This blog is about how the RBA (and others) reckon 5 per cent unemployment is full employment. It’s utter crap of course as unemployment is under-estimated by about 3 per cent anyway. Don’t get me started on the under-employed and all those people who have dropped out of the workforce.
In 1960, when the Reserve Bank of Australia (RBA) was established, the Government instructed it to use fiscal policy to maintain full employment, which remained federal government policy for another 15 years.
It was abandoned in the mid-1970s by rising inflation, slowing growth, and rising unemployment, sometimes called ‘stagflation’. Many countries suffered the same fate.
Policy makers developed a new definition: full employment would mean the level of unemployment that kept a lid on inflation (i.e. on wages and prices).
The definitional change allowed the RBA to continue to meet its original mandate (to maintain full employment) on paper, while adapting to the new economic reality. And that’s the definition we still use today. Full employment is not full employment. The unemployment rate is not what it seems.
Something else happened, too. Policymakers lost faith in the capacity for fiscal policy (the government’s taxing and spending powers) to manage the business cycle.
They gave that job to monetary policy (ie the central bank’s use of interest rates to influence economic activity). The shift to the new model ushered in a new era, such as throwing out the Commonwealth Employment Service.
And after the initial horror of the early 1990s recession, the economy eventually grew for 29 uninterrupted years, a record achievement. But it had a cost.
The phenomenon of long-term unemployment became a genuine scourge after we abandoned full employment. Casualisation and precarious work have spread through the economy. Wealth inequality has increased noticeably. Successive governments have refused to lift thousands of households out of poverty.
And in recent years, wages growth has whittled down to nothing, while the share of national income going to workers has touched record lows. After the initial horror of the early 1990s recession, the economy eventually grew for 29 uninterrupted years but it had a cost.
The phenomenon of long-term unemployment became a genuine scourge after we abandoned full employment. Casualisation and precarious work have spread through the economy.
Wealth inequality increased noticeably. Successive governments have refused to lift thousands of households out of poverty, wages growth has fallen to nothing, while the share of national income going to workers has hit record lows.
Some highly regarded economists have argued that we should drive down the unemployment rate to as low as it will go instead of using neoliberal policy of using thousands of unemployed people as a buffer against inflation.
Meanwhile, job seekers are required to search for a minimum of 15 jobs a month, climbing to 20 from July. While burdensome for employers (if all of Australia’s job seekers actually apply for those jobs, employers will be lumbered with 17 million applications per month, climbing to 23 million) it’s also unhelpful for job seekers.