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We can and should keep unemployment below 4%, says our survey of top economists

Peter Martin, Crawford School of Public Policy, Australian National University

Australia’s leading economists believe Australia can sustain an unemployment rate as low as 3.75% – much lower than the latest Reserve Bank estimate of 4.25% and the Treasury’s latest estimate of 4.5%.

This finding, in an Economic Society of Australia poll of 51 leading economists selected by their peers, comes ahead of next month’s release of a government employment white paper, and an expected direction from Treasurer Jim Chalmers that the Reserve Bank quantify its official employment target.

Asked what unemployment rate was most consistent with “full employment” under present policy settings, the 46 respondents who were prepared to pick a number or range picked an average rate of 3.75%.

The median (middle) response was higher, but still below official estimates – an unemployment rate of 4%.






Significantly, only two of the economists surveyed picked an unemployment rate of 5% or higher, which is where Australia’s unemployment rate has been for most of the past five decades.

The 3.75% average implies either that the Reserve Bank and government have lacked ambition on employment for much of the past half-century, or that the sustainable unemployment rate has fallen.

Australia’s unemployment rate dived to 3.5% in mid-2022 and has remained close to that long-term low since.

The survey result suggests the government can lock in the present historic low and need not – and should not – allow unemployment to climb too far from its present rate.



Many of the experts surveyed questioned the idea of a “magic number” or non-accelerating inflation rate of unemployment (NAIRU) used by the Treasury and the Reserve Bank as a guide to how low unemployment can go without feeding inflation.

Former OECD official Adrian Blundell-Wignall said the concept was not helpful “even in the short run, and certainly not the long run” because NAIRU kept changing depending on what else was going on in the domestic and global economy.

Any rate of unemployment would have a different implication for inflation depending on what the government was doing with tax and spending policy.

Geopolitical events and climate change have probably pushed up the rate of inflation to be expected from any given domestic unemployment rate.

3.5% unemployment, yet falling inflation

Craig Emerson, a former minister in the Rudd and Gillard governments, said NAIRU was best described as the lowest unemployment rate consistent with inflation not taking off. Given Australia’s inflation rate is now coming down, NAIRU is clearly below the present unemployment rate of 3.5%, he argued.

The University of Queensland’s John Quiggin said Australia can be considered to have full employment when the number of job vacancies matches the number of unemployed people. This is the case at present, suggesting “full employment” means an unemployment rate of 3.5%.



Alison Preston from the University of Western Australia said industrial relations changes have given workers much less power to obtain higher wages than before, suggesting the “non-inflation accelerating rate of unemployment” was either lower than before or an irrelevant concept.

Curtin University’s Harry Bloch says there will always be a mismatch between the jobs on offer and the skills available – an academic can’t do the work of a plumber, or vice versa, for instance. But even so, he says it ought to be possible to get unemployment down to the 2% achieved repeatedly during the 1950s and 1960s.

Consulting economist Rana Roy says in normal times “full employment” probably meant an unemployment rate near 1%, but the business cycle meant there would always be brief – “and I stress brief” – periods when governments might have to accept an unemployment rate of nearer 2%.

Fix education, job-matching and childcare

Asked to select the three measures from a list of 11 that would do the most to bring down the sustainable rate of unemployment, the 51 experts overwhelmingly backed improving the quality of school education (55%), followed by improving employment services (39%) and cutting out-of-pocket childcare costs (39%).

There was also strong support for relaxing industrial relations to give employers greater flexibility (33%) and winding back taxes and regulations facing businesses (24%) as well as boosting enrolments in tertiary education (27%).

There was very little support for cutting immigration or the JobSeeker payment.



Labour market specialist Sue Richardson said a high-quality job-matching service would both reduce unemployment and boost productivity because Australians would be matched to jobs for which they were best suited.

The unemployed who would benefit the most would be those further down the queue who were the least successful in finding jobs.

Industry economist Julie Toth said digital technologies and working from home were already making it easier to match Australians with jobs across a range of industries, and it was important to preserve these recent gains.

 

One of the panellists, Peter Tulip from the Centre for Independent Studies, rejected all the options offered for lowering the achievable unemployment rate, and said the only one that might have some effect was restraint when increasing minimum wages.

Another, Brian Dollery from the University of New England, said much of Australia’s unemployment had been generated by unemployment benefits that were too high.

Together, the results of the survey call for the government and the Reserve Bank to be ambitious about unemployment, and not to accept a rate above 4%.

The government’s employment white paper is due by the end of September.


Individual responses. Click to open:

The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Responses (60)


 

Peter Abelson

improving the quality of primary and secondary education, better targeting immigration, reducing out-of-pocket costs of childcare for families

5

A certain amount of unemployment is frictional and largely independent of macroeconomic conditions. This is assumed here to be 1 in 20 workers (i.e., 5% of employment), but more informed research could provide an alternative percentage. It should also be observed that macroeconomic policy may affect (a) the amount of underemployment and (b) the participation rate. Macroeconomic policy should take into account (a) and (b) as well as the "non-accelerating inflation rate of unemployment".


