With one exception, the Intergenerational Report is far less scary than you’ve heard

What if nearly everything that’s been written about this month’s Intergenerational Report is wrong?

I’ll explain. But first, here’s a sample of the headlines: “Young Australians at risk of a poorer future”, “Fewer workers to shoulder soaring income tax”, “Ageing population driving $140 billion blowout in spending”, and so on.

On radio it was worse. One ABC presenter referred to a “ticking tax bomb”.

The picture painted is one of a future in which (old) dependants have far fewer people of working age to care for them, in which tax climbs dramatically to pay for the care of the elderly, and in which the next generation is poorer than this one is.

And to be fair to the people who’ve said these things, some of the language in the Intergenerational Report is like that, but not the numbers.

Each report less scary than the one before

Let’s start with the most fundamental problem identified in the report: that in 40 years’ time (each Intergenerational Report looks forward 40 years) there will be many fewer Australians of traditional working age for each Australian aged 65 and over – what the report calls the “old-age dependency ratio”.

Back in 2002 the government’s first intergenerational report found that whereas there were 5.3 Australians of working age for each Australian aged 65 and over at the time, by 2042 there would be only half as many – just 2.5.

This latest report finds that whereas there are now 3.7 Australians of such age for each of us aged 65 and over, by 2063 there will be 2.6. While not quite as dramatic as the fall projected in first report, and happening two decades later, this is still a big stepdown.

Except that ratio is not a useful guide to the ratio of people of working age to the people they’ll need to support. That’s because young people need support too.

Australia will be older, but also less young

Whereas old people need aged care workers, young people need child care workers; and they both need workers to make the goods and services they use. What matters is the total dependency ratio: old and young combined.

Examining only half the ratio (the half that look worse as the population ages) without also examining the other half (the half that looks better as the population ages) is hard to justify – unless the argument is that the Commonwealth is responsible for aged care and the states for schools.

But that ought not be relevant when talking about the supply of workers.

Australia will need more aged care workers as a proportion of the population in 40 years’ time, but it is also going to need fewer teachers.

What will matter is the ratio of potential workers to all people aged (say) under 15 as well as aged 65 and older, both old and young.

That total dependency ratio also told a dramatic story in the first report. The number of Australians of traditional working age to those aged either under 15 or 65 and older was set to slide from 2 to 1.55.

But the slide isn’t big as this time. The ratio is set to slip from 1.82 (which we are finding manageable) to 1.57, but over 40 years.

Old people will find it easier to find jobs

One of the reasons why the “fewer workers to dependents” story has much less sting than it was going to is we have had many more migrants than we were going to, and the migrants and students we have let in are nearly all aged 15 to 64.

Another, and this would have happened regardless of migration, is that as people of traditional working age become more scarce, people of non-traditional age (65 and over) are taking up and staying in paid work. Back at the time of the first report, only 5% of Australians aged 65 and older were employed. Now it’s 11.5%.

Partly this is because of a rule change (the pension age is now 67), partly it is because work is less physically demanding (an awful lot of us have office jobs) and partly it is because employers are no longer as prejudiced – they’ve had to accept applications from older workers and have discovered they are not too bad.

On present projections we will be much, much richer

As for the idea that young Australians face a poorer future, that’s unlikely to be the case if we do indeed run short of workers (and have to pay them more) and it certainly isn’t what’s projected in the Intergenerational Report.

The report has living standards, as measured by real GDP per person, an extraordinary 57% higher in 2042, even with lower-than-previously-assumed productivity growth.

That’s right, although things won’t be the same for everyone, on average the report has future generations better off materially than present generations, just as they are better off materially than generations 40 years earlier.

It ought to be noted that the first intergenerational report in 2002 predicted an even bigger growth in living standards, and this one says climate change could trim its projections, although the numbers in the report are woolly and the Treasury is still building up the capacity to properly model climate change.

But 57% – or even 50% or 40% – is still an enormous increase in living standards.

On the numbers in the report, intergenerational inequity will be the opposite of what’s usually claimed: the next generation will be so much better off financially it will be easily able to stump up a few more dollars in tax.

