4 years ago
FOUR REASONS FOR TARGETING FOUR PERCENT UNEMPLOYMENT
ANDREW LEIGH MP
My thanks to the organisers of this important conference for the chance to speak with you today.
I acknowledge the traditional Indigenous owners of the lands on which we meet today, and pay respects to their elders. Achieving equality of opportunity relies crucially on Closing the Gap between Indigenous and non-Indigenous Australians.
Over the past generation, inequality in Australia has risen markedly. Whether measured by wealth, income, earnings or consumption, the gap has widened. As many of the presentations in this conference have highlighted, more inequality has meant more social immobility. I think of this using the analogy of a ladder: when the rungs are spaced a long way apart, it’s harder to climb up and down.
There’s also an issue of misperceptions. Many Australians think that the distribution of incomes is fairer than it really is. Surveyed on their perceived level of wealth inequality, the typical Australian thinks that we have a more equal distribution of wealth than in Scandinavia. In reality, Australian inequality is closer to inequality in the United States.
The same holds for perceptions of income. People with incomes in the top 1 percent are likely to have a disproportionate number of friends in the top 1 percent. As a result, they may not understand how atypical they are. As a result, it’s easy to forget that the median household income is around $85,000, the median wage is around $55,000 and the median income among taxpayers is around $45,000. In other words, half of all households have an income below $85,000, half of all workers have a wage below $55,000, and half of all taxpayers have an income below $45,000. I’ll leave it to you to decide whether an individual income of $180,000 makes you ‘rich’ or ‘poor’, but it’s a statistical fact that it puts you in the top 10 percent of individual income earners.
Given an opportunity to discuss equality of opportunity, there are a range of issues I could talk about. Robust competition policy to rein in monopoly power. Attracting and retaining great teachers in disadvantaged schools. Creating an environment for unions to thrive. Negative income taxes to encourage work incentives. Predistribution to assist mothers and babies in the crucial early years. A progressive tax system with fewer tax loopholes. These ideas could fill a book.[i]
Tempting as it is to take such a broad approach, my focus today will be on a single issue: reducing the unemployment rate.
It has become commonplace to regard ‘full employment’ in Australia as 5 percent, or even higher. That means we are, as a nation, content to say that having 700,000 of our fellow citizens out of work is no big deal; that it’s the best we can do.
Not all unemployment is avoidable. It can take time after graduation to find a job. When firms shut down, workers don’t immediately find new employment. Many Australians have had a period in their lives when their only job was trying to find a job.
But not all unemployment is what economists call ‘frictional unemployment’. Today, the ranks of the unemployed include 150,000 people who have been out of work for over 1 year. Of these, 80,000 have been out of work for over 2 years. This represents an awful waste of human potential.
Unemployment figures like these are an inevitable result of accepting that 5 percent unemployment is ‘full employment’ – that it’s the best we can do.
Historically, that’s an unusual view. 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. Throughout those decades, Australia’s unemployment rate averaged less than 2 percent.
Other advanced nations might come to the same conclusion about Australia. To compare unemployment across countries, one can use the OECD’s harmonised unemployment rates. During the Global Financial Crisis, while many countries’ unemployment rates spiked to double-digit levels, Australia’s unemployment rate never exceeded 6 percent.
Using OECD harmonised unemployment rates, the unemployment rate is now 3.2 percent in Germany, 3.6 percent in the United States, 3.7 percent in Britain, and 4.2 percent in New Zealand. If these countries can meet or beat a 4 percent unemployment target, why can’t Australia?
It’s not as though we Australia’s labour market hasn’t outperformed the OECD in the past. During the Global Financial Crisis, Australia’s unemployment rate was around 1-2 percentage points below the OECD average. Yet this week, Australia’s unemployment rate of 5.2 percent was about the same as the average unemployment rate across the OECD of 5.2 percent.
There are four reasons why I believe that Australia should be targeting an unemployment rate of 4 percent.
First, it would mean a lot more people in jobs. If had a 4 percent 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 people not suffering the anguish of unemployment, which we know tends to be associated with unhappiness and frustration. That’s 160,000 unique, wonderful and precious Australians whose skills would be productively used, rather than depreciating. To the greatest extent possible, our economy should ensure that when someone wants to work, they can do so.
Second, it would increase the number of disadvantaged people in work. When employers have dozens of applicants for every opening, they can afford to hire those who look, speak and act like them. When unemployment is high, employers 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 nearly 600,000 children growing up in jobless households, one way to help them problem is to cut the jobless rate.
Third, it would 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 Philip Lowe has observed, the number of unemployed people for each job vacancy has declined from 5 in 2014 to 3 today. Nonetheless, the RBA Governor concludes ‘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.’
Fourth, it is eminently achievable. As the Reserve Bank’s Luci Ellis noted in her Freebairn Lecture earlier this month, the US, Japan and the Eurozone have all revised down their estimate of the NAIRU in recent years. The Reserve Bank’s central estimate puts the Australian NAIRU at 6% in 2003, 5% in 2012, and 4.4% in 2019. The RBA’s estimate of the NAIRU continues to trend downwards, and there is no reason to think that 4% is out of reach.
How do we get there? Part of the answer is to make lower unemployment a priority. We 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 stop 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. At the last election, only a minority of Australians supported our platform, which included a new jobs tax credit, significant infrastructure spending, and major investments in health and education. If these are not the right ways of boosting employment, then what will the current federal government do to ensure that ‘jobs and growth’ isn’t just another three-word slogan?
