How can jobs and joblessness both be going up?

By MILLIE MUROI, Economics Writer

Despite more than two years of higher interest rates, meant to slow down spending and activity in the economy, unemployment in Australia remains unusually low.

The nation’s chief number-crunchers, the Australian Bureau of Statistics (ABS), said there were 16,000 more people employed in October, while the number of unemployed climbed by 8000. The unemployment rate stayed at 4.1 per cent for the third month in a row – still very low by the standards of the past 50 years as well as earlier slowdowns.

You might think when employment rises, unemployment has to fall by the same amount – and vice versa. But here’s the thing: they can both rise or fall at the same time.

How is this possible? Because there’s a third factor: the proportion of people who choose to be in the labour force – either by having a job or actively looking for one. If someone is looking for work and doesn’t have any, it means they’re unemployed, but they’re still counted as part of the labour force.

Usually, more people start seeking a job if the economy and the jobs market are both thriving. Why? Because they believe there’s a better chance of finding a job. By the same logic, if the economy is slowing and the jobs market is worsening, people are less likely to even try searching for a job. The labour force can also grow if the population blossoms, but generally, the better the economy and jobs market, the more people will choose to “participate” in the labour force, helping to fatten it up.

So if the Reserve Bank has pumped the brakes on the economy, and consumer spending is still weak, how has the participation rate increased?

Partly, it’s because overall spending in the economy – including spending by the government – is fuelling demand and keeping it above the level the economy can supply without pushing its limited resources, and therefore price pressures. It’s a good thing that people who want a job still have a good chance of finding one, but the relatively low unemployment rate will discourage the bank from starting to cut interest rates too soon.

That’s because a low unemployment rate is one of the signs of an economy running hot, and therefore at risk of facing inflationary pressures. The bank will be worried demand for goods and services hasn’t weakened enough, and that it might even start soaring. That would throw a spanner in the works for their crusade against inflation.

But what exactly is unemployment? It’s measured as the proportion of unemployed people in the labour force. Or, put another way: the proportion of unemployed people out of all the employed and unemployed people in the economy.

Then there’s the participation rate, which we can calculate by looking at all our “working age” people (in Australia, this is everyone over the age of 15 – including those who, really, are probably too old to work) and the proportion who are in the labour force (working or looking for a job). In most other places, working age is defined as those aged 15 to 64.

If more working-age people decide to start looking for work, it’s possible to have both more people unemployed (the jobseekers who don’t find a job) and more people employed (those who do), as well as a higher participation rate: more working age people, well, working – or looking for a job.

We can also look at the split between full-time and part-time workers. If there are more full-time workers, that’s a sign of a strong labour market. A growing share of part-time workers, meanwhile, is usually a warning that the market for labour is weakening. Over the past year, the share of part-time workers has fallen from about 42 per cent to 31 per cent. More people, and a greater proportion, are working full-time than they were a year ago.

Part-time jobs aren’t necessarily worse than full-time jobs. For some people – such as students, semi-retired people and parents of young children – a part-time job aligns perfectly with their life stage or preferences. It’s only a problem for those who want a full-time job but can only find a part-time one.

Anyone who does at least an hour of work every week is counted as employed. That’s been the case for decades and conforms with the international statistics conventions set down by the United Nations' International Labour Organisation in Geneva.

But it does mean we tend to understate the full extent of joblessness. Our measure of unemployment ignores the people who have had to settle for a part-time job when they’d much rather have a full-time job. This is especially the case as part-time employment has risen since the 1960s.

It’s why the bureau has, in recent decades, been calculating the rate of under-employment: the proportion of people in the labour force who have been working, but would have preferred to work more hours a week than they were able to find.

By adding together the underemployment rate and the unemployment rate, we get the underutilisation rate. This gives us a broader measure of unemployment and the health of our labour market. In October, the underutilisation rate was 10.4 per cent: a touch higher than at the same time last year.

How do we know all these numbers? The ABS conducts a monthly survey. It has a very big sample of households across Australia – usually about 26,000 – and someone from each of these households is asked about the labour force status of each person over the age of 15 under their roof.

The survey sample is split into eight groups, with each group staying in the survey for eight months. One group rotates out every month and is replaced by a new group rotating in. The ABS collects the information through trained interviewers who survey households either face to face or over the phone, and sometimes via an online self-completion form, asking about 70 questions.

While these measures aren’t perfect, and can be confusing, they act as a thermometer for our jobs market. There’s no doubt the pulse is weakening, but so far, there’s enough sign of strength to keep most of us from getting worked up.

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Get this into your head: we are now short of workers, not jobs

Last week, something strange happened without anyone noticing. We got the best monthly report on the jobs market we’ve ever had, and it was greeted with dismay. The message we’ve yet to get is that, when it comes to the need for jobs, our world has been turned on its head.

Every month, the Australian Bureau of Statistics gives us the latest figures for what’s happening to employment and unemployment, based on a huge sample survey of Australia’s 10.5 million households. The figures we got last week, for September, showed that the number of Australians with jobs increased by more than 64,000 during the month, to 14.5 million. The number of people unemployed – wanting a job, but unable to find one – fell by 9000 to a bit under 620,000.

Why was this the best jobs report we’ve had? Because the proportion of the working-age population with a job reached an all-time high of 64.4 per cent. During September, the number of full-time jobs grew by 51,000, to reach 10 million for the first time. So, more than 80 per cent of the extra jobs were full-time.

If the economy was booming, this strong growth in employment wouldn’t be so surprising. But the Reserve Bank has been applying the interest-rate brakes since May 2022, and the economy’s growth has been very weak for the past year or more.

The only thing that’s been growing strongly is the population – which makes the limited worsening in unemployment all the more surprising.

The new Minister for Employment, Murray Watt, boasted that more than a million extra jobs had been created since the Albanese government came to office in May 2022. “This is the most jobs ever created in a single parliamentary term by any Australian government,” he said immodestly.

So why was last week’s good news greeted with dismay? Because it was taken to mean the Reserve Bank will be in no hurry to start cutting interest rates. You know the media: always look on the dark side of life.

Rates will come down in due course, of course. And with the jobs market holding up as well as it has, it gets ever harder to fear the economy will drop into recession. Silly people judge recession by whether the economy’s production of goods and services – gross domestic product – starts going backwards.

But what makes recessions something to be feared is not what happens to production, but what happens to employers’ demand for workers. To the rate of unemployment, in other words. It’s when people can’t find work that they feel pain even greater than the pain people with big mortgages are feeling at present.

When the pandemic lockdowns ended and people were finally able to get out and spend the money they’d earned, businesses started hiring more workers and unemployment fell sharply. By the end of 2022, the rate of unemployment got down to 3.5 per cent – the lowest it had been in about 50 years.

But here’s the surprise: despite the big rise in interest rates designed to slow the economy and stop prices rising so fast – despite consumer spending becoming so weak – 28 months after the brakes were first applied the rate of unemployment has risen only to 4.1 per cent.

That’s still much lower than we’ve seen during most of the past five decades. After the recessions of the early 1980s and early 1990s, unemployment got up to about 10 per cent. In the 2000s, we got used to a rate that started with a 5.

For about the first 30 years after World War II, our problem was finding enough workers to do all the work needing to be done. Since the mid-1970s, however, we’ve learnt to live with the opposite: not enough jobs for all the people – including married women – wanting to work.

By now it’s become deeply ingrained in our thinking that there can never been enough jobs. Every politician and businessperson knows that, if you want to get your way, you promise to create more jobs.

But here’s the surprising news: the unusually low rates of unemployment we’ve experienced this decade aren’t the temporary product of the ups and downs of the pandemic and its inflationary aftermath. They’re here to stay. That’s why the jobs figures are holding up so well.

The half century in which jobs were always scarce has ended, and we’re back to the opposite problem: not enough workers to do all the work that needs doing.

Why? In five words: the ageing of the population. Because the proportion of people too old to work is growing, while families are having fewer children. Old people don’t stop consuming. They need more spending on services such as healthcare and aged care, which requires more workers.

For years we’ve made up for our low fertility rate by allowing high rates of immigration. And we’ll keep seeking from abroad the many doctors and nurses and aged-care workers we need.

Trouble is, all the rich countries have the same population-ageing problem we do. For different reasons, even China has a big ageing problem. So, the world competition for young skilled workers is likely to get a lot more intense.

But isn’t that a problem off into the future sometime, like climate change? Don’t be so sure – like climate change.

With the high cost of home ownership and a shortage of rental housing, right now we ought to be building a lot more additional housing than we are. What’s the problem? A shortage of skilled workers, with many people who could be building homes off working on the state governments’ big infrastructure projects.

And now that the Albanese government has approved the expansion of many coal mines, this will further reduce the number of skilled workers available to build homes.

A shortage of jobs is no longer our problem. It’s a shortage of workers.

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What goes on in the Reserve Bank's mind

By MILLIE MUROI, Economics Writer

So far, the Reserve Bank is winning. Every time we’ve had a new inflation read or jobs data, the country has held its breath … and exhaled a sigh of relief. Things are a little tougher for a lot of people, and a lot harder for some. But inflation, our public enemy number one, is gradually slinking away, and a historically high bunch of us have jobs.

The Reserve Bank might not be high-fiving itself yet, but it’ll be cautiously relieved that things are going (mostly) the way it planned. As the bank gets closer to the finish line, though, the balancing act will get harder. The reserve has been laser-focused on shrinking inflation, which it has. But the labour market is weakening, and there’s a risk we won’t feel or see the full impact on jobs of keeping interest rates on hold until after we’ve gone too far.