 

Harry Bloch

increasing enrolments in tertiary education, improving the quality of primary and secondary education, improving the quality of employment services

2

Two percent might strike some as unachievable level of unemployment, especially without soaring inflation. However, such unemployment rates were regularly achieved in the 1950s and 1960s along with low rates of inflation. Historically, rates of unemployment and rates of inflation don't have much relationship either across time or across countries. The idea of a "natural rate' of unemployment is a myth fostered on the economic profession and then onto the wider business community by a group of monetarist economists associated with the University of Chicago. I know because I was there as a student during the formative years of the myth in the 1960s. In its extreme form the myth is that any unemployment rate above the "natural rate" leads to ever accelerating inflation. No empirical evidence was adduced to support this proposition at the time and only feeble attempts have been made since. The proponents of the myth were keen to fight back against interventionist government policy designed to lower unemployment. The current debate about how low unemployment can go without sending inflation soaring is a sign of their success in this regard. The myth always was and still is utter rubbish, which provides an ironic example of the view offered by John Maynard Keynes in the closing paragraphs of The General Theory, 'Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.' A more sensible, although less popular, view proposed by post-Keynesian economists is that the rate of inflation has little to do with the rate of unemployment. This view starts from the observation that companies in manufacturing and service sectors generally operate with substantial excess capacity. Think of wandering through the typical department store at any time but annual clearance sales. They are more than happy to increase output (and employment) without raising prices. Mining and agriculture (primary industries) are different and generally produce whatever their land, mines, plant and equipment allow. Here, demand or supply disruptions, such as those caused by the war in Ukraine, have immediate impact on prices, which are passed through prices of manufactured goods heavily dependent on these raw materials, for example wheat in bread and crude oil in petrol. Inflation follows, but reducing aggregate demand for all goods and services is a stupid way of dealing with this quite specific source of inflation, especially when the goods with large price increases are essentials and the last for which purchases will be reduce. A more constructive approach to dealing with inflation induced by supply shocks is to address the supply shocks directly, such as releasing crude oil from strategic reserves as the US has done. Opening alternative delivery routes for Ukrainian grain should also be high on the list, as should facilitating expansion in planting of grain crops anywhere in the world that is able to help. Imposing excess profit taxes on energy producers and using the proceeds to subsidise retail energy prices helps restrain inflation, but doesn't address the direct cause and is only available to energy producing countries. Most important is to recognise that these sort of supply shocks are temporary and that prices tend to return to pre-shock level, providing a deflationary influence in future years (as has already happened with petrol prices). This leaves the question of how to get unemployment down to two percent, regardless of whether the unemployment rate is connected to inflation. Here, the most important consideration the heterogeneity of labour and labour markets. Plumbers are not easily substituted by academics nor do workers move across the country for small wage differences. In the current "labour market" there are many occupations in which vacancies exceed applicants and many where applicants exceed vacancies. Some of this is unavoidable in a constantly changing economy, but greater effort to better match skills and jobs through education and training will help. Especially, important given the impact of rapidly changing technology on job requirements is a greater focus on retraining, which seems largely ignored in government policy and left to the vagaries of individual initiative and the desperation companies that can't obtain critical skills.


 

Adrian Blundell-Wignall

improving the quality of primary and secondary education, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), increasing enrolments in tertiary education

4.5

The Nairu is not a helpful concept because it changes constantly depending on what else is going on in domestic policy and in the global economy. First, improving education and skills and keeping labour markets flexible are important if Australia is to find a future for itself outside of mining and finance. It is a competitive world. If we don't keep pace, the Nairu will be higher because the never-to-be properly employed group will rise. This involves school education but also tertiary, where in Australia the focus on attracting foreign students for the fees results in imbalances and pressure to reduce standards so they pass encouraging more to follow. This is happening and reduces the quality of degrees. It needs to be reversed. Second, on the inflation side, a given rate of unemployment will have different inflation implications depending on what the government is doing with fiscal policy. There can be little doubt that recent inflation is more to do with governments putting vast amounts of cash into private bank accounts related to Covid, that they have subsequently been spending. Demand has run ahead of supply. This has increased the Nairu for now. Third, the Nairu is less a domestic phenomenon than it was in the past. Globalisation has led to a domestic and globalised set of Phillips curves interacting with each other. Fourth, geopolitical events and climate change have pushed up inflation pressures for a given domestic unemployment rate. These feed through into wage claims unsupported by rising productivity growth. To achieve a given inflation target, the unemployment rate would need to be higher. I short, it is complex and there is no magic number for NAIRU even in the short run and certainly not the long run. NAIRU is not a very useful concept.


 

Alison Booth

reducing out-of-pocket costs of childcare for families, improving the quality of primary and secondary education

3.5


 

Markus Brueckner

increasing enrolments in tertiary education, reducing taxes and regulations facing businesses, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers)


 

Matthew Butlin

reducing taxes and regulations facing businesses, reducing out-of-pocket costs of childcare for families, improving the quality of primary and secondary education, running the economy "hot" for a period (i.e. through low interest rates) in order to give more potential workers some work experience, increase their employability in the long term

4

It makes little sense to me to define the NAIRU as a point estimate. A range - consistent with the approach to the inflation target - is far more practical from a policy perspective and gives the RBA constrained discretion to manage interest rates and related policy instruments.