We will easily be able to stump up extra tax

And the extra tax the next generation is asked to stump up won’t be “soaring”, despite what the headlines say.

The projections in the report suggest we might have to pay an extra 3.9% of GDP in tax to fund the things we will need, but not all at once, and not the full amount until 2063. By that time (as mentioned) GDP per person will be much higher.

Most of the extra projected government spending (60%) is unrelated to ageing. A lot of it is to fund the cost of new and better health treatments, of the kind we’re pretty certain to want given our higher living standards.

I’ve read the 300-odd pages of the report pretty carefully, and (with the exception of the section on climate change) I’m yet to find anything particularly alarming.

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Why a public holiday for a Matildas World Cup win could cost far less than you think

Prime Minister Anthony Albanese is right about one thing when it comes to public holidays.

Should the Matildas win the World Cup, any decision to grant an extra public holiday is one for the states and territories. The Fair Work Act specifies only eight national public holidays. Any others have to be “declared or prescribed by or under a law of a state or territory”.

The prime minister doesn’t get a look in. Yet he says he will put forward the idea of a public holiday for a Matildas win at Wednesday’s meeting of national cabinet, and expects the premiers and chief ministers to “fold like tents”.

One already has. NSW Premier Chris Minns says should the Matildas win in Sydney on Wednesday, and go on to win Sunday’s final in Sydney, he’ll not only arrange a statewide holiday but also a massive parade to celebrate “what would be an amazing life-changing and unbelievable event in the state’s history”.

Some people claim such a holiday could cost us A$2 billion. But my own calculation – based on very recent global research – shows it could be significantly lower.

‘Imagine the kind of energy’

It wouldn’t be the first public holiday for a sporting event. Melbourne has a public holiday for the Melbourne Cup, South Australia (improbably) for the Adelaide Cup, and all of Victoria for the eve of the AFL grand final.

But it wouldn’t happen on the Monday following the game. Minns says it takes seven days to gazette a public holiday.

To critics concerned about the cost of an extra day off, Minns asks:

can you imagine the kind of energy, economic excitement? It would be an explosion of economic activity, particularly for the CBD.

It is unconscionable to talk about the cost of a public holiday without also talking about the benefit – what the Productivity Commission describes as the “genuine social benefit associated with widespread community engagement in events, especially on days of cultural or spiritual significance”.

These benefits are deeper and richer than those of ordinary annual leave, in which individuals or families are away from work – but not the entire city or country.

The commission – no fan of unlimited days off – points to evidence that “more shared days of leisure enrich the relationships of people with their friends and acquaintances, which then improves the quality of leisure on other days”.

No hit to productivity

It’s easy to imagine that happening should the Matildas win. A national holiday would bring the nation together, at a cost. And very new international research makes it pretty clear that cost would be small.

One thing it wouldn’t do, despite loose talk, is dent productivity.

Productivity is usually defined as production per hour worked. If the number of hours worked is cut, production per hour worked is likely to stay the same, or even increase if people work a bit harder the next day to catch up.

It’s what Prime Minister Bob Hawke was getting at the morning Australia won the America’s Cup in 1983. He famously declared “any boss who sacks anyone for not turning up today is a bum!”. But far fewer people remember what Hawke then added: “You have to work a bit harder the next day to make up.”

Prime Minister Bob Hawke when Australia won the America’s Cup in 1983. ABC

Far more of us are able to work a bit harder to make up than when Hawke made the suggestion. Back then, one in six Australians worked in manufacturing, often on production lines that moved at a constant pace without the ability to catch up. These days it’s just 6%. More of us work at desks.

A back-of-the-envelope estimate of the production that would be lost – quoted as if it is authoritative by Opposition Leader Peter Dutton – is $2 billion.

But while some businesses will produce less, and perhaps sell less, if there’s an extra public holiday, others will sell more (as Minns has pointed out).

And if they have to pay penalty rates to do it, that’s not actually an economic cost. In the language of economists, it’s a transfer from employers and their customers to employees.

