Jon Sumby: Uni of Tas economist (and big industry apologist) Dr Bruce Felmingham did a report last month for the mining lobby which concluded that mining contributed 71% to the Gross State Product and relied heavily on the ‘multiplier effect’ – but this Richard Denniss article in The Canberra Times shows this approach to be a crock …

Optimistic forecasts of job creation based on dubious modelling have been ruled to be rubbish.

The courts were recently asked to answer a simple economic question: Does the construction of a mine create a large number of indirect or downstream jobs?

The mining industry has been claiming for a decade that it does and some economists, including myself, argue that it doesn’t.

But while the public debate was headed nowhere, the case has provided clarity where confusion previously reigned.

While trying to garner planning approval for an extension of its Warkworth coalmine in the Hunter Valley, Rio Tinto’s economic consultants estimated the mine would create 44,000 jobs. That’s a lot of jobs.

Unfortunately for Rio Tinto the Chief Justice of the NSW Land and Environment Court didn’t buy it.

Judge Brian Preston found Rio’s claims weren’t credible and that the evidence it provided did not support the conclusion that the economic benefits of the mine outweighed the social and environmental costs.

Further, he found that the input-output modelling relied on by the miner was a ”limited form of economic analysis” that did not assist in helping the court weigh the economic, social and environmental costs and benefits of the mine.

Input-output modelling has been widely used in Australia to generate estimates of the so called multiplier effect or the number of indirect jobs that are allegedly created.

The mining industry has been a heavy user of this form of modelling, frequently using it to claim that each mining job was responsible for the creation of between three and six jobs elsewhere in the economy.

As Justice Preston found, such claims are rubbish. David Richardson at The Australia Institute has calculated that if every industry paid an economist to work out the number of indirect jobs it created, then the Australian workforce would be more than twice its actual size.

The biggest issue with these claims is that they are based on the assumption that there is a pool of highly skilled ghost workers just sitting around waiting for a new project to go ahead.
In reality, the mining industry has expanded by poaching the best staff from the manufacturing and other industries.

Now that an official judgment has been passed on the dodgy claims of large multiplier effects, the economics profession has been quick to surrender.

This week the Productivity Commission published a paper entitled Input Output Tables: Uses and Abuses.

It concludes: ”Abuse primarily relates to overstating the economic importance of specific sectoral or regional activities. Claims that jobs ‘gained’ directly from the cause being promoted will lead to cascading gains in the wider economy often fail to give any consideration to the restrictive nature of the assumptions required for input-output multiplier exercises to be valid.”

When The Australia Institute has made similar observations the mining industry has referred to us as left-wing and anti-mining. It will be interesting to see if it calls the Productivity Commission similar names.

Richard Denniss is executive director of the Australia Institute.

Richard Denniss in the Canberra Times, here