nsw land and environment court 120910 monday.pdf

7/28/2019 NSW Land and Environment Court 120910 Monday.pdf

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.10/09/12 30 DENNISS/SEARLES


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WILLIAMS: Your Honour, the parties are again agreed subject to the Courtsdirection, that the most efficient way to proceed would be for a five or 10minute presentation by each followed by cross-examination.

HIS HONOUR: Thank you. Dr Denniss, why dont you start and just explain5

your points of view.

WITNESS DENNISS: Sure, thank you. From my point of view the informationthats been provided in forming this decision is based on the inappropriate useof input/output modelling, and while I think there is a role for input/output10modelling in understanding impacts of some decisions, I dont think the kind ofdecision that we are considering in this case is one of those situations.

Basically input/output modelling describes the strength, the relative strength ofthe relationship between different parts of the economy. So when a car15manufacturer makes cars, cars are made out of steel, labour is required,

energy is required and the input/output tables tell us about the relative strengthof that relationship, so if you wanted to know how much more steel would berequired to make an extra 1,000 cars the input/output tables arent a bad firstestimate for where to go looking.20

However, when we start to use these input/output tables to try and understandthe economic impacts, and in particular the labour market impacts of aninvestment such as the Warkworth expansion, I dont think the results areterribly meaningful at all. Now, this is a view which is shared by Treasury and25the Australian Bureau of Statistics and indeed is even conceded in parts of theBennett and Gillespie report, that to try and use input/output tables to tell usabout job creation is simply inappropriate.

The reason for that is that quite explicitly, and I am sure Dr Searle will agree30with me, quite explicitly, the input/output data that is before you assumes theexistence of what I refer to as a ghost workforce. There are hundreds ofskilled potential job seekers currently unemployed, waiting for this investmentto go ahead and quite explicitly in input/output tables, the assumption is thatthere are these unemployed resources which will be drawn in to the new35activity but not drawn away from any other activity, which is - you know, thesignificance of the employment - the unemployment assumption, that they are

not being drawn away from anywhere.

Now, the consequences of that cant be underestimated when youve got not40just an economy that is approaching full employment or as Professor Quigginsaid, an economy which is sufficiently fully employed that the Reserve Bankwill increase interest rates if unemployment rates would be much lower, buteven leaving aside the national unemployment rate which is very low, the ideathat there are hundreds of skilled mining or manufacturing workers sitting idle45at the moment waiting for these projects to go ahead, is even more unrealistic.

To add to that, the idea that there are unemployed skilled mining and

manufacturing workers in the Hunter Valley at the moment again sitting andwaiting for these projects to go ahead, I just dont think is plausible, accurate or50


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useful for analysing a situation like this.

Now, it is very widespread. There is no doubt it is very widespread for peopleto use these sorts of input/output models and what are often calledinput/output multipliers to tell a story about the indirect or upstream and5

downstream impacts of a project, you hear it all the time, but what you donthear all the time is what would happen if every industry were to commission aconsultant to write the same report for them, because what happens withinput/output modelling is that a particular industry, usually the proponent whohas paid a consultant, says, Well, Im going to spend a billion dollars on this,10what are all the jobs that will be created in some other part of the economy?

Effectively what that allows the proponent to do is claim credit for employmentin other industries, employment in other sectors, and we have conducted thisexercise. If every industry were to go and try and estimate the indirect jobs15that flowed because of their industrys existence, what you find is that Australia

would employ around 200% of its current workforce, that is these spill-over orindirect jobs are only meaningful in the kind of partial equilibrium frameworkthat Professor Quiggin was referring to.

20Of course it is nonsensical to think that the Australian economy employs 200%of its workforce, it doesnt, that the problem is that its partial equilibriumanalysis assumes ceteris paribus, all other things being equal. So the miningindustry does its analysis, assuming ceteris paribus in manufacturing.Manufacturing does its analysis assuming ceteris paribus in construction.25Construction does its analysis assuming ceteris paribus in retail and they canall come up with these little numbers that are politically useful to them but theydont make any common sense and any economic sense when viewed at themacro scale.

30That is what the difference between a partial equilibrium analysis andinput/output analysis is one of those, compared to what is called a CGE orcomputable general equilibrium model. In a CGE model quite explicitly--

HIS HONOUR: Sorry, computer?35

WITNESS DENNISS: Computer - sorry, computable.

HIS HONOUR: Computable.40

WITNESS DENNISS: Computable.

HIS HONOUR: Yes.