A better estimate of public holiday costs

Working out the net effect of an extra public holiday on gross domestic product requires ingenuity, because it’s hard to know what would have happened to GDP without it.

Late last year, two economists from Harvard University and the University of Chile, Rodrigo Wagner and Lucas Rosso, presented a solution.

They took advantage of the fact that, in many countries, certain holidays aren’t moved when they fall on weekends. This means in some years those countries have fewer days off work from holidays than others.

Examining data from more than 200 countries over the two decades leading up to COVID, they determined the net dent to GDP from an extra public holiday was only 20% of the GDP that would have been produced that day.

As they put it, this means “an 80% recovery with respect to the GDP that would have been lost if the effect were exactly proportional”.

An awful lot of us do a bit more work to catch up after a holiday, or are in jobs where that doesn’t matter, or get more business because it is a holiday.

As Wagner and Rosso expected, the effects varied by industry. In manufacturing, only about half of the expected losses were recovered. In agriculture, which continues regardless of holidays, all the expected losses were recovered.

More like $1 billion – with some real benefits

What does their research mean here in Australia?

I did my own back-of-the-envelope calculations, applying Wagner and Rosso’s 200-plus nation results to Australia’s GDP.

The result? It suggests a hit to production of as low as $1 billion from an extra holiday.

It is worth saying again that’s not a $1 billion loss. In return, we would get extra leisure, and a good deal more besides.

Wagner and Rosso also used their data to examine other things. They found that self-reported happiness climbed in the years there were extra holidays, while deaths (mainly from job-related accidents) fell.

Like most of the things we like, holidays do have costs. But they are probably lower than we have thought, and – at least in the case of a Matildas celebration – would be offset by rather nice benefits.

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We can and should keep unemployment below 4%, say top economists

Australia’s leading economists believe Australia can sustain an unemployment rate as low as 3.75% – much lower than the latest Reserve Bank estimate of 4.25% and the Treasury’s latest estimate of 4.5%.

This finding, in an Economic Society of Australia poll of 51 leading economists selected by their peers, comes ahead of next month’s release of a government employment white paper, and an expected direction from Treasurer Jim Chalmers that the Reserve Bank quantify its official employment target.

Asked what unemployment rate was most consistent with “full employment” under present policy settings, the 46 respondents who were prepared to pick a number or range picked an average rate of 3.75%.

The median (middle) response was higher, but still below official estimates – an unemployment rate of 4%.

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Significantly, only two of the economists surveyed picked an unemployment rate of 5% or higher, which is where Australia’s unemployment rate has been for most of the past five decades.

The 3.75% average implies either that the Reserve Bank and government have lacked ambition on employment for much of the past half-century, or that the sustainable unemployment rate has fallen.

Australia’s unemployment rate dived to 3.5% in mid-2022 and has remained close to that long-term low since.

The survey result suggests the government can lock in the present historic low and need not – and should not – allow unemployment to climb too far from its present rate.

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Many of the experts surveyed questioned the idea of a “magic number” or non-accelerating inflation rate of unemployment (NAIRU) used by the Treasury and the Reserve Bank as a guide to how low unemployment can go without feeding inflation.

Former OECD official Adrian Blundell-Wignall said the concept was not helpful “even in the short run, and certainly not the long run” because NAIRU kept changing depending on what else was going on in the domestic and global economy.

Any rate of unemployment would have a different implication for inflation depending on what the government was doing with tax and spending policy.

Geopolitical events and climate change have probably pushed up the rate of inflation to be expected from any given domestic unemployment rate.

3.5% unemployment, yet falling inflation

Craig Emerson, a former minister in the Rudd and Gillard governments, said NAIRU was best described as the lowest unemployment rate consistent with inflation not taking off. Given Australia’s inflation rate is now coming down, NAIRU is clearly below the present unemployment rate of 3.5%, he argued.

The University of Queensland’s John Quiggin said Australia can be considered to have full employment when the number of job vacancies matches the number of unemployed people. This is the case at present, suggesting “full employment” means an unemployment rate of 3.5%.

