A decade or more ago, Australia had a problem with unemployment. John Howard was one of those – disparagingly called “economic rationalists” at the time – who insisted that the solution was to be found in the industrial relations system; persistent structural unemployment meant that somewhere in the economy wages were too high, and greater wage flexibility would allow the appropriate adjustments to be made.

He was right. No doubt there are other things at work as well, but a big part of our recent success on the unemployment front has been due to the flexibility introduced to the IR system by the Keating government and strengthened in the first term of the Howard government.

So it’s interesting that Canberra seems unable to grasp the obvious corollary of this: that a shortage of labour in particular sectors of the economy can be remedied by raising wages.

This blind spot permeates discussion of the “skills shortage”, where government and business compete in searching for ways to increase the supply of labour without increasing its price. But the lesson of the petrol and water markets works for the labour market as well; the way to match supply with demand is by adjusting prices.

Now the government has its own labour shortage, with insufficient people signing up to fill the increased targets for the defence forces. Hence Brendan Nelson’s increasingly desperate sounding plans to attract more, including a new scheme for 12-month trial enlistment for school leavers.

Our involvement in Iraq and Afghanistan has obviously brought home the message that the army isn’t just a glorified TAFE institution, but carries significant risks to life and limb. In a time of low unemployment, there are safer ways to earn a living.

The traditional solution for governments that can’t get enough people for unpleasant jobs is to recruit them at gunpoint. To his credit, Nelson has ruled out that option. But if he really thinks the country needs more soldiers, how about just paying them more?

Peter Fray

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