What is “too far”? Well, it’s tricky to say, because there’s no exact number to guide us on how many job losses we’d be OK with. And because – until we’ve locked inflation well within the 2 to 3 per cent target range – a strong jobs market is also a sign the economy might be pushing too hard to keep up with demand, and therefore that inflation might be here for a bit longer.

As one of the country’s leading labour economists, Jeff Borland, has pointed out, while recent data points to the Reserve Bank’s success so far, there probably needs to be a turning point in the bank’s thinking soon if we’re to avoid a big round of lay-offs.

Underlying inflation, the measure the bank cares about – and which doesn’t count items with especially large price changes – fell to 3.4 per cent over the year to August. Gross domestic product (a measure of how many goods and services the economy is producing), while crawling along, is still growing. And at 4.1 per cent in August, the unemployment rate shows we’ve managed to hold on to a lot of the gains in our labour market.

Compared with the US, UK and Canada, Australia seems to be the Goldilocks country. Partly because of Australia’s responsiveness to interest rate changes (we have one of the highest shares of mortgage-holders on variable rate loans, which means interest rate changes are felt pretty much immediately), the central bank has been less aggressive in ramping up interest rates to curb inflation.

While the US Federal Reserve jacked up rates by 5.3 percentage points from 2022 to its peak, Australian interest rates rose only 4.3 per cent (that’s also lower than in Canada and the UK). Despite this, the increase in Australia’s inflation rate since the first interest rate rise hasn’t strayed far from its peers. In fact, the 2.7 percentage point increase in inflation since the first rate rise is a lot lower than in the UK, where inflation surged 4.8 percentage points from its first rise.

The downward journey in inflation has also been fairly even across the countries. From its peak, Australia’s inflation rate has fallen about 0.7 percentage points every quarter, the same as in Canada and only a touch slower than the 0.8 percentage points in the US. The UK, with a high inflation peak, has had the fastest decline at 1 percentage point every quarter.

Australia’s approach has also limited damage to the jobs market. While unemployment increased 1.6 percentage points in Canada since the first rate rise and 0.8 percentage points in the US, the UK and Australia have managed to keep the lift in unemployment to just 0.6 percentage points.

At the same time, Australia’s participation rate has climbed 0.7 percentage points – the highest of its peers – since unemployment started rising. The participation rate is the proportion of working-age people (those aged over 16) who either have a job – full-time or part-time – or are actively seeking one (we call all these people “the labour force”) in the wider working-age population.

All this, together with high inflation, signals to the Reserve Bank that the Australian economy is still “running hot” as the Reserve’s chief economist Sarah Hunter has put it.

We tend to focus on the rate at which the economy is growing rather than the level it is sitting at. That’s why, when we see weak figures such as 0.2 per cent GDP growth for the most recent quarter (and for the quarter before that, and the one before that), we hear warning bells ringing about recession: commonly defined as two back-to-back quarters of falling growth.

So, why isn’t the bank in a rush to ease up on interest rates?

For as long as employment is growing and unemployment has risen only a bit, the bank won’t be living in fear, as many of its critics are, that the economy could drop into recession at any moment.

While the movement in GDP and household consumption has been very weak, the levels they’re at are still high – especially when compared with how much production capacity we have in the economy.

A strong labour market (one where most people who want a job can find one), means there’s still a lot of demand from businesses for workers. Why? Because there’s strong demand for their goods or services, and they need people to help produce or provide them. In August, for example, the Australian economy added more than 47,000 jobs.

But there are some signs the labour market is weaker than the headlines might tell us.

Some of the additional jobs and additional hours worked are a result of a big boost in immigration and therefore our population. In August, our population grew by 50,000 – but this growth won’t last forever, especially with the government’s cap on international students.

A lot of the growth in hours has also been in industries such as education, healthcare and social assistance. As Borland points out, about 40 per cent of the extra hours worked in recent months were in these largely government-funded industries – which, once again, cannot last forever.

We also know businesses are likely to be hoarding workers (firms tend to cling onto their workers when the economy starts to slow, until the very last minute, because it can be a pain to rehire them), and that interest rates take up to 12 to 18 months to impact the economy, meaning we may be yet to see the full impact of our rate rises.

Until underlying inflation sits comfortably within the target zone, GDP turns negative, or the jobs market deteriorates more noticeably, the Reserve Bank won’t be in a rush to dust off its bias towards reining in inflation.

But we know job loss has life-altering and long-lasting consequences for those affected. For the bank to keep Australia on the “narrow path” and continue to kill it (its job, that is, not the economy), it might need to start shifting its focus towards keeping us all in our jobs.

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Our economy has turned into a tortoise. The RBA will be pleased

By Millie Muroi, Economics Writer

Most of us know the age-old saying: slow and steady wins the race. Numbers released into the wild on Wednesday show the Australian economy is definitely a tortoise – but it should make the Reserve Bank pretty happy.

The national accounts – data gathered and shared every three months by the Australian Bureau of Statistics – gives us one of the most detailed pictures of how our economy has been tracking. The numbers always run slightly behind where we are because all the information has to be collected, crunched and spat out into a digestible clump. This week’s data drop was for the three months to June.

So, how did we go? There’s not much that should come as a surprise. Economists have long known the economy has been slowing. And most of the household data points to trends you’ve probably seen and lived yourself less spending, less disposable income and less of our income being put away for a rainy day.

Economic growth – or gross domestic product (GDP) – was weak, expanding 0.2 per cent in the June quarter for the third quarter in a row. But economic growth per person, which matters more when assessing our living standards, has tumbled … again. It fell 0.4 per cent – the sixth back-to-back quarter of shrinkage.

Will this worry our decision makers? Probably not. The focus is almost always on the total, not what’s happening on an individual level. It’s also much simpler to talk about GDP than GDP per capita – and much easier to fit in a headline!

The Reserve Bank, for one, won’t be worried by Wednesday’s figures. In fact, it’s probably quite happy. Why? Because its decisions are made at an aggregate level: it looks at the big picture, not the finer details.

There’s always a risk the bank will push the economy too far down the drain.

The bank’s forecasts for certain sections of the national accounts might have fallen on the wrong side of the fence: disposable income (how much people have to spend or save after taxes) for example, came in 0.3 per cent lower over the year, compared with the bank’s expectations for a 1.1 per cent increase.

But the Reserve Bank has one thing at the front of its mind: pushing inflation back into the 2 per cent to 3 per cent target range. In June, annual inflation was still sailing in at 3.8 per cent.

Sure, the bank also wants to keep Australians employed. But with the number of jobs still growing, and the unemployment rate (at least the headline measure) staying low by historical standards, it’s inflation that the bank is worried about.

As you know, inflation is determined by the balance – or imbalance – between demand and supply. There’s not much the Reserve Bank can do about supply (except shout from the sidelines about the importance of boosting productivity), so its focus is on demand.

From the bank’s perspective, it doesn’t matter where that demand comes from, or who exactly is doing the demanding. Its mission is to dampen demand when inflation is high, and give it a boost when inflation is low and the economy is slow.

There’s always a risk the bank will push the economy too far down the drain. We know GDP is only just managing to keep pace and the Reserve Bank has one tool – interest rates – which it’s not afraid of holding high until there’s a clearer sign it has inflation under its thumb.

After all, it doesn’t want inflation running high and finishing first, unless finishing means an end to high inflation.

For this to happen, the bank needs demand to slow down. That means less spending – at least until we figure out a way to pump out more goods and services with the limited people, machinery and materials we have.

It’s clear households are feeling more pressure. The proportion of households’ income that they were able to save dropped to 0.6 per cent in the June quarter, compared with 1.7 per cent at the same time last year. That’s despite households also cutting their spending.

Household consumption, at more than half of GDP, is the single biggest driver of economic growth. But with household spending down, it was government spending (which contributed 0.3 percentage points to growth) that helped keep the economy expanding. Investment spending on new homes, business equipment and building had no impact this time around, while net trade (the difference between exports and imports) contributed 0.2 percentage points, largely thanks to international students and all the spending they did in our economy.

Overall, there’s little in the national accounts to spook the Reserve Bank. Treasurer Jim Chalmers copped some heat this week for a tweak in his language when he said interest rates were “smashing” the economy. But Chalmers and the bank know that without a miracle or a slowing economy, it’s hard to see inflation being reined in anytime soon.

If anything, the national accounts show the economy is moving the way the bank wants. That means both an interest rate cut and rise are unlikely for the time being. The Reserve Bank doesn’t want the economy to stall, but it needs any increase in demand to run behind growth in supply, for inflation to come down.

Right now, our country is still running too hard down the shopping aisle for suppliers to keep up, meaning we’re putting upwards pressure on prices. That’s where the government needs to strike a fine balance. Spend too little and, as our figures showed, we could slip into recession. But spend too much and inflation could stick around for longer.

Anyone who runs knows it’s impossible to sprint all the time. Going slow is not always fun, but until we build up the stamina, muscle and skill, we have to make sure not to push ourselves too hard for too long in case we sustain an injury.

It’s a similar story for the economy. The demands we put on it have to grow alongside our ability to cater for them. The Reserve Bank is like a coach making tough calls because it thinks we’re pushing too hard.

Our economy is slowing, and it’s a fine balance to strike when jobs are on the line. But as long as we’re not running backwards, and with the jobs market so strong, the bank will be happy to stay the course with our tortoise economy.

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There's a good case for cutting interest rates ASAP

What a difference a number makes. For weeks, the money market’s macho men had been telling us interest rates needed to rise yet further to ensure inflation would keep falling. But last week, their case went up in smoke and now almost no one thinks the Reserve Bank board will do anything at its two-day meeting starting today.

