Textbook economics meets the real world

Ross Gittins explains why Textbook economics meets the real world results in workers getting stuffed around:

When one sector is shedding labour at a time when another sector is desperate for more workers, this allows the expanding sector to attract the labour it needs without bidding up wage rates unduly. That is, the process helps limit inflation pressure.

Get it? The squeeze on manufacturing is happening not by accident but by design. All the textbooks will tell you that's the outcome the rise in the exchange rate is intended to bring about (given that the boom is happen in mining rather than manufacturing).

Remember the recent decision to close the Mitsubishi car plant in Adelaide? It's a classic example of textbook economics working in real life. As soon as they heard the news, mining companies from around the nation rushed to Adelaide to try to recruit the skilled workers they so desperately need.

It was fortunate for many of the laid-off car plant workers the mining industry was booming at the time. But it wasn't a happy accident. The same high exchange rate that was the inevitable consequence of the mining boom was what finally did in the car plant.

Of course, there'll still be tears and pain among the laid-off Adelaide workers and their families. Their treatment has been brutal.

The market system is a great way for societies to become prosperous. But no one ever promised that capitalism is gentle. It ain't.

Emphasis Mine

At least, he is honest.

One problem he overlooks is that not all skilled workers are interchangeable. Unskilled workers can be deployed easily from one industry to another because they need a minimum amount of training to be able to do the job. Whereas it may take up to ten (10) years for a skilled worker to be proficient at their skill.

Skills cause a lot of friction in the labour market as workers cannot readily move from one sector to another.