WITNESS DENNISS: General equilibrium. Thats the more common and I45think most economists would argue, more appropriate kind of model toestimate things like net employment creation associated with projects,because while input/output models assume these ghost workers or this pool of

unemployed skilled workers, computable general equilibrium models, CGE, ifyou dont mind, CGE models start from the pool of labour that exists. So in a50


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CGE model if you increase employment in mining by 1,000 people, the CGEmodel will effectively draw 1,000 people out of other industries. That is therole of the model, to say well, which industries would most likely be the sourceof that.

5

So in Queensland, for example, where theres been some big minedevelopments and proposals, we see, for example, that if the China First Minewere to go ahead, the proponents of that mine concede their own CGEmodelling says 2,000 manufacturing jobs would be lost in the rest ofQueensland. So its not controversial at all to suggest that with a CGE model10new jobs in one industry come from other industries.

If all of a sudden I wanted to buy up waterfront property in Sydney, it wouldntcreate more waterfront property. I would be buying it off someone else. Thesesorts of transfers are quite common in economics. It is certainly the case with15skilled labour in the middle of a fully employed economy in the middle of a

mining boom. Again, to argue that there is lots of unemployed miners, I dontthink, is very realistic.

Now Professor Bennett made the point that even if these arent new jobs, the20continuation of existing jobs is particularly valuable. Now, I would say if thereis - and to be clear, I dont think there will be any net employment creation fromthis mine going ahead. I think if this mine goes ahead jobs will be lost in othermines or in other manufacturing enterprises. But Professor Bennett suggestedthat even if that were the case, that there are benefits associated with the25continuation of existing jobs, but I just looked this up when Professor Bennettwas speaking.

Professor Bruce Chapman, Professor Bennett and mines colleague at theCrawford School, has estimated based on the rate at which mining workers30leave the industry, that in 10 years time 85% of todays mining workers willhave left the industry and in 20 years time 97% of todays mining workers willhave left the industry. So while I dont think theres any employment creationassociated with this project, I also dont think that the benefits of continuationwould be anywhere near as significant as has been suggested for the simple35fact that theres higher turnover within the mining industry.

A few other points that I would make about the use of these input/outputmodels in this instance. All input/output tables are based on assumptionsabout the relative strength of the relationships between different industries,40and I think that - well, the data that we are looking at is based from 2001, theHunter economy, as the rest of the economy has transformed quitesignificantly since then. The uptake of mobile phones and the internet since2001 are a very small example, but all industries over time undertaketechnological and structural change.45

I would suggest that no input/output table based on data from 2001 couldprovide an accurate depiction of not only what is going to happen in 2012 but

what is forecast to happen as far out as 2030. Now, the employment intensityof some industries might increase, might decrease in others. My contention is50


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that 10 year old data is hard to use now, it is very problematic using it 20 yearshence.

To conclude, I again reflect on what was said this morning, it seems to me thatwhen we look at things like the total value of the coal sold and we are including5

the profits of the owners of the mine, when we are including all those benefits,that it doesnt make economic sense to ignore the related costs. That is if weare going to include benefits that occur outside a boundary, surely we shouldinclude the costs that arise outside of those boundaries.

10To summarise, I would suggest that what the mining industry has done inmany instances using these sorts of techniques is they are very good atclaiming credit for indirect benefits, but they are very reluctant to takeresponsibility for indirect costs. So they are very quick to point to jobs in retailor jobs in transport and say, Thats a benefit that comes with this project, but15when it comes to people losing their jobs in the manufacturing sector because

of the higher exchange rate or manufacturing enterprises, shutting downbecause of the higher wage rate, those costs are not being presented, and aCGE model includes those things far more forcibly. Thank you.

20HIS HONOUR: Yes, Dr Searles.

WITNESS SEARLES: Thank you, your Honour, commissioner. I would like tojust start off by giving a brief background to the foundations input/outputmodel. The foundation has been involved in input/output modelling since the25late 1960s and 1970s, well before the time I started there, but I have beeninvolved in input/output modelling since the late 1980s. I agree withDr Denniss that what the IO model does is identify linkages within theeconomy, and specifically it identifies the strength of linkages, and thatsrepresented by a statistic called the multiplier.30

They are very good, I believe, for showing the effects of a stimulus or acontraction in the economy. The outcomes from an input/output analysisusually report a change in employment, output or income, so there are threekey results from an input/output analysis. In terms of the foundations35input/output model our model only relates to the Hunter region, so we identifyany benefits that go outside the Hunter, for example, to the Central Coast,

Sydney or Melbourne, we regard that as a leakage and we dont include it asjobs or output being created.40

One of the important aspects of our model that we believe differentiates it frommany other - particularly regional models that are used is that it is surveybased. We have interviewed a random selection of around 300 firms toidentify where those firms buy their products from and where they sell theirproduct to. It is using this survey based information that enabled us to45construct a region specific input/output model.