 

David Byrne

creating more incentives for business R&D, improving the quality of primary and secondary education, reducing taxes and regulations facing businesses

3


 

Bruce Chapman

reducing out-of-pocket costs of childcare for families, better targeting immigration, creating more incentives for business R&D

3.5

The institutions influencing the so-called NAIRU have changed so much over the years that we need to constantly examine the relevance of the NAIRU notion. In the last two years or so international factors, such as the Ukraine war, have importantly influenced price inflation in ways that are not related to domestic wage bargains or our unemployment situation. It would be very helpful if monetary policy gave much less weight to the alleged price-wage trade-off - this has changed hugely over the years.


 

Melinda Cilento

improving the quality of primary and secondary education, reducing taxes and regulations facing businesses, better targeting immigration

4.5

While there is a clear focus at present on what 'the' rate of unemployment is that is consistent with full employment, there is much beneath an aggregate unemployment rate that needs to be considered including regional and demographic differences in unemployment, changing participation rates and of course the degree of mobility across the labour market. The critical issue is lifting productivity, particularly in the services sector. Reforms long identified but not addressed (occupational licensing) and the growing regulatory burden are working against mobility and productivity. Looking ahead, decarbonisation and emerging technologies point to ongoing labour market transition and underscore the importance of strong foundational knowledge and skills and therefore improving the quality of our primary and secondary education and outcomes.


 

Ken Clements

reducing taxes and regulations facing businesses, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), running the economy "hot" for a period (i.e. through low interest rates) in order to give more potential workers some work experience, increase their employability in the long term


 

Deborah Cobb-Clark

relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), improving the quality of primary and secondary education, reducing out-of-pocket costs of childcare for families

4.75


 

Brian Dollery

reducing the level of Jobseeker payments, better targeting immigration, cutting immigration

5

The subsidization of unemployment through dole payments has generated a large chronic 'unemployment' problem.


 

Uwe Dulleck

increasing enrolments in tertiary education, improving the quality of primary and secondary education, creating more incentives for business R&D

4

I am not sure whether this question makes a lot of sense. In the current situations the conditions are unusual in the sense that supply chain interruptions (post COVID) and potentially changes in preference to work challenge long term determinants of "natural rates" of unemployment (not to talk about the unemployment rates that non-accelerate inflation - besides the above, we do have a war, effect if migrations that affect inflation as well). For me RBA policy should be guided by consistency in RBA behaviour. Whatever the inflation rate they target, as long as that is clearly communicated, it will lead to (reasonably) good RBA policy.


 

Craig Emerson

improving the quality of employment services, improving the quality of primary and secondary education, increasing enrolments in tertiary education

3.5

Previously the RBA had estimated the NAIRU at 5 per cent but subsequently reduced its estimate to 4.5 per cent. Reserve Bank estimates of the NAIRU are based on economic modelling utilising numbers derived from historical experience. But recent history includes the Great Recession of 2008, the rise of China's massive middle class with high savings rates that have put downward pressure on global interest rates, and the worst pandemic in more than a century. Further, the Australian wage-fixing system is much more deregulated, with union membership less than 15 per cent of the workforce compared with around 50 per cent in the early 1980s. The NAIRU is the rate of unemployment that is sufficient to prevent a wage-price spiral like that of the early-1980s. There is no evidence of a wage-price spiral now. We are not living in the 1970s. Rather than estimating the NAURU from history, the right approach is to bring unemployment down to the lowest level consistent with inflation not taking off. That's not 4.5 per cent, it's evidently not even 3.5 per cent. There will always be some frictional unemployment as people leave jobs or locations without immediately finding a new job. For those workers harder to place, the privatisation of the job search network might have been a mistake. Are private provider paid for activity rather than for success? And yes, higher educational attainment at school and post-school would increase the employment prospects of vulnerable workers.


 

Gigi Foster

reducing taxes and regulations facing businesses, reducing out-of-pocket costs of childcare for families, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers)

3.5

To push down the NAIRU one presumably wants to find measures that reduce the inflationary effects of putting someone who is presently unemployed into work. The red tape surrounding the decision to hire someone results in plenty of middlemen getting money from the transaction itself, and the high costs of childcare inflate the expenses required to keep a parent of young children in work. The latter issue in particular is not easy to fix, and certainly won't be fixed by merely throwing money at families with small kids, but a good start would be to reduce red tape in the childcare market such that simpler and cheaper options for families, like family daycare, in addition to "quality standards framework assured" daycare institutions, are more accessible to families that would like to consider such simpler alternatives.


 

John Freebairn

relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), improving the quality of primary and secondary education

4

A unemployment range matches the inflation range, with both to reflect imperfect information and varying general economic circumstances. Also, unemployment is just one of several potential measures, including labour under-utilisation, workforce participation. A focus on enterprise bargaining, together with economy-wide regulations for minimum payments and work conditions, allows for experimentation and competition to develop and implement higher productivity, higher wages and a more fluid labour market with lower frictional and structural unemployment. Higher levels of human capital supported with improved and economy-wide available school education is a basis for a more productive economy which can meet Australia's high and rising wage expectations and adjust to the structural changes associated with, for example, energy transition, world trade evolution, new technology, and an ageing population.


 

Lata Gangadharan

reducing out-of-pocket costs of childcare for families, creating more incentives for business R&D, improving the quality of primary and secondary education

4.5

It would be important to find measures that increase productivity. Many (but not all) of the options provided could do this in some way or the other.


