At some point, you see, the pool of available workers becomes so small that employers have no choice but to offer higher wages to attract the workers they need, and that creates inflation because they have more money to spend.
For most of the last decade, there was a consensus among ecocrats that this NAIRU was somewhere around 5%.
Just before the pandemic, however, top central bank and Treasury economists had begun to recognize that Australia could likely sustain a much lower unemployment rate – in the mid-to-lower 4% range, at least – before trigger inflationary pressures.
And here we are, with an unemployment rate currently at 4.2% and still no significant general wage pressure. Indeed, some central bankers will quietly confide that they think the NAIRU is probably an unemployment rate with a “3 in front”.
Of course, the central bank is agnostic as to what the NAIRU rate should to be. He is only concerned that when we see him, it is time for monetary policy to be tightened from its current very stimulative levels.
It’s up to the government as a whole to decide how aggressive it wants to be in bringing down the national unemployment rate.
While the Reserve Bank has only one lever to produce job growth – low interest rates – the government has several it could pull to get as many Australians into jobs that they are willing and able to perform them.
They include greater direct investment or targeted incentives for private sector investment in skills and research and development, a better match between the long-term unemployed and jobs, and a platform for “pro” economic reform. -growth” including reducing income taxes and shifting the burden. consumption (GST) and property taxes.
The Morrison government deserves huge credit for its economic response to the pandemic, launching the historic JobKeeper program to keep workers attached to their employers and the workforce. Obviously, with unemployment now lower than before the pandemic, it worked.
Thanks to swift and decisive action, hundreds of thousands of workers have avoided the “scars” associated with long-term unemployment.
And yet, even at a historically low rate, the queue of unemployed Australians is still around 600,000.
So, how far can we go with unemployment? This is entirely a matter of policy design.
The upcoming federal election will likely focus, as always, on jobs and economic management.
The Coalition is committed to job growth, but is also under pressure from some quarters to begin the fiscal repair task in next month’s budget.
The Treasurer said this week that now is the time to “draw clear lines in the sand” around the level of support that has been released.
Labor has promised, if elected, to commission a white paper on full employment – the last of which was delivered by Prime Minister John Curtain in 1945.
Meanwhile, the Reserve Bank is under pressure from financial markets and pundits to start normalizing interest rates before it even sees firm signs that falling unemployment is fueling a return to wage growth.
Voters, too, are nervous about price hikes for everyday items like gasoline and groceries — even if those price hikes remain modest by international standards.
It should be remembered that the best way to cope with rising prices is to have a well-paying job.
So yes, let’s celebrate our impending 50-year low in unemployment. But as international borders reopen, much more needs to be done to ensure their sustainability.
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