DOES LOW UNEMPLOYMENT COME AT A HIGH PRICE?

Australia’s unemployment rate is at 33 year lows. This achievement is far from unique. It is a global phenomenon and Australia has benefited from the world boom more than most because of the impact on our export prices. That said, it is quite possible that some of the Howard Government policies such as it its tough welfare to work regime, its well targeted immigration policies and perhaps even Workchoices have contributed to our strong employment performance.

This opinion piece is not about where the credit lies for our low unemployment. Rather I want to ask the question: does low unemployment of the order of 4% or less come at a high price?

This seems to be the view of Howard Government Ministers. We are being told that (a) the low unemployment outcomes would not have been possible without the removal (through WorkChoices) of long standing regulatory protections for disadvantaged workers; and (b) increased inflation and rising interest rates are an unavoidable outcome of low unemployment.

Ministers are effectively saying that low unemployment comes with a very big sting in the tail – reduced workplace security for vulnerable workers and high and rising interest rates and that if we want further reductions in unemployment we must accept more of the same on industrial relations reform and interest rates.

One could question the logical consistency of the Government position. If Workchoices was designed to make low unemployment more compatible with low and stable inflation, then our low unemployment should not have produced an acceleration in underlying inflation. Mr. Costello cannot have it both ways.

Logic aside, if one accepts the basic trade off argument of Howard Ministers, many Australians (perhaps a majority) might wonder if low unemployment is worth having! They might well prefer having, say, 5% unemployment and more workplace security and lower interest rates.

In truth, however, the Government argument is largely fallacious.

First, it assumes that fiscal policy plays a passive role – both in a contra-cyclical sense (e.g. running a fixed 1% surplus whatever the state of aggregate demand) and in a structural sense (e.g. ignoring the potential supply side effects of specific spending programs).

One could legitimately criticize Costellos failure to save more of the revenue windfall from the commodities boom in recent years. Measured by the change in the fiscal balance over recent years, the past three Federal Budgets have done very little to dampen aggregate domestic demand, relieve inflationary pressures or improve our external account deficit. Fiscal policy should have done more to take some of the load off monetary policy.

Again, if Costello had done more to overcome skill shortages and infrastructure bottlenecks instead of splashing money on middle class welfare, there would have been rewarding supply side effects.

With an improved fiscal stance, the hike in interest rates of recent months could have been avoided.

As for the claim that low unemployment is only possible because of WorkChoices, it is far too early to read this from the fall in unemployment in the last two years, as low and falling unemployment has been a global phenomenon in that period.

More importantly, there is encouraging evidence from the experience of Scandinavian and smaller European countries that a strong worker safety net comprising relatively generous unemployment benefits, strong legal rights for trade unions, and some basic worker protection regulations is compatible with low unemployment so long as governments
– allow employers considerable freedom to hire and fire;
– impose stringent availability for work requirements as a condition for unemployment benefits; and
– invest heavily in human capital, e.g. through early childhood intervention, subsidized child care and other measures to increase the size of the labour force, education support, opportunities for life-long learning, provision of health care, public housing, public transport and high quality employment placement services, as well as active labour market programs (such as formal re-education or retraining, subsidised on-the-job training, geographical mobility incentives and, to a degree, job creation measures, including measures to foster a more entrepreneurial culture).

Of course, Australians would never put up with the high taxes borne by Scandinavians (although it is worth noting that the tax system in Denmark is structured to minimise the incidence of high marginal effective tax rates). But what we are discussing in Australia is the marginal direction of future policies should we be gradually heading further down the US libertarian route or towards the Nordic model?

To sum up, I reject the gloomy Howard Government proposition that low unemployment must necessarily be associated with higher inflation, rising interest rates and a retreat from decent safeguards for vulnerable workers. We do have a wider range of policy options than this proposition implies.

======

This entry was posted in Uncategorised. Bookmark the permalink.
Subscribe
Notify of
guest
1 Comment
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Greg
14 years ago

But isn’t the system them Nords got Socialism? Why, that’s akin to Communism! You must be one of them Reds.

To each according to their means, from each according to their needs.