This morning I heard Andrew Leigh on Sky News AM Agenda make the claim that ‘we are a five percent unemployment economy’. In the context of the conversation this was presumably a ‘good’ thing. To the extent that it could be worse, I suppose, five percent (about 5.2 percent) is a good thing. We could have the kind of unemployment rates that Europe routinely experiences or the nine – odd percent that the US is experiencing. We could, but we don’t, and we shouldn’t. We don’t have the same policy choices and policy failures that account for the high rates of unemployment in Europe and the US.
So what should the unemployment rate be? I reckon a lot less than five percent. The natural rate of unemployment isn’t a physical constant. There is no reason why we should be satisfied with five percent – or simply accept that if the ABS measures (about) five unemployment that there is nothing more we can do. While there will always be people in-between jobs, or unable to work, or wanting to work more or less, and so on ultimately the unemployment rate is a matter of choice. Those policies that government adopts that make it harder to hire and fire, harder to expand businesses, and generally make the economy less flexible contribute to resources being misallocated. In the context of labour markets that means lower remuneration and/or higher levels of unemployment.
It is important to realise that high unemployment rates are often not a personal choice but an institutional choice – that means we should spend more time thinking about how to structure institutions to lower the unemployment rate. Being satisfied with five percent suggests a lack of imagination. (To be fair, Andrew wouldn’t be satisfied with five percent but as a lowly backbencher he would have to parrot the party line.)