Daily BulletinDaily Bulletin

The Conversation

  • Written by Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW
Australia's 5% jobless rate is not full employment; pushing up interest rates would be wrong

According to ABS figures released last week, the unemployment rate in Australia has fallen to 5%. This isn’t as low as the 3.7% level in the United States, but by historical standards it is low for us.

We need to go back a decade, to just before the financial crisis of 2008, to see levels much lower than this, when the unemployment rate briefly touched 4%.

This raises the important question of what level of unemployment constitutes “full employment”?

Economists often used to say it was 5%. That’s because even if the jobs market was so tight that employers couldn’t get workers, there would always be some unemployment. Some completely unsuitable people wouldn’t get jobs and some people would be counted as unemployed even when they were moving from one job to another.

Read more: The problem with official statistics – and three ways to make them better

Attempts to stimulate the economy or cut interest rates to get the unemployment rate below 5% was therefore seen as pointless, because it would merely stoke inflation. Which is why the 5% rate has been referred to by the ungainly acronym of NAIRU - the non-accelerating inflation rate of unemployment.

How low can our unemployment rate fall before it genuinely reaches NAIRU and can fall no further, and what are the barriers to getting there?

The short answer is we have no idea, but we should find out by setting policy levers to push unemployment as low as we can.

Do we measure unemployment correctly?

First to the question of whether we measure the unemployment rate correctly. The Australian Bureau of Statistics defines unemployment this way:

Unemployed persons are defined as all persons aged 15 years and over who were not employed during the reference week, and (i) had actively looked for full-time or part-time work at any time in the four weeks up to the end of the reference week, and were available for work in the reference week, or (ii) were waiting to start a new job within four weeks from the end of the reference week, and could have started in the reference week if the job had been available then.“

Critics often point out that this does not capture "underemployment” – where people do work but not as much as they want to – very well at all.

Read more: How the unemployed 'disappear' and why it matters

They are almost surely correct, but there’s nothing new in that, meaning we can be confident comparing the unemployment statistics now to those five years or a decade ago.

Unemployment can’t be zero

The 2010 Nobel Prize for Economic Sciences was won by Peter Diamond, Dale Mortensen and Christopher Passarides for their analysis of how “search frictions” can affect markets. Chief among these frictions is looking for a job. Employers need to advertise. Employees need to find these ads. A good match must be made. These things take time.

Indeed, Peter Diamond’s seminal contribution was to show that even small frictions can have a very large effect on things like the level of unemployment. LinkedIn and online job ads are great, but they make neither search frictions nor unemployment go away.

How low can unemployment go?

The idea of NAIRU is still routinely spouted in generic commentary about why a drop in unemployment means we should immediately brace for an interest-rate rise.

But there are a couple of problems with it – which is why modern economics has largely eschewed it.

Read more: Why the unemployment rate will never get to zero percent – but it could still go a lot lower

First, NAIRU may not even exist. It is premised on the notion of a “Phillips Curve” – a stable negative relationship between the the rate of unemployment and wage rise that hasn’t been found in the data for at least 25 years.

Second, even if the NAIRU does exists, we have known for more than 20 years that its level is super-hard to estimate. Is it 5%, or 4% or 3.5%? Hard to say.

Even an architect of the theory, Nobel-prize winning Ned Phelps, has argued that structural change might change it over time..

Testing the waters

All this means that for the Reserve Bank to raise interest rates because unemployment has fallen to 5% would be a missed opportunity at best, and dangerously silly at worst.

With inflation still subdued, room to move downward on interest rates, and wages growth stagnant, we should test what full employment really means in Australia in 2018.

Having fully 5% of Australians looking for work who can’t find it – plus potentially many more underemployed – is a huge waste of economic, and much more importantly, human resources.

We shouldn’t let out-of-date acronyms and failed theories suggest otherwise.

Authors: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

Read more http://theconversation.com/vital-signs-australias-5-jobless-rate-is-not-full-employment-pushing-up-interest-rates-would-be-wrong-105523

Why the coronavirus shouldn't stand in the way of the next wage increase

arrow_forward

Seeing is believing: how media mythbusting can actually make false beliefs stronger

arrow_forward

Scott Morrison's address to the National Press Club

arrow_forward

The Conversation
INTERWEBS DIGITAL AGENCY

Politics

$1.8 billion boost for local government

The Federal Liberal and Nationals Government will deliver a $1.8 billion boost for road and community projects through local governments across Australia.   The package of support will help lo...

Scott Morrison - avatar Scott Morrison

Scott Morrison press conference

PRIME MINISTER: This is a tough day for Australia, a very tough day. Almost 600,000 jobs have been lost, every one of them devastating for those Australians, for their families, for their commun...

Scott Morrison - avatar Scott Morrison

BOOST FOR BUSHFIRE RECOVERY

Local economic recovery plans will help towns and regions hit by bushfires get back on their feet as part of a new $650 million package of support from the Morrison Government.   As part of th...

Scott Morrison - avatar Scott Morrison

Business News

How have live chatbots turned beneficial for online businesses?

Every business these days have come up with their online models. While some people still rely on the customer service representatives to handle the queries for their company around the clock through...

Paresh Patil - avatar Paresh Patil

Which Internet Marketing techniques can boost my business?

Internet marketing can be easily defined as various internet techniques that can be used to promote a product or service to all those people who use the internet to visit various websites and social p...

Kamballa Johnson - avatar Kamballa Johnson

3 Top Tips to Hiring Long Distance Movers

Moving doesn’t need to be stressful at all. Find the right moving company to help with your relocation and the whole experience should be what you want out of the move in the first place – a new sta...

Ash Thomson - avatar Ash Thomson



News Company Media Core

Content & Technology Connecting Global Audiences

More Information - Less Opinion