The data that we last collected was from 2001 and for reasons that I have both

addressed in my affidavit and that I will just briefly touch on in thispresentation, we still believe that that 2001 data is a reasonable representation50


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of the regions economy.

In terms of the Warkworth report that we undertook, I believe it is aconservative approach to the modelling. Firstly, the analysis that weundertook removed in terms of an input to the model any expenditures that5

Coal and Allied, Rio Tinto, identified to us were not going to be spent in theHunter region, so that was the first step down in terms of having aconservative run of the model.

I would also like to identify that the model itself also assumes from that initial10impact that there is a leakage from the region. We left the model to do that aswell. So there is a built in conservative approach to what we did. In terms ofthe operations, we removed those external expenditures and we did the samething for capital expenditures as well. If Rio Tinto identified that the capitalbeing purchased from overseas or outside the Hunter we would remove that15before we actually put those figures into the model.

In terms of the key results, and I think this is actually quite important because italso relates to the availability of resources. The analysis that we did comparedthe base case, which is the existence of the mine, and we ran a scenario20between 2011 and 2021, we also ran a scenario with the mine being extendedout to 2031. The main difference in terms of the analysis was that the benefitsbeing created from the base case extended out so they continued on, and thisis important when people talk about what might appear to be a sudden boost inemployment or employment being dragged in from the region.25

Those employees are actually already there, and what would likely be tohappen is that if the mine stopped producing at .X for example, then thoseemployees would then be without work, so that in a way is where the availableresources come from. If the mine continues, there is a continuation of those30positions, not necessarily the same people, but those positions.

HIS HONOUR: Does that make the assumption that there is no other work forthem to go to? What if there is another coalmine that opens up and theyrelooking for a workforce in 2021.35

WITNESS SEARLES: That is possible. What I can do though is comment on

the available labour supply in the current market and if it suits your Honour, Iwould like to get onto that. I have just got to sort of progress through thepresentation.40

HIS HONOUR: Yes, yes, please.

WITNESS SEARLES: If that is suitable. So in terms then of actuallyaddressing what had been the concerns with the input/output modelling, in my45affidavit I have identified evidence that has been drawn from both theAustralian Bureau of Statistics and also from sample methodologies that weuse at the Hunter Valley Research Foundation to identify trends in the regional

economy, both from households and from firms.50


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The reason that I am citing this is that I think it is quite a high standard ofevidence that we are using and we are using information that is particular tothe Hunter region, so we are not assuming that the Australian statistics applyto the Hunter, because the Hunter is a very different region to what ishappening in other areas of Australia. As an example, in the 1990s I was an5

economist with the Hunter Valley Research Foundation at the time whenunemployment rates in the Hunter were approaching 17%. It was verydifferent from even though we were in a recessionary period, it was muchharder in the Hunter region than it was elsewhere in Australia.

10In terms of using the 2001 data for the Hunter region, I believe that in fact it isappropriate. It wouldnt have been appropriate had we been using a modelthat was based on data that had been collected in the 80s and 90s and thereason for that is that during the 70s, 80s and 90s, there was very significantstructural change occurring within the Hunter region. We were moving from an15economy that was very reliant on heavy manufacturing to an economy that

was much more diversified.

Most of that structural change had actually completed by the end of the 1990s,and in fact one of the well-known changes that occurred in the Hunters20economy was the closure of steel making at BHP in 1999. Between 2001coming up to 2012 there have been changes in the economy but I believe thatthe evidence suggests that in fact theyve just been a continuation of minorchanges on a path that was already set prior to 2001, after that structuralchange happened.25

In terms of unemployed resources, I believe that the evidence would suggestthat there are unemployed resources in the Hunter region and I refer both tolabour but also to the capacity of local firms. Starting firstly with theunemployment rate. In the Hunter region at the moment the unemployment30rate does tend to oscillate quite a bit because it is based on a reasonably smallsample, but it does hover between 5 and 6%.