Thank you again for the opportunity to join you today. I look forward to the conversation.
ENDS
I acknowledge the traditional Indigenous owners of the lands on which we meet today, and pay respects to their elders. Achieving equality of opportunity relies crucially on Closing the Gap between Indigenous and non-Indigenous Australians.
Over the past generation, inequality in Australia has risen markedly. Whether measured by wealth, income, earnings or consumption, the gap has widened. As many of the presentations in this conference have highlighted, more inequality has meant more social immobility. I think of this using the analogy of a ladder: when the rungs are spaced a long way apart, it’s harder to climb up and down.
There’s also an issue of misperceptions. Many Australians think that the distribution of incomes is fairer than it really is. Surveyed on their perceived level of wealth inequality, the typical Australian thinks that we have a more equal distribution of wealth than in Scandinavia. In reality, Australian inequality is closer to inequality in the United States.
The same holds for perceptions of income. People with incomes in the top 1 percent are likely to have a disproportionate number of friends in the top 1 percent. As a result, they may not understand how atypical they are. As a result, it’s easy to forget that the median household income is around $85,000, the median wage is around $55,000 and the median income among taxpayers is around $45,000. In other words, half of all households have an income below $85,000, half of all workers have a wage below $55,000, and half of all taxpayers have an income below $45,000. I’ll leave it to you to decide whether an individual income of $180,000 makes you ‘rich’ or ‘poor’, but it’s a statistical fact that it puts you in the top 10 percent of individual income earners.
Given an opportunity to discuss equality of opportunity, there are a range of issues I could talk about. Robust competition policy to rein in monopoly power. Attracting and retaining great teachers in disadvantaged schools. Creating an environment for unions to thrive. Negative income taxes to encourage work incentives. Predistribution to assist mothers and babies in the crucial early years. A progressive tax system with fewer tax loopholes. These ideas could fill a book.[i]
Tempting as it is to take such a broad approach, my focus today will be on a single issue: reducing the unemployment rate.
It has become commonplace to regard ‘full employment’ in Australia as 5 percent, or even higher. That means we are, as a nation, content to say that having 700,000 of our fellow citizens out of work is no big deal; that it’s the best we can do.
Not all unemployment is avoidable. It can take time after graduation to find a job. When firms shut down, workers don’t immediately find new employment. Many Australians have had a period in their lives when their only job was trying to find a job.
But not all unemployment is what economists call ‘frictional unemployment’. Today, the ranks of the unemployed include 150,000 people who have been out of work for over 1 year. Of these, 80,000 have been out of work for over 2 years. This represents an awful waste of human potential.
Unemployment figures like these are an inevitable result of accepting that 5 percent unemployment is ‘full employment’ – that it’s the best we can do.
Historically, that’s an unusual view. 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. Throughout those decades, Australia’s unemployment rate averaged less than 2 percent.
Other advanced nations might come to the same conclusion about Australia. To compare unemployment across countries, one can use the OECD’s harmonised unemployment rates. During the Global Financial Crisis, while many countries’ unemployment rates spiked to double-digit levels, Australia’s unemployment rate never exceeded 6 percent.
Using OECD harmonised unemployment rates, the unemployment rate is now 3.2 percent in Germany, 3.6 percent in the United States, 3.7 percent in Britain, and 4.2 percent in New Zealand. If these countries can meet or beat a 4 percent unemployment target, why can’t Australia?
It’s not as though we Australia’s labour market hasn’t outperformed the OECD in the past. During the Global Financial Crisis, Australia’s unemployment rate was around 1-2 percentage points below the OECD average. Yet this week, Australia’s unemployment rate of 5.2 percent was about the same as the average unemployment rate across the OECD of 5.2 percent.
There are four reasons why I believe that Australia should be targeting an unemployment rate of 4 percent.
First, it would mean a lot more people in jobs. If had a 4 percent 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 people not suffering the anguish of unemployment, which we know tends to be associated with unhappiness and frustration. That’s 160,000 unique, wonderful and precious Australians whose skills would be productively used, rather than depreciating. To the greatest extent possible, our economy should ensure that when someone wants to work, they can do so.
Second, it would increase the number of disadvantaged people in work. When employers have dozens of applicants for every opening, they can afford to hire those who look, speak and act like them. When unemployment is high, employers 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 nearly 600,000 children growing up in jobless households, one way to help them problem is to cut the jobless rate.
Third, it would 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 Philip Lowe has observed, the number of unemployed people for each job vacancy has declined from 5 in 2014 to 3 today. Nonetheless, the RBA Governor concludes ‘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.’
Fourth, it is eminently achievable. As the Reserve Bank’s Luci Ellis noted in her Freebairn Lecture earlier this month, the US, Japan and the Eurozone have all revised down their estimate of the NAIRU in recent years. The Reserve Bank’s central estimate puts the Australian NAIRU at 6% in 2003, 5% in 2012, and 4.4% in 2019. The RBA’s estimate of the NAIRU continues to trend downwards, and there is no reason to think that 4% is out of reach.
How do we get there? Part of the answer is to make lower unemployment a priority. We 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 stop 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. At the last election, only a minority of Australians supported our platform, which included a new jobs tax credit, significant infrastructure spending, and major investments in health and education. If these are not the right ways of boosting employment, then what will the current federal government do to ensure that ‘jobs and growth’ isn’t just another three-word slogan?
Thank you again for the opportunity to join you today. I look forward to the conversation.
ENDS