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Alison Preston from the University of Western Australia said industrial relations changes have given workers much less power to obtain higher wages than before, suggesting the “non-inflation accelerating rate of unemployment” was either lower than before or an irrelevant concept.

Curtin University’s Harry Bloch says there will always be a mismatch between the jobs on offer and the skills available – an academic can’t do the work of a plumber, or vice versa, for instance. But even so, he says it ought to be possible to get unemployment down to the 2% achieved repeatedly during the 1950s and 1960s.

Consulting economist Rana Roy says in normal times “full employment” probably meant an unemployment rate near 1%, but the business cycle meant there would always be brief – “and I stress brief” – periods when governments might have to accept an unemployment rate of nearer 2%.

Fix education, job-matching and childcare

Asked to select the three measures from a list of 11 that would do the most to bring down the sustainable rate of unemployment, the 51 experts overwhelmingly backed improving the quality of school education (55%), followed by improving employment services (39%) and cutting out-of-pocket childcare costs (39%).

There was also strong support for relaxing industrial relations to give employers greater flexibility (33%) and winding back taxes and regulations facing businesses (24%) as well as boosting enrolments in tertiary education (27%).

There was very little support for cutting immigration or the JobSeeker payment.

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Labour market specialist Sue Richardson said a high-quality job-matching service would both reduce unemployment and boost productivity because Australians would be matched to jobs for which they were best suited.

The unemployed who would benefit the most would be those further down the queue who were the least successful in finding jobs.

Industry economist Julie Toth said digital technologies and working from home were already making it easier to match Australians with jobs across a range of industries, and it was important to preserve these recent gains.

One of the panellists, Peter Tulip from the Centre for Independent Studies, rejected all the options offered for lowering the achievable unemployment rate, and said the only one that might have some effect was restraint when increasing minimum wages.

Another, Brian Dollery from the University of New England, said much of Australia’s unemployment had been generated by unemployment benefits that were too high.

Together, the results of the survey call for the government and the Reserve Bank to be ambitious about unemployment, and not to accept a rate above 4%.

The government’s employment white paper is due by the end of September.

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Individual responses. Click to open:

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Beyond Barbie and Oppenheimer, how do cinemas make money? And do we pay too much for movie tickets?

I’ve got two questions about blockbuster movies like Barbie and Oppenheimer.

1. Why aren’t the cinemas charging more for them, given they’re so popular?

2. Why are they the same price, given Oppenheimer is an hour longer?

The opening weekend for both films saw an avalanche of Australians returning to the cinema. Extra staff had to be put on (although probably not enough) to manage queues, turn away pink-clad fans who couldn’t get in, and clean up mountains of popcorn trampled underfoot.

An obvious solution to such a rush of demand is to push up prices. Airlines do it when they are getting low on seats. When more people want to get a ride share, Uber makes them pay with “surge pricing”.

Even books are sold at different prices, depending on the demand, their length, their quality and how long they’ve been on the shelves.

But not movie tickets, which are nearly always the same price, no matter the movie. Why? And how much has the cost of a trip to the movies risen over the past 20 years?

Why not charge more for blockbusters?

In suburban Melbourne, Hoyts is charging $24.50 for the two-hour Barbie – the same as it is charging for the three-hour Oppenheimer, even though it could fit in far fewer showings of Oppenheimer in a day. It’s also the same price as it is charging for much less popular movies, such as Indiana Jones and the Dial of Destiny.

It’s also how things are in the United States, where James Surowiecki, author of The Wisdom of Crowds blames convention and says

it costs you as much to see a total dog that’s limping its way through its last week of release as it does to see a hugely popular film on opening night.

Australian economists Nicolas de Roos of The University of Sydney and Jordi McKenzie of Macquarie University quote Surowiecki in their 2014 study of whether cinema operators could make more by cutting the price of older and less popular films and raising the price of blockbusters.

By examining what happened to demand on cheap Tuesdays, and developing a model taking into account advertising, reviews and the weather, they discovered Australian cinemas could make a lot more by varying their prices by the movie shown. We turn out to be highly price sensitive. So why don’t cinemas do that?

