So yesterday the RBA dropped the overnight interest rate to 0.75%. Today the papers are full of analysis and discussion. This observation in the AFR by Christopher Joye is particularly interesting:
Earlier in the year, the RBA arrived at the important conclusion that the fully employed jobless rate is much lower than its previously assumed 5 per cent threshold, presently sitting somewhere between 4.0 and 4.4 per cent. It also appears to be trending downwards over time.
Given our 5.3 per cent unemployment rate, this implies that there are more than 100,000 jobless Australians who should, in fact, be gainfully employed.
It is not clear to me, however, how and why the RBA has formed that view. (The RBA speech talking about estimates of the NAIRU is here).
But let’s do a very quick plausibility check.
The current employment to population ratio is 62.3%. The all-time high for that statistic is 63.4% in December 2007. An extra 100,000 people working today would imply an employment to population ratio of 62.8.%.
I’m at a loss to understand why anyone would think that there could easily be an additional 100,000 jobs in the economy when, since 2007, we have seen the labour market substantially re-regulated, anti-business sentiment increase, and energy costs soar.
It seems to me that achieving the goal of full(er) employment involves cutting red tape, cutting green tape, lowering taxes, and curbing anti-business sentiment. Not just trying to push on a piece of string by lowering overnight interest rates.