The unemployment - to be defined as unemployed by the Australian Bureau ofStatistics means - sorry, to be defined as employed by the Australian Bureau35of Statistics means that you have found an hour or more of work in thereference period, so it is actually a very small step up to actually be considered

as being employed. So the unemployment rate is a proxy for unemployedresources, but it is a very conservative one.40

We believe that you also have to look at some of the other labour force figuresas well. One, for example, is the participation rate, and the participation rate isthe proportion of people in the working age population who are eitherunemployed, that is they are looking for work, or are in work. The participationrate in the Hunter region has tended to be for decades well below the45participation rate in both New South Wales and Australia.

That alone suggests that there is a potential for a pool of - or a supply of labour

to come forward, and in fact over recent years that is exactly what we havebeen noticing. As more and more jobs become available, people who were50


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previously not looking for work or not putting themselves forward for work arecoming forward, and in my affidavit I have a chart there on the participationrates and you can see that in the Hunter region t he participation rate isapproaching that New South Wales, but it is still below it.

5

There is also a factor of underemployment. Underemployment is quite difficultto measure at the regional level. We conduct each quarter a survey of Hunterregion households, and one of the questions that we ask them, particularly forpeople working in part-time employment, whether they are working sufficienthours, and, again, in my affidavit I have presented a chart in there which10indicates that on balance people are working fewer hours than they would liketo. This again represents the potential for labour supply that is in existence atthis point in time.

There is also the ability to increase the supply of labour through training, and in15my affidavit I give an example of a TAFE initiated course that is located in the

upper Hunter that is designed to specifically skilled people for working in themining industry. So again there is this supply of labour which the region iscapable of providing.

20The final point that I would like to mention here is that supply is also beingreleased constantly from other sectors. For example, in the Hunter region atthis point in time we have got a very weak residential building sector, and thatof course has implications for people who would normally be working, thetrades, who would normally be working in the housing industry. Two other25pieces of information that I would like to put forward that support the contentionthat there is available resources.

One comes from our - sorry, both come from our business surveys, which areundertaken amongst a randomly selected group of firms, each quarter in the30Hunter region. One of the questions we put forward to them is, What is themain factor thats constraining their output? The most frequently cited factoris actually sales and orders. Labour comes midway out of six particularoptions that we put to respondents, labour comes in third, and about 25% offirms indicate that the supply of suitable labour, so that means skilled labour, is35a concern for them.

That proportion and the chart is in my affidavit, has remained pretty stable fromI think put the chart back from 2000 and it has virtually been unchanged rightthroughout the mining boom. The second piece of information from our labour40force surveys is related to the supply of resources in general, and it is thecapacity of local firms, and one of the questions we asked our firms in theHunter region is about their operating capacity and between 40 and 45% offirms have indicated that they are operating at 80% or below.

45Again, this is indicating that there is supply of resources within the Hunterregion and that proportion, in my affidavit, has also remained pretty stable overthe last decade. One of the criticisms about the input/output modelling that

had been identified was the fact that it could duplicate and double count. Iagree that there is the potential for input/output modelling to duplicate,50


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however I also would like to say, and I have documented this in my affidavit,that we took care to make sure this duplication did not occur.

The duplication, I believe, will occur if people conduct the analysis and reportboth the income effects and the output effects. Both are represented in dollar5

terms and its quite likely that people will add them together, and in fact theincome effect and the output effect do overlap, so if you do add those twofigures together, you will be double counting. We did not do that in theWarkworth report and we only reported the output effects specifically for thatreason.10

In terms of the benefits of using the foundations input/output model, firstly webelieve it is specific to the Hunter, because it is based on surveys of localfirms. We believe that we have taken a very conservative approach. Themodel itself only pertains to the Hunter region so it doesnt include employment15benefits that fall outside of the Hunter region, and in the way that we did the

modelling, we were very careful to remove inputs that may have overstatedwhat the benefit could be.

That actually relates to one of the criticisms of the input/output modelling in20that we used the - it was stated that we had used the sale price of coal and Iwould like to be clear that in fact we didnt use the sale price of coal, weactually used the cost of producing coal, which is a very different figure and amuch lower figure, and that was the input that we used for our modelling work.That sums up my statement, thank you.25

HIS HONOUR: Now, Dr Denniss, is there anything that you want to respondto that or ask questions?

WITNESS DENNISS: Yes, look, theres a couple of points that need to be30made, and perhaps we might need to clarify whats meant by duplicationbecause I would contend that there is substantial duplication of the benefitsassociated with this modelling. Can I just read a quote from the ABS to helpdescribe why I think theres duplication?

35HIS HONOUR: Yes.