‘There’s a queue, it must be good’

It’s the sort of thing that puzzled Gary Becker, an economic detective of sorts who won the Nobel Prize for Economics in the early 1990s. A few years earlier, he turned his attention to restaurants and why one particular seafood restaurant in Palo Alto, California, had long queues every night but didn’t raise its prices.

Across the road was a restaurant that charged slightly more, sold food that was about as good, and was mostly empty.

His conclusion, which he used a lot of maths to illustrate, was there are some goods for which a consumer’s demand depends on the demand of other consumers.

Queues for restaurants (or in 2023, long queues and sold out sessions, as crowds were turned away from Barbie) are all signals other consumers want to get in.

This would make queues especially valuable to the providers of such goods, even if the queues meant they didn’t get as much as they could from the customers who got in. The “buzz” such queues create produces a supply of future customers persuaded that what was on offer must be worth trying.

Importantly, Becker’s maths showed that getting things right was fragile. It was much easier for a restaurant to go from being “in” to “out” than the other way around. Once a queue had created a buzz, it was wise not to mess with it.

Cashing in from the snack bar

There are other reasons for cinemas to charge a standard ticket price, rather than vary it movie by movie.

One is that it is hard to tell ahead of time which movies are going to soar and which are going to bomb, even if you spend a fortune on advertising as the makers of Barbie did. In the words of an insider, “nobody knows anything.”

Another is the way cinemas make their money. They have to pay the distributor a share of what they get from ticket sales (typically 35-40%). But they don’t have to pay a share of what they make from high-margin snacks.

This means it can make sense for some cinemas to charge less than what the market will bear – because they’ll sell more snacks – even if it means less money for the distributor.

Rising prices, despite some falling costs

But cinemas still charge a lot. From 2002 to 2022, Australian cinemas jacked up their average (not their highest) prices from $9.13 to $16.26 – an increase of 78%.

In the same 20 year period, overall prices in Australia, as measured by the consumer price index, climbed 65% – less than the rise in movie ticket prices.

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A 2015 study found Australian cinemas charge more than cinemas in the US.

Yet some of the cinemas’ costs have gone down. They used to have to employ projectionists to lace up and change reels of film. Digital delivery means much less handling.

A now-dated 1990s report to the Australian Competition and Consumer Commission found the two majors, Hoyts and Greater Union/Village, charged near identical prices except where they were faced with competition from a nearby independent, in which case they discounted.

Whether “by design or circumstance”, the two cinema chains rarely competed with each other, clustering their multiplexes in different geographical locations.

Longer films no longer displace shorter films

I think it might be the multiplex that answers my second question: why cinemas don’t charge more for movies that are longer (and movies are getting longer).

In the days of single screens, a cinema that showed a long movie might only fit in (say) four showings a day instead of six. So it would lose out unless it charged more.

But these days, multiplexes show many, many films on many screens, some of them simultaneously, meaning long films needn’t displace short films.

Although we have fewer cinema seats than we had a decade ago (and at least until the advent of Barbie, we’ve been going less often) we now have far more screens.

Long movies no longer stop the multiplexes from playing standard ones. And because cinemas like to keep things simple, you pay the same price, no matter which movie you chose.

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Australia is about to set its first full employment target – and it will define people’s lives for decades

Stand by for one of the most important decisions Treasurer Jim Chalmers and the Albanese government will make.

That decision is to commit future governments and the Reserve Bank to full employment, and, more importantly, spell out what that means.

The Australian government hasn’t wholeheartedly and publicly committed itself to full employment since the 1945 Full Employment White Paper, released as the second world war was drawing to a close and Australia was gearing up for peace.

The definition Chalmers chooses – whether it specifies an unemployment rate of 3.5%, 4.5%, or the more ambitious target of 3% I would most like – could reverberate for as many decades as the white paper did in 1945.

Tuesday’s Reserve Bank decision not to increase interest rates further makes it more likely we could end up with a more ambitious target.

Australia’s daunting post-war challenge

The 1945 white paper was prepared for Prime Minister John Curtin by a committee led by the head of post-war reconstruction HC “Nugget” Coombs.

