Andrew Leigh

WHY AN UNEMPLOYMENT RATE OF FIVE PER CENT ISN'T GOOD ENOUGH ANYMORE

The Canberra Times, 10 September 2019

If you’ve ever been jobless, you know the truth: unemployment sucks. It’s not just the lack of money, but the hit to self-esteem. Being asked ‘what do you do?’ can be almost as dispiriting as the uncertainty of applying for job after job. Unemployment increases rates of depression, diabetes and even death. 

Yet it has become commonplace to regard ‘full employment’ in Australia as an unemployment rate of 5 per cent, or even higher. That’s effectively saying that at any point in time, 700,000 of our fellow citizens will have to put up with joblessness.

Because firms inevitably shut down, and workers switch careers, not all unemployment is avoidable. But from a historical standpoint, the idea that 5 per cent unemployment is normal is downright weird. If an Australian economist from the 1950s or 1960s was to look at the labour market today, they would be struck by our lack of ambition. Back then, Australia’s unemployment rate averaged less than 2 per cent.

Other advanced nations might also regard us as underperforming. Using the OECD’s harmonised unemployment rates, the jobless rate is now 3.1 per cent in Germany, 3.7 per cent in the United States, 3.7 per cent in Britain, and 4.2 per cent in New Zealand. If these countries can meet or beat a 4 per cent unemployment target, why can’t Australia?

There are four reasons that Australia should be targeting an unemployment rate of 4 per cent.

Most simply, it would mean a lot more people in jobs. If had a 4 per cent unemployment rate, then 160,000 more people would be in employment than there are today. That’s 160,000 people with a pay cheque that could help them and their families meet rising costs such as energy bills and child care. That’s 160,000 unique, wonderful and precious Australians whose skills would be productively used, rather than depreciating. Our economy should ensure that when someone wants to work, they can do so.

A lower unemployment rate would increase the number of disadvantaged people in work. When employers have dozens of applicants for every opening, they can turn away people with disabilities, ethnic and racial minorities, and rough diamonds. But when the labour market becomes tight, employers cannot indulge their prejudices - they must offer a chance to people who look a bit different, who need some training to get on their feet, and who are more vulnerable. In Australia, poverty is closely tied to employment, so if you care about reducing inequality, you should be committed to reducing unemployment. And if you’re worried about the nearly 600,000 children growing up in jobless households, one way to help them problem is to cut the jobless rate.

Lower unemployment would also put upward pressure on wages. There are many causes of the recent wage malaise, including declining collective bargaining, monopsony hiring power, and a lack of dynamic start-up firms. But one factor is that unemployment is too high. As Reserve Bank Governor Philip Lowe has observed, ‘We remain short of the unemployment rate associated with full employment, there is significant underemployment and there is further potential for labour force participation to increase when the jobs are there. Consistent with all of this, wages growth remains modest and is below the rate that would ensure that inflation is comfortably within the 2 to 3 per cent range.’

Finally, it is eminently achievable. The Reserve Bank used to think that when unemployment hit 6 per cent, inflation would start roaring away. Now, they reckon the jobless rate can safely go below 4½ per cent.

How do we get there? Part of the answer is to make 4 per cent unemployment a priority. Australia should stop patting ourselves on the back for having an unemployment rate that’s about the same as it was in the Global Financial Crisis. We should cease being so complacent, and raise our ambition for what a strong employment market looks like.

Another challenge is to ensure that our economy is more open to new businesses. Over the past decade, new business formation rates have fallen. As Treasury’s Meghan Quinn has pointed out, our firms are sluggish when it comes to the uptake of new management practices and use of data. Merger rates have risen significantly over the past generation, raising questions as to whether our competition laws are fit for purpose.

There is also a role for government. In a fragile economy, it makes no sense to have an arbitrary cap on public sector hiring, limits on university places, and an infrastructure program that’s stuck in the slow lane. Four per cent unemployment wouldn’t just help the jobless, it would benefit all of us.

Andrew Leigh is the Shadow Assistant Minister for Treasury, and his website is www.andrewleigh.com.

ENDS

Authorised by Paul Erickson, ALP, Canberra.