The weeks of idle speculation came to an end when finally we saw the consumer price index for the June quarter. It showed underlying inflation falling to 3.9 per cent.

So, sighs of relief all round. But why had we allowed these misguided souls to cause us so much angst? Why had their intimations of death and destruction been given so much air time?

Short answer: because we find bad news more interesting than good news. But as last week’s abrupt turnaround reminds us, the bad news ain’t necessarily so. So maybe we should give a hearing to those urging the Reserve to do something nice rather than nasty.

Let me tell you about a briefing note from the economists at the Australian Council of Social Service, who remind the Reserve that its much-remarked “narrow path” to lower inflation without triggering a recession and high unemployment is narrow “because it’s rare for interest rate hikes of this scale and intensity not to trigger a serious economic downturn”.

The peak welfare organisation says the process of reducing demand and lowering inflation is already well under way and, since increases in official interest rates take up to two years to flow through to inflation and unemployment, it has called for the Reserve to start reducing interest rates immediately.

Those who focus on the slowdown in the fall of the inflation rate and conclude there’s a need for further tightening have failed to see how sharply job opportunities and living standards have fallen, even without a recession.

The council examines the data for the two years since the Reserve began increasing interest rates, from June 2022 to June 2024, and it finds a lot more evidence of downturn and pain than you may realise.

For a start, the number of vacancies for entry-level jobs has declined by almost a third. There are an additional 100,000 people unemployed, and almost as many extra people suffering underemployment (unable to find as many hours of work as they want).

If you know employment is still growing, get this: this has occurred only because of stronger growth in publicly funded jobs (particularly under the National Disability Insurance Scheme). The annual number of publicly funded jobs has grown from 210,000 to 326,000, whereas jobs growth in the market sector has collapsed from 321,000 a year to 6000 a year.

If interest rates stay high, jobs in the market sector are likely to decline, but the present growth in publicly funded jobs won’t last.

We have avoided a recession – an economy that’s getting smaller – so far only because of the surprisingly strong bounce-back in immigration since the reopening of our borders. This won’t continue.

But the real value of goods and services produced per person has been falling, meaning that living standards have been falling. Over the two years, average real income per person has fallen by 8 per cent, or about $5000 a year.

According to the council’s calculations, the stage 3 tax cuts, the energy rebate and increased rent allowance for people on pensions or benefits announced in the May budget will restore only about a fifth of this loss of real income to households.

So the macho men’s fear that the budget measures will add to inflation pressure is laughable. And the council doesn’t miss the opportunity to remind us that JobSeeker unemployment benefits remain a miserly $55 a day.

As for the macho men’s fear that a “price-wage spiral” could take off at any moment, the council says average wages have fallen by 2 per cent since June 2022, after adjusting for inflation.

Wages have started rising a fraction faster than inflation, but it will take many moons to make up that gap. Meanwhile, the collapse in consumer spending has been “precipitous”: a fall of 10 per cent in real spending per person since June 2022.

If the Reserve’s renewed commitment to maintaining full employment is to have any meaning, it will need to start cutting the official interest rate ASAP.

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The RBA has squeezed us like a lemon, but it's still not happy

Let me be the last to tell you the economy has almost ground to a halt and is teetering on the edge of recession. This has happened by design, not accident. But it doesn’t seem to be working properly. So, what happens now? Until we think of something better, more of the same.

Since May 2022, the Reserve Bank has been hard at work “squeezing inflation out of the system”. By increasing the official interest rate 4.25 percentage points in just 18 months, it has produced the sharpest tightening of the interest-rate screws on households with mortgages in at least 30 years.

To be fair, the Reserve’s had a lot of help with the squeezing. The nation’s landlords have used the shortage of rental accommodation to whack up rents.

And the federal government’s played its part. An unannounced decision by the Morrison government not to continue the low- and middle-income tax offset had the effect of increasing many people’s income tax by up to $1500 a year in about July last year. Bracket creep, as well, has been taking a bigger bite out of people’s pay rises.

With this week’s release of the latest “national accounts”, we learnt just how effective the squeeze on households’ budgets has been. The growth in the economy – real gross domestic product – slowed to a microscopic 0.1 per cent in the three months to the end of March, and just 1.1 per cent over the year to March. That compares with growth in a normal year of 2.4 per cent.

This weak growth has occurred at a time when the population has been growing strongly, by 0.5 per cent during the quarter and 2.5 per cent over the year. So, real GDP per person actually fell by 0.4 per cent during the quarter and by 1.3 per cent during the year.

As the Commonwealth Bank’s Gareth Aird puts it, the nation’s economic pie is still expanding modestly, but the average size of the slice of pie that each Australian has received over the past five quarters has progressively shrunk.

But if we return to looking at the whole pie – real GDP – the quarterly changes over the past five quarters show a clear picture of an economy slowing almost to a stop: 0.6 per cent, 0.4 per cent, 0.2 per cent, 0.3 per cent and now 0.1 per cent.

It’s not hard to determine what part of GDP has done the most to cause that slowdown. One component accounts for more than half of total GDP – household consumption spending. Here’s how it’s grown over the past six quarters: 0.8 per cent, 0.2 per cent, 0.5 per cent, 0.0 per cent, 0.3 per cent and 0.4 per cent.

A further sign of how tough households are doing: the part of their disposable income they’ve been able to save each quarter has fallen from 10.8 per cent to 0.9 per cent over the past two years.

So, if the object of the squeeze has been to leave households with a lot less disposable income to spend on other things, it’s been a great success.

The point is, when our demand for goods and services grows faster than the economy’s ability to supply them, businesses take the opportunity to increase their prices – something we hate.

But if we want the authorities to stop prices rising so quickly, they have only one crude way to do so: by raising mortgage interest rates and income tax to limit our ability to keep spending so strongly.

When the demand for their products is much weaker, businesses won’t be game to raise their prices much.

So, is it working? Yes, it is. Over the year to December 2022, consumer prices rose by 7.8 per cent. Since then, however, the rate of inflation has fallen to 3.6 per cent over the year to March.

Now, you may think that 3.6 per cent isn’t all that far above the Reserve’s inflation target of 2 per cent to 3 per cent, so we surely must be close to the point where, with households flat on the floor with their arms twisted up their back, the Reserve is preparing to ease the pain.

But apparently not. It seems to be worried inflation’s got stuck at 3.6 per cent and may not fall much further. In her appearance before a Senate committee this week, Reserve governor Michele Bullock said nothing to encourage the idea that a cut in interest rates was imminent. She even said she’d be willing to raise rates if needed to keep inflation slowing.

It’s suggested the Reserve is worried that we have what economists call a “positive output gap”. That is, the economy’s still supplying more goods and services than it’s capable of continuing to supply, creating a risk that inflation will stay above the target range or even start going back up.

With demand so weak, and so many people writhing in pain, I find this hard to believe. I think it’s just a fancy way of saying the Reserve is worried that employment is still growing and unemployment has risen only a little. Maybe it needs to see more blood on the street before it will believe we’re getting inflation back under control.

If so, we’re running a bigger risk of recession than the Reserve cares to admit. And if interest rates stay high for much longer, I doubt next month’s tax cuts will be sufficient to save us.

Another possibility is that what’s stopping inflation’s return to the target is not continuing strong demand, but problems on the supply side of the economy – problems we’ve neglected to identify, and problems that high interest rates can do nothing to correct.

Problems such as higher world petrol prices and higher insurance premiums caused by increased extreme weather events.

I’d like to see Bullock put up a big sign in the Reserve’s office: “If it’s not coming from demand, interest rates won’t fix it.”

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How much government spending is wasted? Sorry, don't know yet

Hands up if you think a lot of the money the government spends is wasted. I think a lot of people would agree. But the question’s not as easily answered as you may think.

My guess is that many people’s impression of the amount of waste is exaggerated. When they see what they believe is wasteful spending they notice and remember it, whereas when everything seems to be going as it should, they don’t take note.

And what’s wasteful can be in the eye of the beholder. All the government money that comes my way is well spent, but the money it’s giving to people I don’t know or don’t like – or to causes I don’t care about – that’s waste. Well, maybe, maybe not.

Many people convince themselves governments waste massive amounts, in order to justify their objection to paying more tax, or their resentment of what they already pay.

Remember, no one in government just stands there tearing up banknotes. Some of the money can be spent on, say, fighter planes than don’t work properly, or roads that are rarely used, but almost all the money spent ends up in someone’s hands, not just as a pension or benefit, but as a payment for work they did for the government, either as its employee or the employee of a company that did something for, or sold something to, the government.

The people who get money from the government in this way don’t regard it as a waste. What do they do with it? They spend most of it. And when they do, this generates income for other people. The money goes round and round. It’s rare for government spending to benefit no one.

But that doesn’t mean the money was well spent. That it benefited the people it was supposed to benefit, or that they got as much benefit from it as intended. That can be particularly so when governments don’t just give people cash, but do things for them that are supposed to help them.

When you think of it like that, my guess is that a fair bit of the government’s spending is wasteful. But I can’t tell you how much. Why not? Because even the government doesn’t know.

Why not? Because governments don’t do nearly as much evaluation of their spending as they should. Australian governments have no culture of regularly and rigorously checking to see spending programs are achieving their stated objectives.

But here’s the news. The Albanese government has vowed to change this. In fulfillment of an election promise, it has allocated spending of $10 million over four years to set up the Australian Centre for Evaluation as a unit within Treasury. It’s the baby of assistant treasurer Dr Andrew Leigh.

The centre will improve the number, quality and impact of evaluations across the Australian public service, working together with evaluation units in other departments and agencies. “It will save taxpayers money and make government better,” Leigh says.

