Update January 24, 2013: Wayne Swan was out and about yesterday claiming that Australia has a low unemployment rate.
The Treasurer said that Tony Abbott’s “prediction of legs of lamb costing $100, and Gladstone and Whyalla being wiped out (by the carbon tax) have come to nought”. However, he acknowledged that – despite the rate of unemployment remaining low – there were “sectors in the Australian economy which are impacted by the higher dollar, a cautious consumer and global volatility”.
So I thought I’d remind everyone that isn’t true – by Australian policy standards unemployment is high. This post from November 2012 will be sticky for today.
Original post begins.
We keep hearing that Australia’s unemployment rate is pretty low. To be sure compared to some of the unemployment rates in Europe that is true – but then that has always been true.
Unemployment is Europe is high – but what does that say about unemployment in Australia? Well not much. When deciding whether unemployment can be considered high or low we need to have a sensible comparison. We should be comparing actual unemployment rates to estimates of the natural rate of unemployment or the non-accelerating inflation rate of unemployment (NAIRU). These two concepts are not quite the same but there are many estimates of NAIRU for Australia so let’s look at that.
Late in 2007 Treasury official Steven Kennedy told the NSW Economics Society:
… the NAIRU is currently around 4.7 per cent, although there is a considerable band of uncertainty around this estimate.
More reassuringly, our current estimate of the NAIRU for Australia is similar to those for other developed countries. For example, in 2007 the Congressional Budget Office (US Congress) estimates a NAIRU of 4.8 per cent for the US. Further, as for Australia, estimates for other countries have been steadily falling over recent years.
IGR 2010 assumes a NAIRU of 5 per cent, the same rate assumed in IGR 2007.
The 2010-11 MYEFO:
The tight labour market and the pick-up in aggregate demand associated with the higher terms of trade will also have implications for inflation, with Treasury’s most recent estimates of the non-accelerating inflation rate of unemployment (NAIRU) — the rate of unemployment at which inflation pressures start to emerge — ranging between 4½ and 5 per cent.
The 2011-12 MYEFO:
The unemployment rate is projected to be 5 per cent over the medium term, the assumption that has long been used for medium-term projections, and near the top of the band of current estimates of the NAIRU (4½ to 5 per cent).
Okay – so Treasury reckons unemployment should be between 4.5% and 5%. Now see the the switch in the 2012-13 MYEFO:
Australia’s unemployment rate is forecast to remain low, albeit rising slightly from 5¼ per cent in the September quarter 2012 to 5½ per cent by the end of 2012-13, consistent with moderate employment growth over the forecast period. Australia’s low unemployment rate stands in stark contrast with the high unemployment rates in the major advanced economies and is an important measure of Australia’s relative economic strength.
I downloaded the seasonally adjusted unemployment rate from the ABS and graphed the data along with the 4.5% and 5% range estimates for the NAIRU.
By Treasury estimates of the NAIRU Australian unemployment is high – that explains why the last MYEFO moved the goal posts.