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Job markets and the economy

By Fred Argy - posted Monday, 10 March 2008

If I had to single out one big issue which deserves the highest priority at the 2020 Summit, it is the capacity of the Australian economy to sustain low unemployment - say in the range of 3 to 4 per cent - without running into inflationary demand pressures. If the Rudd Government cannot solve this basic problem, its noble vision of a fair and productive society will be tarnished.

Australia is currently facing an inflation problem. In good part, the recent acceleration in underlying price rises is a product of cost-push forces but, rightly or wrongly, the RBA has decided that the growth in domestic spending is excessive and needs to be reined back. The Bank is aware of other forces bearing down on demand - such as the high Australian dollar, the slow-down in world economic growth, the share market slump, the increased aversion to risk in debt markets and the lagged effect of past rises in borrowing costs - but it clearly believes that, without monetary tightening, these factors will not do enough to reduce rising inflation expectations or discourage wage demands.

In its February 2007 statement on monetary policy, the RBA forecast that with unchanged policies, non-farm GDP growth would slow from 4.3 to 3 per cent per annum by 2009-2010. Since then it decided to raise official rates by a further ¼ per cent. One can therefore surmise that it is aiming to slow GDP growth down to 2.5 to 3 per cent in order to bring inflation under control.


With the labour force growing by 1.5 to 2 per cent per annum and with underlying labour productivity growth of 1.5 to 2 per cent, it is clear that the Bank is resigned to seeing unemployment rise, at least in the short term. It may have formed the view that the present unemployment rate of 4.1 per cent is unsustainable because it is below the “equilibrium” rate of unemployment consistent with non-accelerating inflation - the so-called NAIRU.

The latter has been estimated by Treasury to be as high as 5 per cent. So even if the actions of the authorities all went to plan, we are going to have to sacrifice some jobs in order to achieve good inflation outcomes.

This is the immediate economic reality we realistically face. But it would be tragic if the authorities were now to accept that over the next few years Australia will not be able to sustain an unemployment rate much below 5 per cent. It would mean that, after discounting for those who are in transition from one job to another, we would be resigning ourselves to having at least 300,000 officially unemployed people, and half as many again of unofficial (hidden) jobless, who want to work but are unable to fill the vacant jobs.

Apart from the personal hardship it would entail, this scenario would represent a huge waste of productive potential. And it would all be due to wage rigidities and barriers to geographic and occupational mobility - a kind of “market failure” stemming in part from “government failure”.

It is not necessary to adopt such a defeatist policy on the NAIRU. Much can be done through policy reform (mainly “micro”) to get unemployment down below 4 per cent without the risk of accelerating inflation.

This is not just an issue for 2008 or 2009. It is one which will keep recurring in the future so it rightly belongs to the long term agenda.


Need for more research

A government wanting to reduce the NAIRU should first determine WHY there are so many jobless persons unable to fill available jobs. Is it because their productivity is too low relative to the minimum award wage? Is it because they lack the education, training or social skills to fill the available jobs? Is it because the jobs offer family-unfriendly environments? Is it because the jobs are poorly located relative to where the jobless live? Is some of the joblessness due to a “welfare culture” or the product of social dysfunction and lack of personal responsibility?

Some research has already been done on these questions but more is needed.

Lowering the NAIRU

Once the authorities understand the nature of structural joblessness in Australia, they are in a better position to design the right strategy to fix the multi-faceted problem. And they must do it in a way which spreads the costs and benefits equitably across the population. The electorate has made it clear in its response to WorkChoices that it will not tolerate policies which put the main adjustment burden on the most disadvantaged in our community.

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The author is very grateful to Nicholas Gruen for helpful comments on an earlier draft.

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About the Author

Fred Argy, a former high level policy adviser to several Federal governments, has written extensively on the interaction between social and economic issues. His three most recent papers are Equality of Opportunity in Australia (Australia Institute Discussion Paper no. 85, 2006); Employment Policy and Values (Public Policy volume 1, no. 2, 2006); and Distribution Effects of Labour Deregulation (AGENDA, volume 14, no. 2, 2007). He is currently a Visiting Fellow, ANU.

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All articles by Fred Argy

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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