It will partner with other departments to conduct evaluations on mutually agreed priority programs. These evaluations will build momentum by helping to build departments’ capabilities and demonstrating the value of better evaluation across the government.

“Building the … public service’s evaluation capability is also an important step towards reducing the over-reliance on [outside] consultants” and cutting spending on them. Using consultants “is expensive and delivers inconsistent results”, Leigh said.

Last week, Leigh announced that the centre’s first evaluation, with the Department of Employment and Workplace Relations, would be of Workplace Australia, the latest name for the network of community and for-profit outfits contracted to provide “employment services” to people having a hard time finding a job.

Leigh says that making sure the Workplace Australia network’s employment services are achieving their stated objective – which is to reduce long-term and “structural” unemployment – is a key part of achieving the government’s commitment to full employment, as outlined in its recent white paper on employment.

Good. Because I’ll be amazed if the evaluation doesn’t find the Workplace Australia program has been a huge waste of money, doing amazingly little to help unemployed people with problems on their way to a decent job.

On one side, bureaucrats have used the tendering system to pay as little as possible for the services the government says it wants to be provided. On the other, the “providers” – even some of the community organisations that seem only in it for the money – have learnt all the ways to tick the boxes and be paid, while doing precious little to help people with problems.

In the era of robo-debt, it didn’t take the providers long to twig that the previous government was happy to pay them for punishing the jobless for minor or manufactured misdemeanours, rather than helping them.

The telltale sign that Workplace Australia was yet another example of the failure of outsourcing – looked good on paper; didn’t work in practice – is the number of times the bureaucrats have tried to fix it by giving it a new name. The old Commonwealth Employment Service became Jobs Services Australia, then the Job Network, then the one-word, lower-case jobactive, then Workforce Australia.

Leigh, a former economics professor, is a great believer in the wider use of the “randomised controlled trials” that the medicos have used so successfully to ensure the procedures and pills they prescribe are “evidence-based”.

This, he hopes, will make the evaluations more accurate in determining what works and what doesn’t.

I have to say there’s a reason that, to date, the evaluation and improvement of spending programs has been half-hearted to non-existent. It’s because ministers and their department heads aren’t keen to have people producing documentary evidence that they aren’t doing their job properly. And the last thing they’d want is for such a report to find its way to the public’s attention.

So Leigh’s is a worthy crusade. Let’s hope he gets somewhere. Actually, if evaluations became a regular thing, and led to regular improvements, ministers and mandarins would have a lot less to fear.

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Chalmers should give the RBA an employment target

My trouble is I’m too nice. I’m too reluctant to tell people when I think they’re not trying hard enough. If I had time over again, I’d be tougher on nice young Treasurer Jim Chalmers and his white paper on employment.

The Albanese government wants to revitalise our resolve to achieve full employment, but didn’t have the courage to put a number where its mouth is and nominate a numerical target for employment.

I’ve been convinced of this by my former colleague, friend and most worrying competitor, Peter Martin, now of the universities’ The Conversation website.

Chalmers says the white paper is “ambitious”, but Martin isn’t convinced. “A clearly ambitious statement would have specified a target for unemployment, ideally one that was a bit of a stretch,” Martin says.

He notes that the Keating government’s Working Nation statement did that in 1994. Released at a time when unemployment was almost 10 per cent, it specified a target unemployment rate of 5 per cent – an ambition that served as a beacon for decades.

With all the progress we’ve made in recent times, getting unemployment down to about 3.5 per cent for more than a year, Martin proposes setting a stretch target of 3 per cent, or even 4 per cent, as an aspiration.

Essentially, his argument for setting a target is that “what gets measured gets done”. And he’s dead right. This is not about economic theory, it’s about the practicalities of not just having ambitions, but making sure you have your best shot at achieving them.

In an ideal world, it would be enough to merely state your ambitions. But in a world of human fallibility, we need to impose on ourselves rules and targets to help us stick to our guns.

The target we’ve had for the rate of inflation – of 2 to 3 per cent, achieved on average over time – which we’ve had since 1996, has been no magic answer, but has been highly effective in leaving everyone in no doubt about whether we were on track or off track, and by how much.

But, as is widely agreed, in the day-to-day management of the economy, we have two objectives, not one: price stability (as measured by the inflation target) and full employment (as not measured by any target).

This lopsidedness leaves us constantly tempted to err on the side of low inflation at the expense of low unemployment. That’s the unspoken message the lack of a numerical target is sending the economic managers, particularly the Reserve Bank. As I’ve written before, this omission may secretly suit the interests of business.

So if the Albanese government’s professed determination to get full employment back up on its pedestal alongside price stability is to be meaningful, it must involve setting two targets, not one.

Last week, one of the nation’s leading labour market economists, Professor Jeff Borland of Melbourne University, joined this debate. He doesn’t agree that the white paper was the right place for the government to nominate a specific numerical target.

But he does believe the managers of the macroeconomy require a numerical target. To achieve what the white paper calls the “maximum sustainable level of employment”, he says, “you need to know what it is”.

Borland accepts the white paper’s criticism of the present way of estimating full employment, the NAIRU, or non-accelerating-inflation rate of unemployment, which “evolves over time, is difficult to measure, and does not capture the full potential of the workforce” – a reference to underemployment and “potential workers”, who want to work but aren’t actively seeking a job, and so aren’t counted in the labour force.

Borland adds another criticism, that “estimation of the NAIRU has become a ‘black box’, making it almost impossible to understand why it is at a particular level at any time.”

So Borland accepts the government’s argument that, rather than relying solely on estimates of the NAIRU, “policymakers need a broad suite of measures to gauge the extent of current underutilisation [of labour]” and whether the labour market is close to the current maximum sustainable level of employment.

This means Borland rejects Martin’s argument that unemployment can stay the measure of full employment because it moves in line with underemployment (having a part-time job, but not as many hours as you want).

“The rate of unemployment is no longer sufficiently informative about labour underutilisation – and labour underutilisation is what we should care about for policymaking,” Borland says.

However, he dismisses the claims of other critics that the new full-employment objective is bad news for keeping inflation under control.

He quotes what the white paper says on the matter. The objective is to “keep employment as close as possible to the current maximum sustainable level of employment that is consistent with low and stable inflation”.

The plain truth is that there has always been much potential for conflict between the goal of price stability and the goal of full employment. Life is full of such conflicts.

And a key teaching of economics is that when you encounter two conflicting but highly desirable objectives, the answer is never to fly to one extreme or the other, as humans are so often tempted to do.

No, economics teaches that what you should do is seek out the best available “trade-off” (combination) between the two, so you end up with as much of each as the circumstances allow.

The point is that making sure we have explicit targets for both is the best way to motivate the economic managers to find the best trade-off available. Both the white paper and the recent independent review of the Reserve Bank’s performance imply that, in recent years, we haven’t been finding the best trade-off between the two.

But there’s still time for Chalmers to nominate a numerical employment target. Although the Reserve’s act requires it to achieve full employment, the review recommended that, in the setting of interest rates, the full-employment objective be raised to the same status as the inflation target.

The place for this to happen is in the imminent “statement on the conduct of monetary policy”, the agreement between the treasurer of the day and the governor that the treasurer has newly appointed.

It was in the first of these agreements, in 1996, between Peter Costello and Ian Macfarlane, that the Howard government accepted the inflation target the Reserve had formulated as the government’s target.

In the upcoming agreement between Chalmers and new governor Michele Bullock, he could ask the Reserve to go away and come up with its own employment target.

But if he wants to be seen by the public as doing his job with diligence and the courage of his convictions, he will ask the new governor to accept an employment target the government has determined as the embodiment of the fine ambitions expressed in its white paper.

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Albanese wants to put full employment back on its throne

Something really important to the management of the economy happened this week: the Albanese government released its white paper on employment. If the government achieves the vision it has laid out, it could be a turning point in how our economy works, one that begins a lasting reduction in the rates of unemployment and underemployment.

This is Labor’s decision to put “full employment” back on its throne as a central objective of macroeconomic policy. Or, as the paper puts it, “placing full employment at the heart of our institutions and policy frameworks”.

For the first 30 years after World War II, the achievement of full employment was the overriding objective for the managers of the economy. This era began in 1945, with the Curtin Labor government issuing a white paper on full employment in Australia. Notice a pattern?

It worked well for 30 years, but fell apart with the arrival of high inflation in the mid-1970s. Since then, the primary concern of macroeconomic management has been to keep inflation low, with the goal of achieving full employment usually given not much more than lip service.

What’s changed has been the way the ups and downs of the pandemic have suddenly returned us to the lowest rate of unemployment in almost 50 years, about 3.5 per cent. But also the lowest rate of underemployment – part-timers who can’t get as many hours of work as they want – in several decades.

At present, we have about the highest proportion of the working-age population participating in the labour market – by having a job or actively seeking one.

This unexpected return to something close to full employment has prompted many people to think we should be trying at lot harder than we have been to keep employment high and unemployment low.

And that’s why the Albanese government has decided to put the goal of full employment back on its throne in the halls of macroeconomic management.

“Macro” means focusing on the economy as a whole. “Micro” means looking at particular bits of the economy, or at particular mechanisms within the economy.

Since World War II, governments have sought to use “fiscal policy” (the budget) and “monetary policy” (interest rates) to “manage” the macroeconomy by smoothing out the ups and downs in demand for (spending on) goods and services – and thus employers’ demand for workers.

If the goal of full employment is now back on centre stage, what does full employment actually mean?