WITNESS DENNISS: According to the ABS, when using input/output modelsthe implicit assumption is that those taken into employment were previouslyunemployed and were previously consuming nothing. In reality, however, not40all new employment will be drawn from the ranks of the unemployed, and tothe extent that it was, those previously unemployed would presumably haveconsumed out of income support measures and personal savings.Employment output and income responses are therefore overstated by themultipliers for these additional reasons.45

Now, the significance of that is that while I dont suggest for a minute thatDr Searles has conflated the two different forms of multipliers, but when you

assume that everyone moves from the ranks of the unemployed to the ranks ofthe employed, and you then go and calculated what he refers to as the pay50


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packet effect, if people were moving from having zero pay packet to theirmining income pay packet, then when they go and spend that money in thelocal economy, that will have a far bigger impact on the local economy than ifpeople move from manufacturing job A to mining job B.

5

So the pay packet effect that is referred to in the Hunter Valley ResearchFoundation work I would argue is a duplication of the benefits because quiteexplicitly, and Dr Searles doesnt dispute this, the assumption is that all ofthese jobs come from the ranks of the unemployed. Now, to quote the MiningCouncil of Australia:10

The mining industry has got a skills shortage issue, a chronicshortage of mining professionals and tradesmen.

I dont believe, and it is my opinion, that it is frankly absurd to believe that is a15pool of unemployed skilled people who can move from zero pay packet to

employment in this industry and that in turn the social and economic benefitsassociated with that transition can be anything like what is being estimated bythe Hunter Valley Research Foundation.

20Dr Searle(as said) might have some evidence for you on what proportion -well, there are two extremes and there is a middle ground. I am comfortablewith my proposition that the employment creation from this will be zero orsomething approaching zero. Dr Searle is suggesting that some people mightbe trained and take up these jobs, but the question is will all of them be trained25and take up this job?

Even if we concede some small net employment increase, I think it isinconceivable that all of these jobs that are being described as havingeconomic and social value are jobs that would otherwise not exist. That is30what we know is the Reserve Bank sets interest rate policy to manage themacro economy in such a way that it targets an unemployment rate,unfortunately some would say of around 5%.

So whether Dr Searle thinks there is under employment or not in the Hunter35region it is not really the point. The point is what would the Reserve Bank do ifunemployment were significantly lower than it is now and the answer is it

would increase interest rates. So I do think that there is significant duplication,not that - I agree that the kind of duplication he described does not occur, but ifyou think that there are 900 or so unemployed people who can move into40these jobs, then the numbers put forward by the HVRF are sound, but if this isjust people moving from one industry to another, then it is not.

Now, to quote the proponents of a large mind in Queensland, this is theproponents, I might add, when they did CGE modelling of the kind that I think45is far more appropriate they say:

Of note, the manufacturing sector is estimated to record a

considerable decline in overall industry output during its operation.It is anticipated that the manufacturing sector will be one of the50


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hardest hit sectors in terms of the reallocation and draw of labour tothe China First Project given the relatively similar skill setsemployed.

Now, there might be something uniquely Hunter Valley about the capacity to5

generate these skilled workers that the industry needs, but the mining industryin Queensland arent aware of them and the Mining Council itself dont appearto be aware of them.

HIS HONOUR: Question of - Dr Searles, is you mentioned about the basis of10structural change and how this economy occurred before 2001, since thentheres only minor changes. Just on this point about the employment wheretheres been a number of mining projects which have commenced since 2001and indeed this project itself got ascent in 2003, have you done any researchon the workforce that were employed in these mining projects and from15whence they came.

Did they, for example, support your hypothesis that they would be allunemployed people first getting their job in the mines, or did they, as I thinkwould seem more likely, come from other industries either within the Hunter or20other mining projects elsewhere.

WITNESS SEARLES: We havent done any specific research to see exactlywhere the employees have come from, but if I could make just a couple ofpoints. One is that in the Warkworth example, there is sort of a continuum and25I guess the way that I am viewing it is that there are people in those miningpositions up and to a certain point. If the extension does not go ahead, thenthose people will become unemployed at that point.

If the extension does continue on, those people would then transit from being30in this job to that job, so it is effectively the same positions. The contention - Ibelieve the contention is that people being drawn from other sectors does relyon us being close - either at or close to full employment, and in the Hunterregion I dont believe that is the case. We have a reasonably complex regionaleconomy and, for example, at the moment, as I mentioned earlier, people who35are working in the building sector are going to find that their job prospects areactually reasonably quite weak and some of those skills should be skills that

will be picked up by the mining sector.