In the 20 years leading up to the war, more than 10% of workforce had been out of work, climbing to 25% during the depression. The committee wanted the all-out mobilisation necessitated by war to be continued into the peace.

Their challenge was to find jobs for the 1 million defence staff who would be returning to civilian life.

Achieving that would require governments to actively stimulate private spending, through their own spending and through monetary and other policies “to the extent necessary to avoid unemployment and the consequent waste of resources”.

That was an idea accepted by both Labor and Coalition governments right through to the 1970s, where unemployment remained as low as 2%. It was also one Coombs himself adopted as the first head of the Reserve Bank of Australia from 1960.

But the employment target Coombs helped write in to the Reserve Bank Act was fuzzy: it simply committed the bank to “the maintenance of full employment in Australia”.

Finally setting a jobs target

Fast forward to March 2023, when the treasurer was handed the review of the Reserve Bank, An RBA fit for the future.

That final report pointed out the bank’s target for inflation is specific – defined in a written agreement with the treasurer as “2-3% on average, over time”.

In contrast, the bank’s target for employment has no numbers attached – resulting in inflation getting prioritised.

While it is true that putting a number on a target doesn’t guarantee an outcome, the number put on the inflation target does seem to have helped bring it down.

The RBA review recommended the treasurer’s agreement with the bank be updated, requiring it to adopt an explicit target for “full employment”. That would most likely be expressed via a range of indicators, including the unemployment rate, the underemployment rate, and the tenure of employment.

Chalmers says he will update the agreement and issue the direction by the end of the year. Before then, next month he will make public his own target for full employment via his employment white paper, now being prepared by the treasury.

Moving unofficial targets of the past

The numbers that the treasurer and the Reserve Bank adopt will matter enormously. And it’s worth clarifying that the target can’t be an unemployment rate of zero.

There will always be some temporary unemployment as people move between jobs. That’s also the case when people leave industries that are no longer needed – such as thermal coal mining in the years ahead, as our energy mix changes – and go on to retrain for jobs in emerging industries.

For a while in the 1990s, the Reserve Bank acted as if full employment meant an unemployment rate of 7%. That was its estimate of the “non-accelerating inflation rate of unemployment” (also known as NAIRU), the rate needed to stop shortages of useful workers pushing up inflation.

In 2017, the bank cut that estimate to 5% and then 4.5% in 2019. Then, about a year after COVID hit, it appeared to cut it further when Governor Philip Lowe said in 2021 there was a chance Australia could achieve and sustain an unemployment rate in the “low fours”, although only time would tell.

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The lower our target, the more secure we will be

The unemployment rate is now 3.5% – a near five-decade low.

If the government and the bank choose to adopt 3.5% as a target, it would put 150,000 more Australians into work than would a higher unambitious target of 4.5% – in perpetuity.

A lower target of 3% (not too far above the 2% Australia achieved from 1940 to 1974) would do much more than put people into jobs and better use our resources.

It would also help us adapt to change in the way we are going to need to.

Creating confidence to face change

The 1945 white paper was on to this, at another time of massive transition when the wartime industries were dying and the peacetime industries emerging.

It said an assurance of full employment would

assure workers that the community has need of their services somewhere, and will restore the basic sense of security without which new risks will not readily be undertaken.

It’s a point echoed by Prime Minister Bob Hawke’s former economic advisor, Ross Garnaut, in an address to the Australian Conference of Economists last month.

He said unless there was confidence in high employment, every time an industry or employer was threatened with closure, there would be a cry of “jobs, jobs, jobs” as workers fought to protect what they had.

Garnaut told me it was a lesson he learned from Hawke when he signed on with the prime minister in 1983. Hawke agreed with him that the economy would have to change and some industries would have to die. But Hawke told him he wasn’t going to bring on those changes until unemployment was clearly coming down.

When people knew they could get another job, they would accept change.

Now, as in the 1940s and 1980s, we need that confidence. If Chalmers and the Reserve Bank adopt an ambitious target, they’ll create it and set us up for the challenges ahead.

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