 

RICHARD HOLDEN

improving the quality of primary and secondary education, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), reducing taxes and regulations facing businesses

4.25

Reducing the NAIRU requires big changes to human capital and investment/employment incentives--and those things are complements. We need to educate people better, and we need to provide fewer disincentives for business to invest and employ.


 

Nicki Hutley

reducing out-of-pocket costs of childcare for families, improving the quality of primary and secondary education, increasing enrolments in tertiary education

3.75

The concepts of "full employment" and the NAIRU may not be that helpful to policy makers, given the uncertainty surrounding them and the inability to model a precise rate. Further, if these measures are concerned with wages growth as the primary source of inflation (as opposed to aggregate demand) then, as the RBA itself has pointed out, this needs to be considered in terms of productivity as well as corporate profitability. Regardless, increasing the capacity of individuals to work (participation rate and skills) will improve the available pool of labour and potentially lower the NAIRU. Supporting childcare affordability (and access) is a key part of this. But enhancing skills and employability is also critical. One could also argue that basic employment skills are just as important as getting people into tertiary studies (noting Skills Commissions says 90% of new jobs will need some sort of secondary training). Expanding support in primary and secondary schools for vulnerable children in particular is critical. But we should also be looking to support adults who, perhaps as a result of disadvantage, have not previously worked. This will be good not only for the economy (lowering the NAIRU) but also for society as a whole.


 

David Johnston

improving the quality of employment services, better targeting immigration, running the economy "hot" for a period (i.e. through low interest rates) in order to give more potential workers some work experience, increase their employability in the long term

4


 

Frank Jotzo

relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), reducing out-of-pocket costs of childcare for families

3.5


 

Guyonne Kalb

relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), reducing out-of-pocket costs of childcare for families, better targeting immigration

3.5


 

Michael Keating

improving the quality of primary and secondary education, improving the quality of employment services, better targeting immigration

4

In my view the priority is to maintain inflation within its target range. It then follows that the rate of unemployment consistent with achieving this target inflation rate will vary from time to time. This is because the influence of the various labour market institutions that affect the labour market can change through time. This changing influence not only affects the level of full employment that can be sustained, it also affects the size of the wage response to any shift in unemployment away from the NAIRU.


 

Geoffrey Kingston

relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), reducing the level of Jobseeker payments, reducing taxes and regulations facing businesses

4.375

The NAIRU is notoriously elusive. I have no reason to agree with the official family's current estimates. Whatever the sins of the previous government, increasing the NAIRU was not among them. Alas, the current government looks set on increasing the NAIRU, by tightening industrial relations regulations, increasing the level of Jobseeker payments (next month), and increasing the taxes and regulations facing business.


 

Michael Knox

better targeting immigration, reducing taxes and regulations facing businesses, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers)

4.5

The less regulated a national labour market is ,the lower the level of unemployment that is achieved . The simplest side by side comparison in March /April this year is France and the UK . France with its famously high level of regulation and provisions against dismissal had a March unemployment rate of 7.1% . The UK with a more deregulated labor market had an April unemployment rate in April 3.8% . The greater the level of labour market regulation ,the greater the disincentive for employers to provide jobs. Separately is the issue of immigration . The Australian bi - partisan skilled migration program remains one of the most successful structural supports of continuing growth that Australia has.


 

Emily Lancsar

increasing enrolments in tertiary education, reducing out-of-pocket costs of childcare for families, improving the quality of employment services

3.75

3.5 - 4% given present policy settings, building in a review. Use of a range (as done for target inflation) acknowledges the uncertainty in identifying the rate consistent with full employment. 3% would be more ambitious and increase the benefits of full employment including fostering confidence in ability to find a job. Chosen measures to reduce the NAIRU are a mix of short and longer term measures. Improving the quality of employment services is important for all unemployed but particularly to help the long term unemployed re-enter the labour force. Investment in childcare/reducing out of pocket costs has multiple benefits in addition to increasing female workforce participation (often in priority areas such as health, aged care and teaching), including easing cost of living and improving productivity. Investment in tertiary education improves performance of labour markets and productivity growth.


 

Elisabetta (Lisa) Magnani

improving the quality of primary and secondary education, increasing enrolments in tertiary education, reducing out-of-pocket costs of childcare for families

4

Inflation is "fundamentally the outcome of the distributional conflict, between firms, workers, and taxpayers" (Blanchard, 2022). Our understanding of these distributional conflict need to better guide the discussion on the NAIRU. To make this concept relevant in the face of current forms of inflationary processes, three features of the Australian economy are important, namely the composition of its unemployment, the composition of its employment and the sources of inflation. The current unemployment at 3.5% goes hand in hand with a higher and increasing underemployment rate, currently at 6.4%, but much higher for selected groups, particularly women and young people. About 44.5% of the current 790,000 people who were underemployed in June 2023 were involuntarily so. Contrast these facts with the rise in multiple job holders (about 950,000 individuals currently), many of whom are employed in relatively low wage sectors, such as hospitality, community services and education. Output could better respond to increases in aggregate demand if the Australian economy could more efficiently utilize its labour force and pay it better. Finally, historically high corporate profits have been recognized as leading factors in explaining the post-pandemic inflationary process. Policies that aim to reduce the NAIRU would need to directly address the relatively high underemployment rate by contributing to the further inclusion of those many of would like to work fully time rather than part time. I suggest policies to properly fund public education and policies that increase enrolment in higher education. Profit moderation and support to wages would help reduce the need for multiple job holdings.