HIS HONOUR: All right. Questions please.40

WILLIAMS: Dr Denniss, this is an extension project, as youre aware, with itsmajor employment effects, some before then, but the major employmenteffects, 2021 to 2031. Does the labour market have the capacity to respond toanticipated demand in a 10 year timeframe?45

WITNESS DENNISS: Well Im not quite sure what you mean. The labourmarket doesnt exist per se. The labour market is you know thousands of

employers and tens of thousands of employees coming together, so individualstudents deciding what to do at university might be looking 10 years out and50


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some firms with those sort of time horizons might be thinking about that. Butthe labour market sort of isnt sitting there making any decisions today.Employers are making decisions and employees are making decisions.

WILLIAMS: No but as you point out, people will be leaving school in the5

Hunter Region for example?

WITNESS DENNISS: Yes.

WILLIAMS: And they will be making decisions whether to train in a trade?10


WILLIAMS: Whether to study engineering at university. Others who arepresently unemployed in the area might be making decisions about whether to15take a shorter form of training, for example the plant operator training that can

be undertaken in a much shorter time?

WITNESS DENNISS: Yes.20

WILLIAMS: Those kinds of decisions are in part informed by expectationsabout employment--


WILLIAMS: --within an industry such as this on a 10 year timeframe?

WITNESS DENNISS: Indeed. I mean to the extent that the labour marketdoes a good job of matching all those desires with all the outcomes, thatsexactly whats going on. But at the same time theres lots of people enrolling30in courses today that probably arent going to generate the jobs for them in10 years time because no-one has that sort of foresight.

WILLIAMS: That is what you would call a labour market imperfection?35

WITNESS DENNISS: Indeed and its one of the reasons why 5 per centunemployment is perhaps confusingly for non economists seen as full

employment.

WILLIAMS: But theres various facilities available, vocational guidance for40example to inform people about anticipated labour market trends?


WILLIAMS: And one would assume that rational school leavers or rational45unemployed people would take account of information of that kind on a 10 yeartime horizon?

WITNESS DENNISS: Yeah well look I guess if you, history suggests peoplehavent done a great job of that and theres certainly a lot of optimistic people50


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going into acting but you know, people--

WILLIAMS: Well leave the fringes aside, theres certainly a trend in jobs likegeology, when theres a shortage of geologists theres a spike in enrolment ingeology at universities?5

WITNESS DENNISS: Look indeed, well I dont, thats not my expertise but Idont dispute for a minute that people make decisions about what to study,what to learn and what skills to get based on some hope of what they think isgoing to happen. I dont dispute that at all.10

WILLIAMS: And some level of information about what they expect is going tohappen?

WITNESS DENNISS: Some of them what sorry?15

WILLIAMS: Some level of information?

WITNESS DENNISS: Yes some level of information but I mean people arehorribly wrong. I mean we did a survey recently and asked people what20percentage of the work force do you think is employed in mining. The averageguess of the average Australian is around 10 per cent. According to the ABS,its 2 per cent. So people are 500 per cent out with their perception and inTasmania, you mention jobs before - we recently surveyed people and askedthem what percentage of Tasmanians work in forestry and the average answer25was 20 per cent, when in fact 1 per cent of people work in forestry. So looktheres no doubt that people make decisions based on their perceptions but Iguess Im a bit dubious about the accuracy of the information that some peoplebase those decisions on.

30WILLIAMS: But the two examples that you give surveying the generalpopulation about matters that many economists would not be able to give aneducated answer to, is really quite different to asking about the decisions thatfor example school leavers make based on information available to them as towhat areas they expect employment to be solid in?35

WITNESS DENNISS: Look again, its you know the decisions of school

leavers isnt my expertise, but I think, the point I was raising is that if humansare making decisions based on the information theyre exposed to, well youknow you only have to pick up a newspaper to see apparently how many40people work in mining. Theres ads on television telling us this stuff. But thefact is perception and reality are often quite blurred so, but again I dontdispute the underlying point that people look ahead and try and make gooddecisions for themselves. I just dont think theyre always accurate.

45WILLIAMS: You give a deal of emphasis in your affidavit to what you refer toas the invisible pool of highly skilled workers?



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WILLIAMS: If we turn to your preferred approach of computable generalequilibrium modelling, that makes its own quite extensive assumptions does itnot?

WITNESS DENNISS: It does. And if you think of the assumptions sort of a5

Venn diagram the computable general equilibrium model has got someassumptions that overlap with the input output and some that are unique toboth.

WILLIAMS: And in relation to employment, CGE assumes in the long term full10employment, correct?

