RDP 9403: Capital Constraints and Employment 1. Introduction

Australian investment is currently at historically low levels. In seasonally adjusted terms, real expenditure on plant and equipment was approximately 25 per cent lower in the December quarter of 1993 than four years earlier, falling from 7.5 per cent of GDP to 5.6 per cent.[1] On some estimates, the capital stock has been falling over this period, i.e. gross investment has been less than depreciation.[2] There has been considerable concern expressed about these low levels of investment. Access Economics (1992, p. 15) has claimed that “current investment levels are at crisis levels.” One reason for concern is that this low level of investment may restrict output growth, and thus employment, during the recovery from the recent recession.[3]

This paper attempts to place concerns about these issues on a more rigorous foundation than is present in most current discussions. To do this we calculate the level of output that could be produced, on a sectoral basis, operating the current capital stock at full capacity. We then calculate the employment that this full capital utilisation level of output could create. This allows an understanding of whether capital shortages are likely to restrict the growth of employment as the recovery proceeds. We also calculate hypothetical projections for each sector of the investment required to sustain employment growth over a five year horizon.

The results of our analysis suggest that, in the manufacturing; mining; transport, storage and communications and recreation, personal and other services sectors there is sufficient capital installed to accommodate substantial increases in employment and output. Similarly in the wholesale and retail trade sector capital is currently under-utilised. However, in this sector the amount of labour currently employed is greater than necessary, given the degree of capacity utilisation; this means that the potential for employment growth as the capital stock is more fully employed may be limited. In other sectors of the economy further capital accumulation may be needed before substantial increases in employment are realised. However, these other sectors include labour intensive service sectors where capital is not the primary constraint on output or employment. Furthermore, we find that the investment requirements for renewed employment growth are relatively modest, at least after an initial jump to recover the ground lost over the past three years.

The remainder of this paper is organised as follows. Section 2 describes the techniques used to calculate capacity output, capacity employment and the investment projections. The results of these methods are presented in Section 3 along with some discussion of interesting features of the sectoral results. Finally, Section 4 concludes and summarises the paper.


Source: Australian National Accounts (ABS Cat. 5206.0, Table 59) [1]

Access Economics Monitor, January 1993. [2]

These concerns were also raised in the context of European unemployment through the 1980s; see Bean (1989). [3]