 

Margaret McKenzie

reducing out-of-pocket costs of childcare for families, increasing enrolments in tertiary education, improving the quality of primary and secondary education, improving the quality of employment services

2

I do not necessarily regard the NAIRU as an approach to setting policy. The trade off between inflation and unemployment is by no means supported by the evidence, including times of zero interest rates when inflation kept falling. They cannot just keep saying the position or slope of the NAIRU keeps shifting. It is a paradigm that I suspect will be superseded fairly abruptly as has happened in the past. Many of the options above are likely to increase unemployment and possibly do nothing for or worsen inflation. A provision of public services including education and childcare at no charge would be the best strategy for reducing inflation, as when free childcare reduced cpi by half during the pandemic.


 

Warwick McKibbin

relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), reducing out-of-pocket costs of childcare for families, reducing taxes and regulations facing businesses

4.25

The NAIRU is a reduced form relationship between inflation and unemployment. It is not a constant relationship but provides one potential indicator of inflationary pressure. Shifts in foreign or domestic demand, supply, or structural shocks can move the NAIRU. In a globally integrated world, inflation can change without a change in domestic labour market pressures. Wages did not cause the current rise in Australian inflation, and the ongoing reduction in Australian inflation due to global trends is unlikely to be caused by pressures in the Australian labour market.


 

Flavio Menezes

reducing out-of-pocket costs of childcare for families, improving the quality of primary and secondary education, increasing enrolments in tertiary education

3

The NAIRU serves as a theoretical framework, offering a macroeconomic perspective for assessing potential trade-offs. However, its policy relevance appears unconvincing, largely derived, as far as I know, from a singular instance of inflation acceleration spanning the late 1960s to the mid-1970s. Consequently, my attention has shifted towards addressing the root causes of structural unemployment, arising from a misalignment between available job opportunities and the labour force. My emphasis on education aims to guarantee that job seekers possess the necessary skills for both present and upcoming employment prospects, leaving no one behind in the pursuit of reducing unemployment. In line with the Haig-Simons income principle, I propose the deduction of childcare expenses from labour income, with a possible cap, to foster increased labour market participation. The potential necessity for a cap arises if childcare providers have significant market power.


 

James Morley

improving the quality of employment services, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), improving the quality of primary and secondary education

3.6

It would be a big mistake to set a numerical target for "full employment". There are two related problems with such an approach: First, the natural rate of unemployment moves around a lot more than most people (including many policymakers) seem to think. Just as one example of academic research supporting this, see my 2007 paper "In Search of the Natural Rate of Unemployment" (https://doi.org/10.1016/j.jmoneco.2005.11.002). Second, the natural rate does not appear to be impacted by monetary policy. So to require the RBA to achieve a fixed numerical target in terms of the unemployment rate (or other labour market measures such as employment/population ratio) is to set them up for inevitable failure. It is better to have a full employment mandate without a specific numerical target (see my article in The Conversation on a similar discussion in the New Zealand context from a few years ago: https://theconversation.com/why-new-zealand-cant-outsource-employment-policy-to-its-central-bank-87522). This, of course, contrasts with a numerical inflation target given that central banks can influence the long-run level of inflation with monetary policy. My numerical answer that the current natural rate of unemployment in Australia is 3.6% comes with a lot of caveats. This is just an estimate and the uncertainty around the estimate is large (standard uncertainty bands would cover anywhere between 2%-5%). Also, the natural rate is likely to change substantially in the future, just as it has in the past, so I would not treat this as a number that should be legislated or mandated. The particular estimate of 3.6% is based on Okun's law and my current estimate that the Australian output gap is just slightly above zero at 0.15% based on the Beveridge-Nelson filter (this number can be found by entering in data for Australian quarterly real GDP into bnfiltering.com to estimate the output gap). It is a good thing in this case at least that the natural rate changes a lot. It means that it is possible inflation can come back down even though the unemployment rate is so low by historical standards at 3.5%. But it also means that any mandated target that is set in stone would end up being a temporary policy experiment that will end in tears for both the RBA and the current or future Treasurer. In terms of policies to bring down the natural rate of unemployment, my research suggested that policies to facilitate productivity growth and job retraining given structural changes across sectors could help.


 

Ben Phillips

increasing enrolments in tertiary education, improving the quality of primary and secondary education, improving the quality of employment services

4.5

The NAIRU is a concept that is I think pretty difficult to pin down with any given estimate subject to change through time and one that abstracts from the realities of the current economic environment. Also, worth remembering that some policies that may have the potential to lower the NAIRU as suggested above may have some impact but be socially undesirable. For example, cutting JobSeeker (although the current level is so low that we've likely reached a threshold point where incentives wont change) may act as an incentive for a small fraction of the unemployed pool but the reality is that many JobSeeker recipients have serious limitations on their ability to participate in the labour market and will simply be in deeper poverty.


 

Alison Preston

better targeting immigration, creating more incentives for business R&D, improving the quality of primary and secondary education

3

I've suggested 3% - but who really knows. The NAIRU (non-accelerating inflation rate of unemployment) can't be calculated and the relationship between unemployment and wage growth (and thus inflation) has changed in recent years. The majority of workers no longer have the power to bargain for higher wages, even in a tight labour market. This brings into question the relevance of the NAIRU when the RBA is making its determinations.