The white paper defines it as where “everyone who wants a job is able to find one without having to search for too long”. But it adds a qualification: the jobs we create should be “decent jobs that are secure and fairly paid”, a requirement many employers won’t like the sound of.

The paper says it wants “sustained” full employment, which means “minimising volatility in economic cycles and keeping employment as close as possible to current maximum level consistent with low and stable inflation”.

So restoring the priority of full employment doesn’t mean ceasing to care about inflation, but does mean that getting serious about full employment will affect the day-to-day management of the macroeconomy.

The paper also says full employment must be “inclusive”: broadening the opportunities for people to take up paid work and lowering the barriers to work created by various forms of discrimination.

But how will the government go about achieving this more inclusive view full employment? Well, one way to answer this is to take the economists’ standard list of the types or causes of unemployment.

“Frictional” unemployment occurs because, at any time, there’ll always be some people moving between jobs or seeking their first job. So frictional employment is inevitable and nothing to worry about.

It occurs because it takes time for someone wanting a job to find someone wanting to give them one. You’d think that with so much advertising of job vacancies, and so much looking for jobs, occurring online, frictional unemployment ought to be lower than it used to be.

“Cyclical” unemployment is caused by downturns in the economy, which reduce employers’ demand for workers with little reduction in the people seeking work. As the paper says, it can be lessened through “effective macroeconomic policy settings”.

That is, to get the economy moving quickly out of a recession and, better, managing to stop it getting into recession in the first place. It’s when people lose their jobs during a prolonged recession – and education-leavers take months to find their first job – that you get a build-up in “long-term” unemployment.

These are the people who needed special, personalised help from the government because the longer they go unemployed, the less an employer wants to take them on. This role used to be played (not particularly well) by the Commonwealth Employment Service, which was replaced by what’s now called Workforce Australia, using often for-profit providers of “employment services” to people with problems.

If you’ve heard anything about robo-debt, it won’t surprise you that it’s become a travesty of what it was supposed to be, with providers gaming the system and gaining the impression the government wants them to punish people rather than help them.

The Albanese government has instituted an inquiry into the present system of government-funded employment services. How seriously it reforms this shemozzle will be a key test of how committed the government is to achieving sustained full employment.

The final type of unemployment is “structural”, caused by a mismatch between the skills a worker possesses and the skills employers are seeking. Sometimes the mismatch is geographic; often it’s caused by the ever-changing structure of industry, as some industries decline and others expand.

This is the hardest cause of unemployment to reduce. But it involves reforming every level of education and committing to retraining and lifelong learning. Again, this will be a key test of whether the government is committed to achieving sustained full employment, not just dreaming about it.

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Another rise in interest rates is enough already

Whatever decision the Reserve Bank board makes about interest rates at its meeting tomorrow morning – departing governor Dr Philip Lowe’s second-last – the stronger case is for no increase. Indeed, I agree with those business economists saying we’ve probably had too many increases already.

If so – and I hope I’m wrong – we’ll miss the “narrow path” to the sought-after “soft landing” and hit the ground with a bang. We’ll have the recession we didn’t have to have. (That’s where recession is measured not the lazy, mindless way – two successive quarters of “negative growth” – but the sensible way: a big rise in unemployment over just a year or so.)

For those too young to know why recessions are dreaded, it’s not what happens to gross domestic product that matters (it’s just a sign of the looming disaster) but what happens to people: lots of them lose their jobs, those leaving education can’t find decent jobs, and some businesses collapse.

Market economists usually focus on guessing what the Reserve will do, not saying what it should do. (That’s because they’re paid to advise their bank’s money-market traders, who are paid to lay bets on what the Reserve will do.)

That’s why it’s so notable to see people such as Deloitte Access Economics’ Stephen Smith and AMP’s Dr Shane Oliver saying the Reserve has already increased interest rates too far.

Last week’s consumer price index for the June quarter gave us strong evidence that the rate of inflation is well on the way down. After peaking at 7.8 per cent over the year to December, it’s down to 6 per cent over the year to June.

As we’ve been told repeatedly, this was “less than expected”. Yes, but by whom? Usually, the answer is: by economists in the money markets. Here’s a tip: what money-market economists were forecasting is of little interest to anyone but them.

That almost always proves what we already know: economists are hopeless at forecasting the economy. Even after the fact, and just a week before we all know the truth. No, the only expectation that matters is what the Reserve was expecting. Why? Because it’s the economist with its hand on the interest-rate lever.

So, it does matter that the Reserve was expecting annual inflation of 6.3 per cent. That is, inflation’s coming down faster than it thought. Back to the drawing board.

The Reserve takes much notice of its preferred measure of “underlying” inflation. It’s down to 5.9 per cent. But when the economy’s speeding up or slowing down, the latest annual change contains a lot of historical baggage.

This is why the Americans focus not on the annual rate of change, but the “annualised” (made annual) rate, which you get by compounding the quarterly change (or, if you can’t remember the compounding formula, by multiplying the number by four).

Have you heard all the people saying, “oh, but 6 per cent is still way above the target of 2 to 3 per cent”? Well, if you annualise the most recent information we have, that prices rose by 0.8 per cent in the June quarter, you get 3.3 per cent. Clearly, we’re making big progress.

But the next time someone tells you we’re still way above the target, ask them if they’ve ever heard of “lags”. Central Banking 101 says that monetary policy (fiddling with interest rates) takes a year or more to have its full effect, first on economic activity (growth in gross domestic product and, particularly, consumer spending), then on the rate at which prices are rising. What’s more, the length of the lag (delay) can vary.

This is why central bankers are supposed to remember that, if you keep raising rates until you’re certain you’ve done enough to get inflation down where you want it, you can be certain you’ve done too much. Expect a hard landing, not a soft one.

Since the road to lower inflation runs via slower growth in economic activity, remember this: the national accounts show real GDP slowing to growth of 0.2 per cent in the March quarter, with growth in consumer spending also slowing to 0.2 per cent.

How much slower would you like it to get?

The next weak argument for a further rate rise is: “the labour market’s still tight”. The figures for the month of June showed the rate of unemployment still stuck at a 50-year low of 3.5 per cent, with employment growing by 32,600.

But the nation’s top expert on the jobs figures is Melbourne University’s Professor Jeff Borland. He notes that, in the nine months to August last year, employment grew by an average of 55,000 a month – about double the rate pre-pandemic.

Since August, however, it’s grown by an average of 35,600 a month. Sounds like a less-tight labour market to me.

And Borland makes a further point. Whereas the employment figures measure filled jobs, the actual number of jobs can be thought of as filled jobs plus vacant jobs – which tells us how much work employers want done.

This is a better indicator of how “tight” the labour market is. And, because vacancies are falling, the growth in total jobs has slowed much faster. Since the middle of last year, part of the growth in employment has come from reducing the stock of vacancies.

Another thing the Reserve (and its money-market urgers) need to remember is that, when it comes to slowing economic activity to slow the rise in prices, interest rates (aka monetary policy) aren’t the only game in town.

Professor Ross Garnaut, also of Melbourne University, wants to remind us that “fiscal policy” (alias the budget) is doing more to help than we thought. The now-expected budget surplus of at least $20 billion means that, over the year to June 30, the federal budget pulled $20 billion more out of the economy than it put back in.

Garnaut says he likes the $20 billion surplus because, among other reasons, “we can run lower interest rates”.

One last thing the Reserve board needs to remember. Usually, when it’s jamming on the interest-rate brakes to get inflation down, the problem’s been caused by excessive growth in wages. Not this time.

Since prices took off late in 2021, wages have fallen well behind those prices. Indeed, wages haven’t got much ahead of prices for about the past decade. And while consumer prices rose by 7 per cent over the year to March, the wage price index rose by only 3.7 per cent.

This has really put the squeeze on household incomes and households’ ability to keep increasing their spending. And that’s before you get to what rising interest rates are doing.

Dear Reserve Bank board members, please remember all this tomorrow morning.

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Beating inflation shouldn't just be left to higher interest rates

Everyone’s heard the surprising news that last financial year’s budget is now expected to run a surplus of about $20 billion, but few have realised the wider implications. They strengthen the case for relying less on interest rates to fight inflation.

But first, the news is a reminder of just how bad economists are at forecasting what will happen to the economy – even in not much more than a year’s time. Which shows that economists don’t know nearly as much about how the economy works as they like to imagine – and like us to believe.

Then-treasurer Josh Frydenberg’s budget in March last year forecast a budget deficit in 2022-23 of $78 billion. By Jim Chalmers’ second go at the budget last October, that became a deficit of about $37 billion.

By the following budget, in May, the best guess had turned into a surplus of $4 billion. And just two months later – and that financial year actually over – the best guess is now a surplus of about $20 billion.

That’s a forecasting turnaround, over the course of only about 15 months, of almost $100 billion, or 4 per cent of gross domestic product.

What did Treasury get so wrong? It grossly underestimated the growth in tax collections. This was partly because it assumed a fall in the prices of our key commodity exports that didn’t happen, thus causing the company tax paid by our miners to be higher than expected.

But mainly because collections of income tax were much higher than expected. The economy grew at close to full capacity, so more people found jobs and many part-time workers got more hours or became full-time.

A huge number of new jobs have been created, almost all of them full-time. Do you realise that a higher proportion of people aged over 15 have paid employment than ever before? The rate of unemployment fell to its lowest in 50 years and many people who’d been unable to find a job for many months finally succeeded.

Obviously, when people find work, they start paying income tax, and stop needing to be paid unemployment benefits. So full employment is excellent news for the budget.

But the rapid rise in the cost of living during the year caused workers to demand and receive higher pay rises, even though those rises generally fell well short of the rise in prices.

