Despite warnings of a global economic downturn, Australia has once again defied expectations with its official unemployment rate stable at 3.5% in March.
However, a lot happened behind that number. The total number of people with a job grew by 53,000. The increase of 116,600 jobs over the past two months surpasses anything since mid-2022, when the unemployment rate hit 3.5% for the first time. It seems there is still plenty of strength in labor demand.
The only reason Australia doesn’t have an even lower unemployment rate is that the labor force participation rate has increased by about the same amount as employment – 51,500. The similar magnitude of the increase in employment and labor force participation over the past two months, together with continued high vacancy rates, suggests that employment growth is now dependent on new entrants into the labor force.
Another month of low unemployment is another month of the benefits that come with it. Low unemployment means higher GDP, with more of the country’s available labor supply being used to produce output.
It also means more equity. Groups that have the most difficulty finding work see the greatest employment boost when unemployment is low.
With these benefits in mind, one would expect that making unemployment as low as possible would be a constant policy goal for the government. However, I don’t believe that has been the case lately.
Instead, the focus was on achieving the inflation target. Since the target was set in the early 1990s, attention to unemployment has gradually declined.
Too much fear of inflation
Certainly, there was concern when the unemployment rate threatened to climb above 5% or 6%, as with the global financial crisis of 2007-2008 and the outbreak of COVID-19 in 2020.
But other than that, we haven’t seriously looked at how low the unemployment rate should be, or policies designed to meet that goal. By not thinking more seriously about the unemployment rate, Australia missed the opportunity to lower the rate in the 2010s.
In economics, it is standard practice to view full employment as the lowest possible unemployment rate without labor demand leading to excessive wage growth and inflation.
This number — known as the non-accelerating inflation rate of unemployment, or NAIRU — is a matter of debate. Prior to the pandemic, it was widely believed that the unemployment rate could not rise lower than about 5% without causing wage inflation.
Read more: Vital Signs: Australia’s 5% unemployment rate is not full employment; raising interest rates would be wrong
But during 2021-22, with fiscal policy stimulus to tackle COVID-19, the unemployment rate fell to its current level of 3.5%, without accelerating wage inflation.
We need a new unemployment target
So what is needed now is a rebalancing of macroeconomic policy objectives. We need a full employment target expressed as a level or an acceptable range of unemployment or underutilization of labourto accompany the existing inflation target.
A full employment target will force governments to commit to what is the minimum unemployment rate possible to sustain; and increases accountability for taking action to achieve that goal.
In choosing the target, a balance must be struck between the benefits of a lower unemployment rate for national production and equity, and the possible inflationary consequences of trying to push the unemployment rate too low.
It should use a wide variety of indicators of labor market outcomes; than just the NAIRU, which ignores the output and distribution benefits of low unemployment.
Underemployment also counts
Ideally, the target should also be formulated with the understanding that the policy problem is broader than unemployment. What should motivate the policy is that people cannot work the hours they want or want to work.
Unemployment is part of that. But that also increasingly applies to underemployment. By 2022, approximately 45% of the additional hours that could have been worked in the Australian labor market were due to worker underemployment.
Read more: Technically unemployment now starts with a ‘3’. How to keep it there?
Therefore, however the full employment target is expressed, the variety of types of labor underutilization must be taken into account.
Finally, in addition to the aggregate full employment target, we also need specific policies for groups that need additional help. Even with the current low unemployment rate, some groups are still missing out on job opportunities to an unacceptable level, such as First Nations people, people with disabilities, and people living in disadvantaged regions.