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Party politics lost in unemployment

By Ben Rees - posted Monday, 1 September 2014

In 1993 the RBA attempted to define the natural rate of unemployment in a presentation to the Committee on Employment Opportunities. Historic unemployment levels were blamed on structural unemployment. Consequently, "policies aimed at stimulating demand cannot do much about".

Acceptance that demand management could not solve structural unemployment meant acceptance of a "natural rate of unemployment". For Australia, this lay between 6%-8%. Friedman's natural rate of unemployment had become institutionalized in RBA thinking.

Structural unemployment occurs when displaced workers in declining industries do not possess the necessary skills to transition to expanding industries. Education and training become important policy instruments to make workers "job ready". The second policy response is to ensure flexibility in wage determination.


Theoretically, education and training transforms structural unemployment to frictional unemployment. Say's Law of Markets is re-established and the assumption of full employment reinstated.

Labor and natural rate of Unemployment

By the time the Hawke administration had been elected to government, Friedman's theories had been blended into supply side economics. Margaret Thatcher and Ronald Reagan had adopted this policy direction which combined modern monetarism with nineteenth century Adam Smith, David Ricardo and Jeane Baptiste Say. Hawke is credited with introducing Thatcher and Reagan's supply side economics to Australia.

The Liberal Party

In a 1975 policy document of the Liberal Party, monetarist theory of money supply control was advocated

...a target rate of growth of the money supply should take into account the particular definition of the money supply used, the degree to which it is anticipated inflation and price expectations can be reduced, as well as forecasts of productivity, real growth and changes in the velocity of money


The Howard Government elected in 1996 granted independence to the Reserve Bank. Both the Government and the RBA were in agreement over the importance of striving for low inflation and low inflationary expectations. The RBA 1993 unofficial internal inflation target of 2%-3% became the official policy target along with the natural rate of unemployment defining full employment.


Post 1971, the moral question in economics has been abandoned. Individual interest has been the driver of economic policy to achieve growth, income and employment. With an underutilization rate of 14%, under employment around 7.5%, and unemployment 6.4% and rising, it would seem that self interest policies have not delivered for the social interest. It is time for a national debate on economic philosophy. All major political parties appear to be wandering in a wilderness of nineteenth century theories.

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About the Author

Ben Rees is both a farmer and a research economist. He has been a contributor to QUT research projects such as Rebuilding Rural Australia. Over the years he has been keynote and guest speaker at national and local rural meetings and conferences. Ben also participated in a 2004 Monash Farm Forum.

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