 

John Quiggin

improving the quality of employment services, improving the quality of primary and secondary education, running the economy "hot" for a period (i.e. through low interest rates) in order to give more potential workers some work experience, increase their employability in the long term

3.5

Full employment should be measured by conditions in the labour market. The appropriate measure is that the number of job vacancies should be equal to the number of unemployed workers, so that all unemployment is either frictional or mismatch. This is approximately the current situation. NAIRU model amounts to little more than "whatever the Reserve Bank is happy with". In particular, since inflation is currently decelerating, the model would imply that we are above NAIRU. The fact that no-one suggests this reflects the inadequacy of the model.


 

Mala Raghavan

creating more incentives for business R&D, reducing out-of-pocket costs of childcare for families, improving the quality of employment services

4

In today's economic climate, the NAIRU could be lower than the rate (4.5%) indicated by the RBA or Treasury. This observation is supported by the latest ABS labour market figures. Though the unemployment figure for June 2023 shows a rate of 3.5%, it is essential to consider other labour market indicators, such as the underemployment rate of approximately 6.4% and the underutilisation rate of 9.8%. These figures suggest that there is still spare capacity in the labour force. Therefore, the risk of inflationary pressure from the labour market is relatively low compared to pressure from other sources, such as those driven by supply-side factors. Implementing measures that enhance workers' welfare and encourage productivity and labour force participation could be beneficial. By improving workers' welfare, firms might witness increased productivity and efficiency. At the same time, initiatives incentivising labour force participation could lead to a larger pool of available talent and reduce skill shortages in specific sectors. Focusing on policies that support workers and encourage productivity could lead to lower NAIRU.


 

Alicia Rambaldi

improving the quality of employment services, improving the quality of primary and secondary education, reducing out-of-pocket costs of childcare for families

4.5

Measures that lead to improvements in skills, labour force participation and better matching of workers to jobs.


 

Sue Richardson

running the economy "hot" for a period (i.e. through low interest rates) in order to give more potential workers some work experience, increase their employability in the long term, improving the quality of employment services, cutting immigration

3

Working holiday makers and international students work mainly in entry level jobs: they compete directly ( and successfully) with longer term unemployed. This is not the case for permanent migrants, so cuts to immigration need to be tailored to the objectives of such cuts. The path that the economy has taken to the current level of unemployment influences the employability of the current unemployed: the longer a person is unemployed, the harder it is to find a job. Thus longer periods of relatively high unemployment very probably increase the NAIRU and longer periods of low unemployment reduce it. High quality job matching services both increase labour productivity (because people are a good fit for their job) and reduce unemployment. It is likely that people who are not at the top of the employability queue are also not the most skilled at finding a job, so will benefit most from a high quality employment service.


 

Leonora Risse

improving the quality of employment services

When looking to define measures of full employment and NAIRU, we need to expand our focus beyond unemployment (whether or not a jobseeker has a job) to also encompass underemployment (whether a worker is working as many hours as they would like). Taking hours of work into account matters because hours of work that can fluctuate in response to changing economic conditions, not just the unemployment rate. When spending slows down, we usually see workers' hours being cut back or shifts being lost first, before we see workers being laid off completely. When spending picks up, existing workers' hours go up first, before employers bring in new hires. Combined, these metrics give us the "under-utilisation" rate for the labour market. When we add the current unemployment rate of 3.5% to the current underemployment rate of 6.4%, this sums to an under-utilisation rate of 9.9% (ASB, seasonally-adjusted, June 2023) Underemployment is where we see a persistent gender gap. It is currently at 5.5% for men compared to 7.8% for women. This adds up to an under-utilisation rate of 8.7% for men compared to 11.2% for women. This means that a larger share of women, than men, aren't working as many hours of work as they would like or financially need. The underemployment rate also shows us how households are handling inflationary pressures. When costs of living intensify, existing workers might look for more hours of work out of financial necessity. Even if their actual hours of work do not fall, the under-employment could rise as workers are looking for more hours. We can't glean these information signals from the unemployment rate only. Policies to reduce unemployment requires well-designed job matching services, as well as supportive opportunities for jobseekers to upskill, retrain and/or relocate to match the new and emerging jobs that unfold as the economy continues to dynamically transform. It requires better recognition of the portable skills, experience and capabilities that jobseekers already possess than can be transferred to new opportunities, which can be overlooked and under-valued by employers. There needs be ongoing focus on the discrimination and inequities that overlooks the capabilities of many jobseekers, including older workers (especially older women), people living with a disability, and people from culturally and linguistically marginalised backgrounds. Placing greater responsibility on the higher education sector to ensure their students can secure meaningful employment after graduation could also be explored more closely.


 

Rana Roy

.