So all the people who already had jobs paid more tax, too. But not only that. Our “progressive” income tax scale – where successive slices of your income are taxed at progressively higher rates – means that pay rises are taxed at a higher rate than you paid on your existing income.

Ordinary mortals call this “bracket creep”. Economists call it “fiscal drag”. Either way, the higher rate of tax workers paid on their pay rises also made a bigger-than-expected contribution to income tax collections and the budget balance.

Note that this unexpected move from deficit to surplus in the financial year just past, this underestimation of the strength of tax collections, has implications not only for the size of the government’s debt at June 2023, it has implications for the size of tax collections in the next few years, as well as for the amount of interest we’ll have to pay on that debt this year and every year until it’s repaid (which it won’t be).

In Frydenberg’s budget in March last year, the projected cumulative deficit for the five financial years to June 2026 was just over $300 billion. By the budget in May, this had dropped to $115 billion.

And now that we know last year’s surplus will be about $20 billion, the revised total projected underlying addition to government debt should be well under $100 billion.

Get it? Compared with what we thought less than 16 months ago, the feds’ debt prospects aren’t nearly as bad as we feared. And the size of our “structural” deficit – the size of the deficit that remains after you’ve allowed for the ups and downs of the business cycle – isn’t nearly as big, either.

Which suggests it’s time we had another think about our decision in the late 1970s – along with all the other rich economies – to shift the primary responsibility for managing the macroeconomy from the budget (“fiscal policy”) to the central bank and its interest rates (“monetary policy”).

One of the arguments used by the advocates of this shift was that fiscal policy was no longer effective in stimulating the economy. But our remarkably strong growth since the end of the pandemic lockdowns shows how amazingly effective fiscal policy is.

It’s now clear that fiscal “multipliers” – the extent to which an extra $1 of deficit spending adds to the growth in real GDP – are much higher than we believed them to be.

We know that a big part of the recent leap in prices was caused by shocks to the supply (production) side of the economy arising from the pandemic and the Russia-Ukraine war. But central banks have argued that a second cause was excessive demand (spending), which happened because the stimulus applied to cushion the effect of lockdowns proved far more than needed.

If so, most of that stimulus came from fiscal policy. Our official interest rate was already down to 0.75 per cent before the pandemic began. So, further proof of how powerful fiscal stimulus still is.

But another implication of the $20 billion surplus is that the stimulus wasn’t as great – and its ultimate cost to the budget wasn’t as great – as we initially believed it would be.

In the budget of October 2020, the expected deficit of $214 billion in 2020-21 was overestimated by $80 billion. In the budget of May 2021, the expected deficit of $107 billion in 2021-22 was overestimated by $75 billion. And, as we’ve seen, the deficit for 2022-23 was initially overestimated almost $100 billion.

This says two things: the fiscal stimulus caused the economy to grow much faster than the forecasters expected, even though the ultimate degree of stimulus – and its cost to the budget – was much less than forecasters expect.

Economists know that the budget contains “automatic stabilisers” that limit the private sector’s fall when the economy turns down, but act as a drag on the private sector when the economy’s booming.

We’ve just been reminded that the budget’s stabilisers are working well and have been working to claw back much of the fiscal stimulus, thereby helping to restrain demand and reduce inflation pressure.

Whenever departing Reserve Bank governor Dr Philip Lowe has been reminded of the many drawbacks of using interest rates to manage the economy, his reply has always been: sorry, it’s the only instrument I’ve got.

True. But it’s not the only instrument the government has got. It should break the central bank’s monopoly on macro management and make more use of fiscal policy.

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Ever wondered why your wages aren't rising?

It’s dawning on people that when the competition between businesses isn’t strong, firms can raise their prices by more than the increase in their costs, and so fatten their profit margins. What’s yet to dawn is that weak competition also allows businesses to pay their workers less than they should.

In standard economic theory, it’s the intense competition between firms that prevents them from overcharging for their products and earning more than a “normal” profit.

Normal profit gives the owners of the firm just sufficient return on the capital they’ve invested to stop them leaving the industry and trying their luck elsewhere.

The theory assumes the industry has numerous firms, each one too small to influence the market price. In today’s world, however, many markets are dominated by just two, three or four huge firms.

These firms are big enough to influence the market price, especially when it’s so easy for them to collude tacitly with their rivals.

We see the four big banks doing this every time interest rates are raised. They have an unspoken agreement not to compete on price.

EverI say they have “pricing power”, but many economists say they have “monopoly power”. How can a handful of firms have monopoly power? Because economists don’t use that term literally. On a scale of one to 1000 firms, we’re right down the monopoly end.

Dr Andrew Leigh, the Assistant Minister for Competition, and a former economics professor, has been giving a series of speeches about recent empirical studies on how competitive our markets are.

In one, he quoted the findings of Jonathan Hambur, a researcher who pivots between Treasury and the Reserve Bank, that Australian firms’ “mark-ups” – the gap between their cost of production and their selling price – have been rising steadily.

But in a further speech this month, Leigh turned the focus from what “market concentration” (among a few massive companies) means for the industry’s customers, to what it means for its employees.

So, in econospeak, we’re moving from monopoly to “monopsony”. Huh? Taken literally, monopoly means a market in which there’s a single seller meeting the demand for the product. Monopsony means there’s a single buyer from the people supplying the inputs to production. Workers supply the firm with the labour it needs.

The term was introduced by Joan Robinson, a colleague of Keynes at Cambridge, who was among the first to question the standard theory of how markets work. She was 30 in 1933 when she published her dissenting view that truly competitive markets were rare.

She argued that monopsony was endemic in the labour market and employers were using it to keep wages low. If there are few employers competing for workers, those workers have fewer “outside options” (to move to another firm offering higher pay or better conditions).

This limits workers’ bargaining power and gives employers the power to keep wages lower.

At the time, few economists took much interest. But in recent years there’s been a growing focus on market power by academic economists.

For instance, monopsony was cited in a US Supreme Court ruling against Apple in 2019. A report by Democrats in the US House of Representatives accused Amazon of using monopsony power in its warehouses to depress wages in local markets.

Evidence from the US, Britain and Europe has demonstrated that increases in labour market concentration – fewer employers to work for – are associated with lower wages.

Leigh says economists have long known that people in cities tend to earn more than those in regional areas. His own research found that when someone moves from a rural area to a major Australian city, their annual income rises by 8 per cent.

“The economics of monopsony suggests that an important part of the urban wage premium can be explained by greater employer competition in denser labour markets,” Leigh says.

Leigh reminds us that Australia’s average full-time wage ($1808 a week last November) was only $18 a week higher than it was 10 years ago, after allowing for inflation. Many things would explain this pathetic improvement, but one factor could be employers’ monopsony.

We know that the rate at which people move between employers has fallen. But over a person’s working life, the biggest average wage gains come when people switch employers. And when some people leave, the bargaining power of those who stay is increased.

This decline in people moving could be caused by increased employer monopsony. Hambur has done a study of employment concentration between 2005 and 2016.

He found that, within industries where concentration rose, growth in real wages over the decade was significantly lower.

When a firm has a large share of the industry’s employment, the gap between the value of the work a worker does, and the wage they’re paid in return, tends to grow.

He found that employment in regions close to major cities is twice as concentrated as in the cities. In remote areas it’s three times.

Read this carefully: Hambur found that labour markets had not become more concentrated over the decade. But at every degree of concentration, its negative impact on wages had more than doubled.

So, employers’ market power could well be a factor helping to explain the virtual absence of real wage growth over a decade. Hambur finds that the greater impact of employer concentration may have caused wage growth between 2011 and 2015 to be 1 per cent lower than otherwise.

This would help explain why not all the (weak) growth in the productivity of labour during the period was passed through to real wages – as conventional economists and business people always assure us it will be. Weak competition allowed employers to keep a lot of it back for themselves.

Part of the competitive process is new firms entering the industry. New firms usually poach staff away from the existing firms. But we know the rate of new entry has declined.

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Don't miss the good news among the bad: we've hit jobs, jobs, jobs

Here is the news: not everything in the economy is going to hell. Right now, jobs, jobs, jobs are going great, great, great.

The news media (and yours truly) focus on whatever’s going wrong – the cost of living, interest rates, to take two minor examples – because they know that’s what interests their paying customers most.

This bias in our thinking exists because humans have evolved to be continually on the lookout for threats. Those threats used to be wild animals, poisonous berries and the rival tribe over the river, but these days they come more in the form of politicians who aren’t doing their job and business people on the make.

If you’re not careful, however, the preoccupation with bad news can leave you with a jaundiced view of the total picture. Everything’s bad and nothing’s good.

But it’s rare for anything to be all bad or all good. And, particularly where the economy’s concerned, it’s common for good things and bad things to go together.

For instance, when unemployment is high, inflation is usually low. And when inflation is high, unemployment’s usually low. (It’s in the rare event where they’re both high at the same time – “stagflation” – that you know we’re really in trouble.)

So, when our present Public Enemy No. 1 – Reserve Bank governor Dr Philip Lowe – began a speech last week by making this point, I realised I should make sure that you, gentle reader, hadn’t missed the rose among all the thorns.

Lowe said the high inflation we’re experiencing was “one of the legacies of the pandemic and of Russia’s invasion of Ukraine”. But “another remarkable, but less remarked upon, legacy of the pandemic is the significant improvement in Australia’s labour market”.

“Significant improvement” is putting it mildly. Have you heard of “full employment”, where everyone who wants a job has one? It’s the way our economy used to be for about three decades following World War II.