WITNESS DENNISS: Yes it does.

WILLIAMS: So if you make the assumption of long term full employment, it15necessarily follows from that assumption that a job created in mining is a job

taken away from somewhere else?

WITNESS DENNISS: Possibly, but even outside of full employment, so CGEmodels typically assume that full employment might be achieved at some point20in the future. They dont assume that were at full employment right now. Sothats the difference between the static and the dynamic. But really whatsbinding in a model like that, is the assumption about the degree of substituteability say of a manufacturing workforce for a mining workforce. So the degreeof movement that the model allows between employment in one sector and25employment in another sector. So if you look at that China First CGEmodelling for Queensland, the reason that the CGE models draws 2,000 jobsout of manufacturing, is that the modeller has assumed that unlike the inputoutput assumption that theres 2,000 skilled people sitting around, the CGEmodeller has assumed that there is some degree of substitute ability between30manufacturing workers and mining workers. So you know, at that extremeversion theyre making the exact opposite assumption but, but its up to themodeller to say, well what percentage of the manufacturing workforce could beemployed in mining, what per cent, and youd find the proportion is higher formanufacturing than it is for tourism for example.35

WILLIAMS: But the further out you go from today, in terms of the project

youre considering, first the greater the uncertainty about whether there will befull employment however thats defined, correct?40

WITNESS DENNISS: Absolutely.

WILLIAMS: And in 2021, theres at least a very significant chance that therelatively full employment that we have at present will not subsist in Australia?

45WITNESS DENNISS: Theres a chance itll be higher. Theres a chance itllbe lower. Theres a chance itll be exactly the same.

WILLIAMS: And in reality, no-one can say with confidence what it will be?50


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WITNESS DENNISS: No but I guess you know its the modelling thats beforeus thats full of decimal places and confidence.

WILLIAMS: And further out we go, with the start date of a project, the greaterthe possibility of labour substitute ability through skills acquisition and like5

measures?

WITNESS DENNISS: Well it depends. I mean one of the main, as I said theMinerals Council are quite concerned about the skilled shortage and training--

10WILLIAMS: Thats at present isnt it?

WITNESS DENNISS: No I was going to say, there are people who have gottraining but dont have experience and unfortunately, employers often dontjust want someone with the TAFE qualification, they want someone who has15experience doing the job. And you cant train experience so.

WILLIAMS: But in - Im sorry?

WITNESS DENNISS: Well I was just going to say theres a lag, but again I20come back to what I said at the beginning. I dont dispute that some people,more people might be attracted into this you know these sorts of courses overtime. Its entirely--

WILLIAMS: And in--25

WITNESS DENNISS: --possible.

WILLIAMS: --I am sorry I am not wishing to interrupt.30

WITNESS DENNISS: Thats all right. Ive finished.

WILLIAMS: Have you finished?


WILLIAMS: And in 10 years thats time to get skills and experience?

WITNESS DENNISS: Its, possibly yeah absolutely.40

WILLIAMS: Dr Searles would you like to comment on any of thoseobservations?

WITNESS SEARLES: No I dont think theres sort of anything further really Ican, I can add.45

WILLIAMS: Can I then - now you have not undertaken a CGE model--

WITNESS DENNISS: No.50


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WILLIAMS: --in respect of this project have you?

WITNESS DENNISS: No Ive reported other peoples CGE modelling of sortof analogist sorts of projects but no Ive not undertaken such a model.

5

WILLIAMS: But projects being undertaken a long way from this project?

WITNESS DENNISS: Yes. But just to show what a CGE model output lookslike and why it differs from input output modelling.

10WILLIAMS: In the case of the China First Project that you refer to, thats aGreenfields project is it?

WITNESS DENNISS: Yes it is.15

WILLIAMS: Could I just ask this, the government has moved recently to

abandon the $15 floor under the price of carbon in 2015 that will result in alower carbon price at that time, will it not?

WITNESS DENNISS: I think so yes.20

WHITE: Dr Searles you have provided some evidence in your report about theunemployment rate in the Hunter Region I believe, and it would be relevant forthe Court to understand what the unemployment rate in the Singleton Councilarea would be?25

WITNESS SEARLES: Within the Hunter Region there is variability and I canttell you exactly what it is today, but I do know that it can be under 2%.

WHITE: The first question I asked you was, it is relevant for the Court to30understand what the unemployment rate in Singleton Council is?

