision was “significantly obstructing investment and job creation in New South Wales,” the mining giant thundered.

It was “a blow to our plans for the Mount Thorley Warkworth mine and the jobs of the 1300 people who work there”.

If only the judge had thought about the impact on jobs.

As it happened the judge spent a good deal of time considering the impact on jobs, especially Rio’s far-fetched claim that its plan would have created an extra 44,600 jobs.

What he found will send shockwaves through the ranks of economic consultants. It will never again be safe to come up with a big number for jobs created (“direct and indirect”) expecting the decision maker to give it a tick because it is the outcome of an economic model.

The Treasury has been on to the scam for a long time.

In an economy near full employment you can’t create extra highly skilled jobs.

Here’s its former secretary Ken Henry addressing troops in 2007:

“Consider, for example, recent commentary in the press which argues that the government should support a nuclear power sector because jobs would be created. Where will the nuclear scientists and technicians come from? Is it seriously being suggested that they will come from the dole queue or from Indigenous Community Development Employment Projects?”

“The next time any of you get an opportunity to write a coordination comment on a Cabinet submission that proposes a taxpayer-funded handout for some stunning new investment proposition – and I predict that some of you won’t have to wait very long for such an opportunity – I suggest you draw attention to the submission’s failure to identify the businesses that will lose labour, and be forced to reduce output, if the proposal is agreed to.”

Rio Tinto used what is known as an input-output model to argue that if it spent more at its mine in the Hunter more jobs would be created elsewhere in the Hunter. That’s the sort of thing an input-output model is likely to conclude. Mining’s links to some industries (such transport) are strong, its links to others (such as communications)are weak. The model assigns each link a ‘multiplier’ and - voila! - out comes a disturbingly precise estimate of the total number of jobs created. Rio said expanding its mine would create an extra 44,675 jobs, where each is defined as full-time and lasting for one year.

It’s a common (if flawed) technique. Pizza Hut used it to claim the introduction of the Big Foot pizza would create thousands of jobs. But the organisers of really big events such as the Sydney 2000 Olympics have shied away from it, perhaps fearing close scrutiny...

The study conducted for Rio by Andrew Searles of The Hunter Valley Research Foundation was a good example of a well-constructed input-output study (although the data he used was more than a decade old). The main problem with it is that is was an input-output study. As with all such studies it assumed there were unemployed resources on tap, ready to meet the firm’s needs.

“I am sure Dr Searles will agree with me,” the Australia’s Institute’s Richard Dennis told the court. “Quite explicitly the input-output data that is before you assumes the existence of what I refer to as a ghost workforce.”

“The idea that there are unemployed skilled mining and manufacturing workers in the Hunter Valley at the moment sitting and waiting for these projects to go ahead, I just don’t think is plausible, accurate or useful.”

Indeed the mining industry itself had been warning of chronic shortages and bidding up wages to grab workers from other industries.

Counting as jobs created the jobs workers went to without counting as jobs destroyed the jobs they went from was double counting.

“What would happen if every industry were to commission a consultant to write the same report for them,” Dr Denniss asked rhetorically.

“If every industry were to go and try and estimate the indirect jobs that flowed because of their industry’s existence, what you find is that Australia would employ around 200 per cent of its current workforce,” he replied using calculations from Bureau of Statistics input-output tables.

Dr Searles said he thought there was enough skilled unemployed labour in the region to meet the needs of the expanded mine and that the unemployment rate might climb in the future.

The court was told the rate for Singleton Council was 1.1 per cent.

Dr Dennis extolled the virtues of computable general equilibrium model which takes skill shortages into account. Dr Searles said he had never used one.

It wasn't Rio’s finest day in court, but it would be wrong for it to claim the judge didn’t seriously consider its claims about jobs.

In today's Sydney Morning Herald and Age


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