But you have to be as ancient as me to remember what it was like. One reason I quit my job and embarked on a course that eventually led me to this august organ was the knowledge that, should I need to get a job, all I had to do was wait until next Saturday’s classified job ads, and pick the one I wanted.

That’s full employment. And the world hasn’t been like that since Gough Whitlam was prime minister. Until now. We have more people with jobs than ever in our history.

At about 3.5 per cent, the rate of unemployment is lower than at any time since 1974. And before any of the imagined experts let fly on Twitter, this is not because any government, Labor or Liberal, has fiddled the figures.

What’s true is that, in recent decades, more people have been under-employed – they haven’t been able to get as many hours of work as they’ve needed.

But as Lowe says, in recent times, people have found it easier to obtain more hours of work. So the rate of underemployment is at multi-decade lows, and the proportion of jobs that are full-time is higher than it’s been in ages.

We now have 64 per cent of people of working-age actually in a job, the highest ever. The proportion of people either already in a job or actively seeking one – the “participation rate” - is also at its highest.

A lot of this is explained by the record high in women’s participation in the labour force.

Lowe says the rate of participation by young people is “the highest it has been in a long time” and the youth unemployment rate is “the lowest that it has been in many decades”.

If all that’s not worth celebrating, I don’t know what is.

But for all those desperate to find a negative – often for reasons of partisanship – it’s not that you can’t believe the figures. It’s this: can you believe they’ll continue?

With the Reserve raising interest rates so fast and far to slow the economy’s growth and reduce inflation pressure, it’s clear that this is as good as it gets in the present episode.

For the past couple of months, we’ve seen the figures edging back a fraction from their best, and on Thursday we’ll see if that’s yet become a trend.

At present, Lowe is at the controls bringing the economic plane in to land. He’s aiming for a soft landing, but may miscalculate and give us a bumpy landing which, to mangle the metaphor, will send unemployment shooting up.

If so, we may have had just a fleeting glimpse of full-employment nirvana before it disappeared into the mist.

But for the more optimistically inclined, even if the landing is harder than planned, we’ll have started from a much lower unemployment rate than in past recessions, meaning it won’t go as high as it has before, and it should be easier to get back to the low levels we’d now like to become accustomed to.

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Why economists keep getting it wrong, but never stop doing sums

Why are economists’ forecasts so often wrong, and why do they so often fail to see the freight train heading our way? Short answer: because economists don’t know as much about how the economy works as they like to think they do – and as they like us to think they do.

What happens next in the economy is hard to predict because the economy is a beehive of humans running around doing different things for different reasons, and it’s hard to predict which way they’ll run.

It’s true we’re subject to herd behaviour, but it’s devilishly hard to predict when the herd will turn. Humans are also prone to fads and fashions and joining bandwagons – a truth straightlaced economists prefer to assume away.

I think it embarrasses economists that their discipline’s a social science, not a hard science. Their basic model of how the economy works became entrenched long before other social sciences – notably, psychology – had got very far.

They dealt with the human problem by assuming it away. Let’s assume everyone always acts in a rational, calculating way to advance their self-interest. Problem solved. And then you wonder why your predictions of what “economic agents” will do next are so often astray.

Actually, the economists don’t wonder why they’re so often wrong – we do. They prefer not to think about it. Anyway, there’s this month’s round of forecasts we need to get on with.

The economists’ great mission over the past 80 years has been to make economics more “rigorous” – more like physics – by expressing economic relationships in equations rather than diagrams or words.

These days, you don’t get far in economics unless you’re good at maths. And the better you are at it, the further up the tree you get. The academic profession is dominated by those best at maths.

Trouble is, although using maths can ensure that every conclusion you draw from your assumptions is rigorously logical, you’ll still get wrong answers if your assumptions are unrealistic.

In the latest issue of the International Monetary Fund’s magazine, the ripping read named Finance and Development, a former governor of the Bank of Japan reminds his peers about the embarrassing time in 2008, after the global financial crisis had turned into the great recession, when Queen Elizabeth II, visiting the London School of Economics, asked the wise ones why none of them had seen it coming.

With frankness uncharacteristic of the Japanese, the former governor observed that King Charles could go back and ask the same question: why did no one foresee that the economic managers’ response to the pandemic would lead to our worst inflation outbreak in decades?

One answer would be: because all our efforts to use computerised mathematical modelling to make our discipline more rigorous have done little to make us wiser. The paradox of econometric modelling is that, though only the very smart can do it, the economy they model is childishly primitive, like a stick-figure drawing.

The best response some of the world’s economists came up with, long after the Queen had gone back to her palace, was that academic economists had largely stopped teaching economic history.

These days, economists can’t do anything much without sets of “data” to run through their models. And before computerisation, there were precious few data sets. But those who forget history are condemned to . . .

The great temptation economists face is the one faced by every occupation: to believe your own bulldust. To be so impressed by the wonderful model you’ve built, and so familiar with the conclusions it leads you to, you forget all its limitations – all the debatable assumptions it’s built on, and all the excluded variables it isn’t.

As part of the academic economists’ campaign for an inquiry into the Reserve Bank, some genius estimated that the Reserve’s reluctance to cut its already exceptionally low official interest rate even lower in the years before the pandemic had caused employment to be 250,000 less than it could have been.

Only someone mesmerised by their model could believe something so implausible. Someone who, now they’ve got a model, can happily turn off their overtaxed brain. There’s no simple linear, immutable relationship between the level of interest rates and the strength of economic growth and the demand for labour.

At the time, it was obvious to anyone turning their head away from the screen to look out the window that, with households already loaded with debt, cutting rates a little lower wouldn’t induce them to rush out and load up with more – the exception being first-home buyers with access to the Bank of Mum and Dad, who as yet only aspired to be loaded up.

To be fair to the Reserve in this open season for criticism, it’s far more prone to admitting the fallibility of its modelling exercises than most modellers are – especially those “independent consultants” selling their services to vested interests trying to pressure the government.

In its latest statement on monetary policy, the Reserve explains how its modelling finds that supply-side factors explain about half the rise in the consumer price index over the year to September 2022.

But then it used a more sophisticated “dynamic stochastic general equilibrium model” which found that supply factors accounted for about three-quarters of the pick-up in inflation.

The Reserve’s assistant governor (economic), Dr Luci Ellis, told a parliamentary committee last month that this “triangulation” left her very confident that the demand side accounted for at least a quarter and probably up to a third of the inflation we’ve seen.

(Remembering the debate about the extent to which the present inflation surge reflects businesses sneaking up their profit margins – their “mark-ups,” in econospeak – note that this second model includes “mark-up” as part of the supply side’s three-quarters. Always pays to read the footnotes.)

One of the tricks to economics is that many of the economic concepts central to the way economists think are “unobserved” – the official statisticians can’t measure them directly. So you need to produce a model to estimate their size.

A case in point is the economists’ supposed measure of full employment, the NAIRU – non-accelerating-inflation rate of unemployment – the lowest the rate of unemployment can fall to before this causes wage and price inflation to take off.

Some of those business economists who believe the Reserve hasn’t raised interest rates nearly enough to get inflation down justify this judgment by saying our present unemployment rate of 3.7 per cent is way, way below what conventional modelling tells us the NAIRU is: about 5 per cent.

But Ellis told the parliamentary committee that the Reserve had rejected this estimate. The “staff view” was that the NAIRU had moved from “the high threes to the low fours”, and this was what its forecasts were based on.

So why dismiss the conventional model? Because, Ellis explained, it’s driven solely by demand-side factors. It’s “not designed to handle the supply shocks that we have seen over COVID”.

Oh. Really. Didn’t think of that. Mustn’t have had my brain turned on.

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If only Labor's wage changes were as bad as the bosses claim

Have you ever wondered why capitalism has survived for several centuries in the advanced economies? How a relative handful of rich families and company executives have been getting richer and more powerful for so long in countries where everyone gets a vote and could, if they chose, insist on something different?

It’s because the capitalists, counselled and coerced by politicians anxious to keep the peace, have made sure that the plebs, punters and ordinary working families have been given enough of the spoils to keep them reasonably content.

I remind you of this because, for 30 or 40 years in America, and now about a decade in Australia, the capitalist system – economists prefer calling it the market system – hasn’t been giving ordinary workers enough to keep them getting better off, while the few people at the top of the tree have been doing better, year after year.

If you wonder why so many Americans voted for a man like Donald Trump, and now delude themselves that he didn’t lose the last election, why the Yanks seem to be rapidly dismantling their democracy, a big part of their discontent is their loss of faith that the economic system is giving them a fair shake.

Fortunately, it’s nothing like that bad in Australia. Not yet, anyway. What’s true is that the average standard of living in Australia today is no better than it was a decade ago – something that hasn’t happened before in the more than 75 years since World War II.

Over the eight years before the pandemic, wages rose barely faster than inflation. We’ve had wage stagnation, now made a lot worse by the supply-chain disruptions of the pandemic, soaring electricity and gas prices caused by Russia’s war, and by the way floods keep wiping out our fruit and vegetable crops.

When Labor went to this year’s federal election promising to “get wages moving”, I think it struck a chord with many voters.

After we ended centralised wage-fixing by the Industrial Relations Commission in the early 1990s, we moved to collective bargaining at the level of the individual enterprise. Workers’ right to strike was hedged about with many requirements and limits.

At the beginning, more than 40 per cent of workers were covered by enterprise agreements. By now, however, some academic experts calculate that the proportion of workers covered by active agreements is down to about 15 per cent.

At the jobs and skills summit in September, all sides agreed that the enterprise bargaining system had broken down. Last week the government introduced its answer to wage stagnation, the Secure Jobs, Better Pay bill.