With due apologies, my answer to the first question is 'non-compliant': any unemployment rate that is consistent with ?present policy settings? will be inconsistent with ?full employment?. From Oscar Wilde?s report in The Importance of Being Earnest, we know that Lady Bracknell found the very idea of adults being re-christened ?grotesque and irreligious?. Now I do not take quite so harsh a view of all acts of re-christening. But to re-christen Milton Friedman?s ?natural rate of unemployment? first as ?NAIRU? (?non-accelerating inflation rate of unemployment?), and then as ?full employment?, seems to me to display a contempt for ordinary language that reminds one of the worst excesses of French post-modernism. And I presume we all know what that unfortunate movement led to! In ordinary language, ?full employment? obtains when all those who are able and willing to work do in fact work ? taking into account the inevitable frictions and time-delays in moving from one position to another. In a technical language that does not do violence to ordinary language, full employment implies a zero rate of ?structural? and ?cyclical? unemployment, with any residual unemployment being nothing other than a temporary ?frictional? state coinciding with the voluntary decisions of workers to move from one position to another. The RBA provides a good summary of the relevant definitions here. Hence, if past experience is any guide, full employment would entail, normally, an unemployment rate of circa 1%. (And if past experience is not an appropriate guide, it is incumbent on any government committed to ?full employment? to do the research required to establish the relevant rate of ?frictional unemployment? in the present day.) To be sure, there will be, periodically, abnormal circumstances when some degree of ?cyclical unemployment? may be unavoidable. For quite independently of anything to do with the labour market qua causal factor, there is such a thing as the business cycle. Hence, there will be brief ? and I stress brief ? periods when governments committed to full employment may need to accept an unemployment rate of circa 2%. And that is just how it was in Australia in the quarter-century from 1949-50 to 1973-74 ? as is shown in RBA data, quoted in David Richardson?s 2019 Australia Institute report,?Tolerate Unemployment but Blame the Unemployed: The Contradictions of NAIRU Policy-Making in Australia?, Figure 2, page 22. The unemployment rate fluctuated between 1% and 2% for almost all of this period, with two spikes below 1% and one brief spike above 2%, peaking at 2.6%. That is full employment as I understand the term. Subsequently, beginning in the late 1970s in the United States and the United Kingdom, one by one, governments across the OECD world abandoned the commitment to full employment ? a process that was more or less completed by the end of the 1980s. In part, this entailed accepting with equanimity an official rate of unemployment far above 2% ? at least twice as much, more usually three times as much, sometimes more. In greater part, it entailed a re-definition of unemployment itself. In Australia, for example, someone able and willing to work full-time but who worked ?1 hour? or more in the reference week is counted as employed, not unemployed; someone able and willing to work but who is not able to start ?immediately? is counted as a non-participant rather than unemployed; and so on. Analysing Australian data for 2018, the Australia Institute report cited above concludes: ?the implication of 5 per cent ?official? unemployment is a level of true unemployment and underemployment (counting the officially unemployed, marginally attached non-employed, and underemployed) that is closer to 20 per cent. It stretches the imagination to believe that 20 per cent is in any way ?natural?.? See Richardson, pages 22-26: https://australiainstitute.org.au/wp-content/uploads/2020/12/Tolerate_Unemployment_but_Blame_the_Unemployed-WEB.pdf This is the background against which we need to assess the scope for ?full employment? under ?present policy settings?. Thus, even if fiscal and monetary policy aimed to achieve, and pro tempore succeeded in achieving, an official unemployment rate of 2% ? and, to date, no decision-maker has spoken of a number as low as 2% ? the result would be a true level of unemployment far above full employment. At best, one would see the reduction in official unemployment combined with a concomitant reduction in hidden unemployment, leaving the true level at or near a double-digit rate. At worst, one would see a movement between the classifications of officially unemployed, under-employed and marginally attached non-employed, leaving the true level of unemployment unchanged. Moreover, so long as the search for ?full employment? remains a search for ?NAIRU?, we will never be able to stabilise the level of unemployment at the lowest feasible NAIRU. The point here is not simply that NAIRU is notoriously difficult to estimate: published estimates have been highly volatile ? with estimates for Australia ranging between 2.3% and 9.5%, and the RBA?s own estimates ranging widely over time. (See Richardson, pages 16-17, and ibid., Figure 1, page 18.) The point is that it is condemned to be a moving target. Statistically, there is no stable, well-defined relationship between unemployment and inflation. The reason for this is obvious: the labour market is, obviously, not the only generator of inflation (or ?accelerating? inflation or ?prolonged? inflation). Several centuries of statistical data may be called as evidence here but I shall limit myself to only two relevant cases. In Australia, over the period between 1949-50 and 1953-54, as the Korean War came and went, inflation accelerated to circa 20% before falling back to circa 1%, whereas the unemployment rate, under the then regime of full employment, remained confined to a range between circa 0.5% and circa 1.5%. (See Richardson, Figure 2, page 22.). So the question is: what was the value for Australia?s NAIRU when inflation accelerated to 20%? In the case of the present inflation, Germany is perhaps the most striking exemplar of the point at issue. In the five-year period to July 2023, we find as follows: German inflation remained reliably below 2% until the great take-off in 2021. It then accelerated to 8.8% in October 2022, held at 8.7% in January and February 2023, before falling back to a still abnormally high 6.2% in July 2023. It is clear that inflation is not on course to return to below 2% and it is entirely possible that it will spike again as winter approaches. Over the same period, German unemployment has fluctuated within a relatively narrow range between 5% and 6%, with a brief spike above 6% at the peak of the COVID lockdown. (See here ? and here). https://tradingeconomics.com/germany/inflation-cpi https://tradingeconomics.com/germany/unemployment-rate Once more, the question is: what was the value for Germany?s NAIRU through this period? To sum up: if NAIRU is to be derived from the actual incidence of ?accelerating inflation? irrespective of whether or not that inflation is generated in the labour market, then it will always be a moving target, incompatible with ?full employment? as understood in ordinary language. On the other hand, if NAIRU is to be derived from a purely theoretical model restricted to only such inflation as is generated in the labour market, with all other things being held strictly constant, its relevance to policy becomes severely limited. Moreover, since we know that full employment is compatible with low and stable inflation over extended time periods, even in our living memory, it is not at all obvious that inflation generated in the labour market is a function of the general rate of employment, as distinct from more specific factors requiring more specific remedies. A final point: the RBA is not the party responsible for the policy settings that have delivered the present regime of high unemployment. Across the OECD world, including Australia, central banks have long maintained, and continue to maintain, negative real interest rates. The responsibility for high unemployment resides with governments ? governments that have enabled and encouraged de-industrialisation, deskilling of labour, oligopolies in product markets restricting output and employment, and monstrous distortions in the finance and housing markets resulting in the redirection of credit from productive ends to the parasitic activity of bidding up housing prices. I conclude therefore that the RBA would be well-advised to inform the government that full employment means full employment, a la Australia?s experience from 1949-50 to 1973-74, a rate of unemployment of no more than 2%; to declare that the tools for restoring full employment are in the hands of the government, not the RBA; and to play the ball back into the government?s court. Regarding the second question, nominating measures that would bring down the NAIRU, it follows that I cannot recommend any particular suite of policies specifically designed to reduce NAIRU. Inter alia, such a recommendation would entail, potentially, a damaging volatility in the quantitative values of the recommended policies in order to align them with the changing values of NAIRU. Any reduction in unemployment per se is welcome. And I do not wish to criticise any good-faith efforts to reduce unemployment. However, I must observe that each and every one of the policy options listed above has been tried in the recent past ? in some cases, repeatedly, and with great fanfare. It is highly doubtful that repeating them yet again will result in a large reduction in unemployment, let alone a restoration of full employment. Rather, my preferred option would be to commence the more difficult task of mapping the pathways to restoring full employment, and the reforms and investments in labour, product and capital markets required to that end. But this is not the place to pen that essay.