WITNESS SEARLES: I think yes it is relevant, but there are other aspects to itas well and in terms of mobility of labour for example a lot of employment anda lot of people working in the Singleton area actually to live in other local35government areas in the lower hunter and I havent actually got the informationwith me at hand, but journey to work from the Australian Bureau Statistics, I

did actually look at it a couple of weeks ago and it showed that there wassubstantial numbers of people who travel from Newcastle or Lake Macquarieand Maitland to the Singleton area.40

WHITE: No doubt, but it would be relevant for the Court to note would it notthat the latest data from Singleton Council indicates that the unemploymentrate in 2012 is 1.1%?

45WITNESS SEARLES: Yes.

WHITE: Your Honour for your Honours note the report of that is tender bundle

volume 7, tab 265 at page 4092. In response to Dr Denniss you opine thatthere is an available supply of labour within the Hunter Region, I dont need to50


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go over that with you, that has been well covered. It is fair for the Court tonote, isnt it that whilst you say that there is an available supply of labour, youdont identify what the skill set of the labour pool is?

WITNESS SEARLES: No it is very difficult to determine the information that I5

have used both from the Australian Bureau of Statistics but also from our ownsurveys just indicates there is an available supply of labour. The businesssurveys that we have which do include a cross-section of firms throughout theHunter Region indicate that labour is - sorry suitable labour, so there is animplication there that we are talking about labour with the appropriate skill set,10that that is third down the list in terms of constraints on the firm.

WHITE: Yes, but as you fairly concede in your report you are not in a positionto comment on the skill set of the available labour pool?

15WITNESS SEARLES: Thats correct.

WHITE: So you dont know even if the labour pool exists which is a bone ofcontention between you and Dr Dennis whether those people would be able totake up jobs in the mine?20

WITNESS SEARLES: If you were talking about a specific, a new projectaltogether, yes I think there would be some validity to that point. However inthis particular instance we are talking about a continuum of a project thatwould actually move beyond closure to - sorry that there would be a point25where the mine wouldnt be operating and then would actually continue on sothat there would be a transition of those jobs.

WHITE: I will ask Dr Denniss to comment on that last point?30

WITNESS DENNISS: Well again I think for me it comes back to this issue ofduplication, I mean on the one hand that we are hearing that there will be allthese benefits to the local economy as new jobs are created, but at the sametime we are hearing that these jobs are already in existence and in turn thepay packet effect of someone keeping the job theyve got, the new pay packet35is by definition zero at that point in time. I just think that perhaps the way thedata has been presented in the report is confusing, but if what we are being

asked to consider is how many more people will have a job if this goes ahead,I would argue the answer is something near zero.40

The long time periods involved allow for adjustment to occur in any directioninto any industry, you know just as we can train new mining workers over tenyears, we can train new manufacturing hospitality workers and thats give ortake what the economy struggles to do on a daily basis and the - on the onehand what is being suggested is you know big numbers about you know, forty45thousand men, what was it jobs or something being created but then part ofthe explanation for what is going on is this continuation argument when againthe evidence suggests most of the people working in minding now wont be in

mining in ten years time.50


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.10/09/12 47 DENNISS/SEARLES WD

So I think there is - there is a number of issues crashing in on the sameproblem, but most people working in mining now wont be working there in adecades time. People in school today are preparing to do a whole bunch ofdifferent jobs, some of which are mining, most of which arent, but there isgoing to be a mismatch between those decisions, but when we just sort of strip5

it back and look at these so called social benefits of continuity, theyre absent.When we look at the pay packet effect it is absent, unless this ghost pool ofworkers exists, and you know whether it exists now or whether it exists in tenyears it is from an economist point of view a strange assumption to make, Ithink.10

WHITE: Dr Searles your firm doesnt do CGE modelling does it?

WITNESS SEARLES: No.15

WHITE: It just does the input output modelling?

WITNESS SEARLES: While we dont have CGE model or I havent personallynot been involved with it, but a colleague of mine has been in touch with one ofthe Victorian universities who do undertake CGE modelling because a client20asked us to actually undertake that specific form of modelling, so we have thepotential to do it if we had to.

WHITE: But you dont do it at the moment?25

WITNESS SEARLES: Well this was actually for a project that weve just put infor, so I am not quite sure how to answer that to you. I am not doing it at thispoint in time.

WHITE: I will put it another way. Your experience isnt with CGE modelling?30

WITNESS SEARLES: Correct.

WHITE: As you concede in your report, you are not qualified to comment onthe outputs of CGE models?35

WITNESS SEARLES: Correct.

nsw land and environment court 120910 monday.pdf

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