It would make a host of changes, many of which strengthen existing provisions of the Fair Work Act, and most of which the industrial parties agree would be improvements. It makes job security and gender pay equity explicit goals of the act, prohibits sexual harassment and requirements that workers keep their pay secret, and strengthens the right of workers with family responsibilities to request flexible working hours. More debatably, it abolishes the Australian Building and Construction Commission.

To repair enterprise bargaining, it clarifies the BOOT – better off overall test – requiring that agreements leave no worker worse off. This was the Business Council’s greatest complaint against enterprise agreements.

One reason such agreements now cover so few workers is that they’re expensive and complex for small and middle-size employers to organise. Hence, the proposal to widen the existing provision for “multi-employer bargaining”: workers in similar enterprises allowed to bargain collectively with a number of employers.

This would widen access to enterprise bargaining. It’s aimed particularly at strengthening the bargaining position of women in low-paid jobs in the aged care, childcare and disability care sector.

Ambit claims and exaggerated rhetoric are standard fare in industrial relations, but the cries of fear and outrage coming from the various employer groups are over the top.

It would “create more complexity, more strikes and higher unemployment,” said one. It was “so fatally flawed” it would “emasculate enterprise bargaining”, according to another outfit. It was “seismic” in its impact, claimed a third.

Methinks they doth … I’d be amazed if they actually believe that stuff. They’re probably still adjusting to the shock of having the unions back in the government tent. They know they won’t be able to stop the bill being passed, so they want at least to be seen opposing it with all their voice.

What changing the law won’t change is that the proportion of workers in a union has fallen from 50 per cent to 14 per cent. The small and middle-size businesses we’re talking about have even fewer union members than that.

No union members, no strike. No strike, no big pay rise. In any case, really powerful unions get big pay rises without needing to strike.

This is an attempt to make bargaining provisions that didn’t work last time, work this time. I doubt if these modest changes will do much to “get wages moving” again. More’s the pity. If I’m right, Australia’s capitalism will remain broken.

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Helping the disadvantaged find jobs is now the Hunger Games

Some injustices get huge publicity, others get little attention from the media because they’re not expected to arouse much sympathy from a hard-hearted public. But I was raised in a strange religious sect whose mission was to care for the down and out.

At a time when the official unemployment rate is down to 3.4 per cent, job vacancies are at a record high and employers are crying out for more immigrant labour, there are still about a million people on unemployment benefits – JobSeeker, to use its latest euphemism – of whom three-quarters have been on benefits for more than a year.

How could this be? Well, one explanation is that the world is full of people who, unlike you and me, prefer not to work for their living. While we’re slaving away at the daily grind, they’re at the beach surfing, or sitting at home with their feet up watching daytime television, living the life of Riley on $46 a day.

Actually, it’s just going up to $48 a day. Think of it. Almost $50 a day for doing precisely nothing. While you and I are struggling with the soaring cost of living, these people don’t have a worry. There are jobs going begging, but they aren’t interested. If only we were as bone idle as them, we too could live life free of care.

That’s one explanation – one many people believe, or want to believe. The world is full of people who prefer taking it easy, so they must be forced back to work by keeping the dole low and penalising them if they don’t even bother to apply for jobs.

An alternative explanation was offered in a little-noticed speech to the jobs summit by Dr Peter Davidson, an adviser to the peak welfare body, the Australian Council of Social Service, and in a recent report by Anglicare.

The alternative explanation is that most of those who stay unemployed for long periods face serious impediments to getting a job. They have health or family problems that make it hard for them to search for a job, or limit the times when they’re available to work.

Or they’re not particularly attractive to employers. They have limited education, skills or experience, they’re too young or too old, or they don’t live where the jobs are.

And here’s the worst of it: they’ve been without a job for so long because they’ve been without a job for so long. It’s a catch-22. The longer it’s taking you to find a job, the less willing an employer is to offer you one.

The good news is that, now we’re so close to full employment – now employers can’t be so choosy – we’ve started making inroads into the backlog of long-term unemployed. But it will take a long time to shift, especially if the businesses that taxpayers pay to help them find jobs find it more profitable to waste their time and trip them up.

We all have our own mental picture of who’s unemployed. Match your picture against what Davidson told the summit: of all the people on unemployment benefits, 57 per cent are 45 or older, 40 per cent have a disability, 20 per cent have what he calls “culturally and linguistically diverse backgrounds”, 13 per cent are First Nations people and 12 per cent are sole parents, mainly women.

One reason there are a lot more long-term unemployed than there were in the old days is the decision that benefit recipients of working age – including widows, many sole parents and the less-than-fully disabled – should be on (the much lower and more tightly regulated) unemployment benefit.

At the time, those transferred to a lower benefit were to be given special help with training and job-finding. But after the Howard government abolished the Commonwealth Employment Service, and the provision of “employment services” was contracted out to charities and, increasingly, for-profit providers, their role became more about policing and punishing.

Davidson says the new Workforce Australia scheme – which is little better than the Jobactive scheme it’s replacing – is “more of an unemployment-payment compliance system than an employment service”.

It sends people out into the labour market and, when they don’t find jobs, tells them to search harder. People are told “it’s not our role to find you a job”.

It locks people into an endless cycle of make-busy activities like Work for the Dole and poor-quality training courses. It reaches less than 10 per cent of employers, and offers them little assistance.

This is confirmed by detailed research by Anglicare Australia. Director Kasy Chambers says they found that “private providers are being paid millions of dollars to punish and breach people”.

“Work for the Dole and Jobactive have repeatedly been shown to fail ... yet the people we spoke to also told us that they want to do activities that matter, and that lead them into work.”

Last word to Davidson: “This is supposed to be an employment services system, not the Hunger Games.”

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Why labour shortages can be good for you - and the economy

In Professor Ross Garnaut’s much-praised speech to last week’s jobs summit, he told a story about politicians desperately seeking workers. At about the time Anthony Albanese was in Fiji talking about recruiting nurses, the West Australian premier was in Ireland, also trying to recruit nurses.

He sought a meeting with the Irish minister for health, but without success. Why? Because the Irish minister was in Perth trying to recruit nurses.

Garnaut’s point was that, when a country underpays its nurses, it’s open to having them pinched by another, better-paying country.

But I drew a different conclusion. It’s all very well for the nation’s employers to go to Canberra complaining about the desperate labour shortage and demanding that the government lift its target for how many visas for permanent immigrants it will issue this year.

Albanese was persuaded to raise the target from 160,000 to 195,000. But when we’re short of skilled labour at the same time many other rich countries are also short, raising the target and achieving the target are two different things.

My guess is that we’ll be hearing complaints about labour shortages for years to come. And I’m not sure that will be a bad thing. Give me a choice between a jobs market that’s “tight” – as it is now – and one that’s “loose”, with high unemployment, and I know which I’d prefer.

Journalists are trained to be sceptical of claims people make. And when economists hear people complaining that they can’t get enough workers, or that there’ll be shortage of X thousand teachers/doctors/chicken sexers by the year Y, they’re more questioning than sympathetic.

For a start, some part of the worker shortages we keep hearing about is caused by people off work because of COVID. This, surely, must be a problem that will ease in coming months. For another thing, while shortages of skilled workers get the most publicity, many of the shortages are actually for relatively unskilled work as a waiter or behind a counter.

When economists hear businesspeople complaining they “can’t get the staff”, their first question is: have you tried offering a higher wage? What employers never say is “with the low wage and bad conditions I’m offering, I can’t get any takers”. Think fruit-picking.

When you hear of bosses so desperate that they’re giving their existing workers a “loyalty bonus” or offering new workers a “sign-on bonus”, remember this: paying any kind of once-off bonus is a way of avoiding granting a proper pay rise.

This means they’re not yet at desperation point. Sometimes I wonder if businesses are delaying improving pay and conditions while they increase pressure on the government to solve their problem the easier and cheaper way, by hastening the post-pandemic inflow of skilled workers on temporary visas, plus backpackers and overseas students.

But though employers have used high levels of immigration to keep wages low and reduce the need for educating and training our own young people, I doubt they’ll be able to return to that lazy, second-rate world.

Garnaut says immigration is much more likely to raise, rather than lower, average real wages if it’s focused on the permanent migration of people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian production, and which cannot be provided by training Australians.

The other much-praised speech at the jobs summit came from the boss of the Grattan Institute, our top independent think tank, Danielle Wood. Garnaut and Wood had the same message: with the unemployment rate down to 3.4 per cent, we must seize this chance to return to the “full employment” Australia hasn’t enjoyed since Garnaut (and I) were growing up in the 1950s, ’60s, and early ’70s.

Wood wants achieving and maintaining full employment to be our “economic lodestar”. Already being so close to it “means that more people who want a job now have one. It means that some people otherwise at the fringes of the labour market – young people looking for their first job, people with a disability, older workers, and the long-term unemployed – are now seeing doors open in ways they haven’t in the past,” she said.

“When unemployment is low, it lowers the cost of leaving a bad job and finding a better one. This is good for productivity.

“Poor-performing businesses that survive, not on the strength of their products or services but off the back of exploiting their workers, are driven out. Investments and workers flow instead to better-run businesses.

“And when workers are harder to find, businesses have an incentive to invest in new equipment and processes, which ultimately boosts productivity and drives higher living standards,” she said.

Garnaut agrees. “Full employment is hard work for employers,” he said. “Many prefer unemployment, with easy recruitment at lower wages. Yet full employment has advantages for many employers. It brings larger and more stable demand for consumer goods and services for businesses selling in the Australian market.

“And for employers who identify as Australians, it brings enjoyment of a more cohesive and successful society.” Sounds good to me.

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