 

Stefanie Schurer

improving the quality of employment services, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers), creating more incentives for business R&D

4.5

This question is about how to increase employment without triggering inflationary pressures to the economy. The single most effective policy measure for this would be to increase fair competition for businesses. By fair I mean that no single business can exploit market power. To become and stay competitive, businesses have to invest in their own R&D (Research and Development), so that they can produce products that are sought after in a global market. Companies that are competitive in a global market generate sustainable (and potentially expanding) employment opportunities for workers. However, to stay competitive, companies sometimes need flexibility in offering a great variety of work contracts, not just a one-size fits all wage contract (eg to buffer against fluctuations in the market). The quality of employment services is critical too, as employment agencies can help workers to find the companies and the jobs that match their skills (so that there is less frictional unemployment in the economy). I would have also opted for "better targeting immigration" (but I could only tick 3 boxes), so that the right skills can be imported if needed. High quality employment services could help flag which skills are most in demand (but cannot be filled) by businesses. Skill shortage can be solved in the medium run by importing the right skills (immigration) and in the longer-run by boosting tertiary education.


 

Jeffrey Sheen

reducing taxes and regulations facing businesses, improving the quality of employment services, relaxing industrial relations regulation to allow for greater "flexibility" (as defined by employers)

Reducing NAIRU is achieved with carefully implemented measures that reduce firms? marginal costs, their product market power, and the relative bargaining power of workers. Many in the offered list of measures will raise longer run real wages without having much effect on unemployment. Some may reduce unemployment but increase its total social cost.


 

Julie Toth

reducing out-of-pocket costs of childcare for families, running the economy "hot" for a period (i.e. through low interest rates) in order to give more potential workers some work experience, increase their employability in the long term, creating more incentives for business R&D

3.75

The NAIRU appears to have fallen in recent decades, but the reasons for this are not entirely clear. The COVID pandemic has possibly provided a crucial turning point in NAIRU-friendly work arrangements (only history and a lot of academic research will confirm this!). In particular, the pandemic has accelerated the adoption and acceptance of digital technologies, genuinely flexible work arrangements and novel employee benefits. Across a range of industries, digital technologies are reducing on-costs for employers AND reducing entry barriers for potential employees (e.g. for parents and remote workers). We need to ensure we don't lose these benefits. A structurally lower NAIRU would be the cherry on top.


 

Joaquin Vespignani

reducing taxes and regulations facing businesses, increasing enrolments in tertiary education, improving the quality of primary and secondary education

4

Obtaining education is crucial in reducing the natural rate of unemployment. By receiving education at all levels, workers can secure long-term employment and decrease the length of time they are unemployed.


 

Rachel Ong ViforJ

creating more incentives for business R&D, reducing out-of-pocket costs of childcare for families, improving the quality of primary and secondary education

4


 

Beth Webster

improving the quality of employment services

2

More public sector supported employment options for people with social and disability issues would assist the very long-term unemployed participate more fully in society.