Care industry’s giant sucking sound a threat to prosperity

Rapid growth in government spending on disability and social services is crowding out private enterprise and killing productivity.

During the 1992 US presidential campaign debates, independent H. Ross Perot, centre, faced off against Democrat Bill Clinton and Republican George H.W. Bush. Picture: AFP

During the 1992 US presidential campaign, third-wheel candidate H. Ross Perot memorably warned of the perils of the newly minted North American Free Trade Agreement between the US, Canada and Mexico. In a debate with George HW Bush and Bill Clinton, Perot said Americans would soon hear a “giant sucking sound going south” as profit-obsessed factory bosses shifted good jobs over the border to their “dollar an hour” neighbours.

NAFTA was never going to bust the mighty US economy but it soon became the firestarter for anti-globalists of all persuasions, including many of those currently hoping to Make America Trump Again.

Here, on a reduced scale and with more modest vacuuming intensity, there are growing qualms about the rise and rise of the “care economy”, sucking in workers, chewing up a greater share of taxpayer funds and dragging down national productivity.

The burst of employment and rapid growth in government and private spending on disability services, aged care, childcare, health and medical services are among the great structural changes of our time. Westpac senior economist Pat Bustamante says our economy is “quietly undergoing one of the largest transitions in modern history, rivalling the structural change driven by the mining investment boom of the 2000s”.

The transformation was under way before the pandemic, but it’s now more visible in job figures and the fiscal ledger as public spending on services, capital works and bureaucrats takes up a greater share of our economy. The care sector employs 15 per cent of all workers; a decade ago it was 10 per cent.

Societal ageing is a driving force, with an ever-increasing number of frail people with complex needs – not just boomers, they’re just the pioneers. So, too, our community’s preference for better services paid for by a shrinking share of workers.

Even if its growth rate is reined in, the $49bn National Disability Insurance Scheme is expected to cost more than the Age Pension in a decade. Since the start of the NDIS rollout in 2016, the disability services workforce has more than doubled to 534,000.

New public demand has increased from a pre-pandemic average of around 22.5 per cent of gross domestic product to a record high of 27.3 per cent, and growing, due to the increased provision of taxpayer-funded childcare, education, healthcare, aged care and disability support, as well as the infrastructure catch-up to deal with record population growth.

Bustamante is quick to point out this is not a “bad thing”. “Governments exist partly to provide citizens with goods and services that the market sector would not,” the former federal Treasury economist writes in a recent research note. “And there are many cases where this generates large social and economic benefits.”

But there are implications for the economy, as capital and labour shift and more is produced in the “non-market sector”, which are industries that provide goods or services free of charge or sold at highly subsidised prices.

Here measured productivity, where output is notoriously difficult to measure, is now less than two-thirds of the abysmal economy-wide average level.

A new study from researchers Matt Maltman and Ewan Rankin at the not-for-profit e61 Institute, where I work as an adviser, tries to quantify the macro impact of the rapid growth in the care economy. They find there has been virtually no measured labour productivity growth in the sector for 20 years.

In fact, what Rankin calls a “massive generational shift” has subtracted 0.2 per cent each year since 2019 from measured labour productivity, which is “a substantial acceleration of its prior effect”.

The authors found expansion in the care workforce has drawn new people into jobs (including migrants and the previously jobless), raised competition for workers with other industries, but still has not managed to fill all the necessary jobs. Vacancies in this female-dominated sector are higher than in other industries.

The capital and labour switch has been aided by relatively strong wages and prices growth. Since 2010, hourly wages have increased by 50 per cent in the care economy (outstripped only by utilities and energy), propelled by government policy. The price of medical ser­vices has doubled. Much of this rise is government-financed, and the e61 authors say the taxes that fund this have redistributive and efficiency implications.

“If taxes are higher than otherwise to finance the expansion in the care economy, this reduces household disposable incomes and demand for a broad range of goods and services,” they write.

The Productivity Commission’s latest performance analysis is sobering. During the pandemic, aggregate productivity rose and then fell as restrictions were eased. Now, commission deputy chairman Alex Robson says, “this bubble has well and truly burst” and our productivity level is stuck at the average recorded in the years before the Covid health and economic crisis.

Across the 12 months to June, productivity in the non-market sector declined by 0.7 per cent; in the market sector, productivity rose by 1 per cent. “This suggests policymakers need to pay closer attention to the deeper structural issues at play,” says Robson.

Research by the commission found our healthcare sector is highly productive, ranking third among 28 high-income countries. “Quality improvements, not cost reductions, were the big drivers of productivity growth, and the vast majority of these have come from advances in saving lives,” the commission’s April report says.

But let’s not get complacent. In its five-year review, published last year, the commission said there was more scope for innovation in health and education through better use of data and artificial intelligence, as well as streamlining of services, using better diagnostic tools and ditching wasteful medical procedures. As well, it said governments should look to adjust funding models, to pay for outcomes rather than quantity of services delivered, including a greater focus on preventive care.

Disability services, aged care and childcare are labour-intensive and not readily transformed by technology and innovation. This means the rest of the economy needs to squeeze out higher productivity gains if we are to continue to generate income and pay for these services in an ageing Australia that is becoming more expensive to run.

How will we do that?

Cutting costs may be harder than trying to raise the quality of services. Shifting the cost burden to those with the means to pay, as the recent aged care reforms are geared towards, will help.

Rankin, an e61 research manager, says harsh cuts and slashing staff are unlikely to work at this time. “Boosting productivity in the care sector will rely on better aligning incentives with quality improvement and the adoption of best-practice ideas,” he says.

The e61 authors argue ensuring skilled and motivated people enter the sector is also key to productivity, while relative wages growth is the best mechanism to facilitate this reallocation, rather than, say, low-skilled migration to fill job vacancies.

In its recent health check on the Australian economy, the International Monetary Fund gave a tick to the Albanese government’s competition policy, including on mergers, and urged more action to stamp out non-compete clauses. The IMF described the aged care reforms and NDIS review as “positive forward steps” in dealing with structural budget pressures.

But there is a much bigger to-do list, including tax reform, better pricing of carbon dioxide emissions, infrastructure delivery and restoring labour market flexibility. On this last point, the US provides a salutary lesson. That whoosh of air you hear amid the tumult in the global economy is the sound of America’s productivity surge.

A new study about productivity in the post-pandemic world from the Bank for International Settlements found that US business dynamism, which has spurred investment, especially in manufacturing and clean energy, and labour market flexibility are behind its stellar performance.

Like Canada and Australia, the US has attracted migrants in this phase. So why are its peers lagging behind? It’s possibly due to “capital shallowing”, meaning the investment response in Canada and Australia has lagged growth in the labour force. “A more dynamic and high-pressure economy in the United States may have enabled faster absorption of immigrant labour,” the BIS study says.

The danger from stagnant productivity is clear: lower growth, persistent inflation and higher debt. So while we remake our economy, and add in forever care spending, is it impolite to ask our leaders not to lose sight of the main game in the coming election campaign?

We’re leaking air and our wealth machine is losing power. To retool a line from Clinton strategist James Carville in the ’92 race, it’s the supply side, stupid!