Comment

Richard Denniss
The RBA’s policy guide is wrong

The unemployment rate published by the Australian Bureau of Statistics is an incredibly stable, accurate and reliable indicator of something almost entirely irrelevant. It provides us with 63 years’ worth of raw data on the number of Australians who worked for less than one hour, were actively seeking work and, because they had no caring responsibilities, were available to start work immediately.

The unemployment rate is in no way connected to the number of people receiving unemployment benefits. If you are looking for work but your partner earns good money then you wouldn’t be eligible for the dole, even though the ABS might classify you as unemployed. And if you are single and broke because you had only two hours’ work then you would likely be eligible for unemployment benefits but the ABS wouldn’t classify you as unemployed. According to the ABS, no matter how briefly you are employed, you can’t also be unemployed. And for those with caring responsibilities – even if you were on the dole and actively seeking paid work but couldn’t start immediately – you wouldn’t be unemployed either. You would be a NILF – not in the labour force.

Definitions of unemployment might seem a bit esoteric. But if you have a mortgage, are looking for a job, or would like a pay rise, then the way we measure unemployment – and our definition of full employment – plays a major role in your wellbeing, and that of the Australian economy as well.

One major user of ABS unemployment data is the Reserve Bank of Australia, which is responsible for setting the interest rates that play a major role in determining house prices, mortgage interest rates, the exchange rate and even GDP. In a speech last year, under the subheading “The journey towards full employment”, RBA governor Philip Lowe said, “Our central forecast is that the unemployment rate will fall to below 4 per cent over the course of this year and remain there next year. The last time that the unemployment rate was that low was almost half a century ago. If we reach this milestone, it would be a significant achievement.”

But would it?

The definition of unemployment we use today was first adopted by the ABS in 1960 when there were big differences in the way Australia looked and worked compared with today. Like spreadsheet software and smart phones, the gig economy as we now know it was the stuff of science fiction in those days. Men overwhelmingly worked full-time and it wasn’t until 1966 that women who worked in the Commonwealth Public Service could keep their jobs when they married. You can see why those measuring the labour market in 1960 – when wages were set according to how much a man needed to care for his wife and children, and women could be sacked for getting married – might choose to focus on the number of people in work, not their hours, or the conditions and quality of that work.

The staff of the ABS who use our 63-year-old definition of unemployment to estimate our unemployment rate each month know the problems with using a definition that’s approaching retirement age. They know that all the “deregulation” and “labour-market flexibility” championed by the Howard government greatly deepened Australia’s reliance on precarious, casual and part-time work. They know that underemployment (insufficient hours) and hidden unemployment (people who need a job but who might have stopped searching or who can’t start immediately) are more common now than they were back in the Vietnam War era.

To be fair, the ABS also publishes much broader indicators than “headline” unemployment. But just as McDonald’s having salad on the menu does nothing to reduce the harm of their more popular offerings, the fact that the ABS knows how unhealthy the headline unemployment rate is for our democratic and economic debates doesn’t make it any less harmful.

Definitions and data provide a window through which we can view part of the world around us. All definitions shape what we can see, but just like our city skylines, our labour market has changed radically over the past six decades. Which is why the RBA governor’s claims about the significance of our unemployment rate resembling that of 50 years ago is both worrying and dangerous.

In 1972, female participation in the labour force was just 38.6 per cent, compared with 62.4 per cent today. Similarly, part-time and casual work were far less common, as was gig work, sham contracting and franchising. Indeed, such forms of work were so uncommon that they are barely covered in the official statistics.

The Reserve Bank governor knows all this, as do the economists and speechwriters who helped craft the claim that it was a “significant achievement” for the unemployment rate – in an economy beset with underemployment – to resemble the one in which full-time work was the norm. In 1972 only 4 per cent of men worked fewer than 29 hours per week; today it’s nearly 20 per cent. Comparing the unemployment rate today with the unemployment rate when Gough Whitlam was prime minister is like comparing cassette tape sales now and then. Just because it’s possible doesn’t mean it’s meaningful.

So why do it?

While you might think that the main role of the RBA is to control inflation and keep it within the 2-3 per cent range it talks so much about, the Reserve Bank Act 1959 actually stipulates the main function of the RBA is to deliver full employment. Inflation doesn’t actually rate a mention in its legislated objectives, let alone the need to deliver 2-3 per cent inflation.

The problem for the RBA governor is that the central bank hasn’t been very good at delivering full employment for a long time, especially if your definition of full employment is broader than the ABS’s narrow definition from the Age of Aquarius.

Philip Lowe knows that broader measures of full employment exist, such as indicators of hours of work, underemployment and the labour utilisation rate, which he even referred to in his “significant achievement” speech. But what the governor also knows is that all of those indicators would suggest that he is nowhere near as close to full employment as we were in 1972.

The latest data shows that about 491,700 people in Australia meet the official definition of unemployed and a further 829,800 are underemployed. All up, those defined by the ABS as unemployed or underemployed add up to 1,321,500, or 13 MCGs worth of people looking for more work. Which is a lot more than 4 per cent.

But despite the enormous harm, to individuals and to the economy, of 1.3 million people lacking work, and despite the fact that keeping inflation in the 2-3 per cent range is not mentioned in the Reserve Bank Act, the RBA has been steadily lifting interest rates to slow the pace of economic growth and job creation in order to keep wages and hopefully inflation low. The personal and economic costs of this pursuit of low inflation are enormous and greatly outweigh the costs of tackling climate change. But, because definitions are boring, it is almost never discussed.

In United States parlance, the RBA is dominated by “inflation hawks” who, as we saw in 1991, are more than willing to cause mass unemployment in their pursuit of low inflation. They literally gave us “the recession we had to have”. And while they may seem a bit technocratic, these fights between economists and regulators about whether central banks should prioritise the pursuit of low inflation over enough work for all those seeking it, anyone worried about mortgage interest, getting a job or securing a pay rise should probably tune in.

Philip Lowe and the RBA think that if unemployment gets “too low” then wages might rise “too fast”, because it’s easier for workers to find or negotiate a better paying job when fewer people are competing for that job. And the RBA thinks that wage increases inevitably lead to price increases because firms have no choice but to pass on the higher costs, even though their record profits clearly leave them plenty of choices.

So you can see why, if the RBA is focused on controlling inflation, it might as well slow down the economy, the rate of job creation and, in turn, the rate of wage growth – because it might lead to lower prices. Though, of course, firms may just increase their prices anyway. And you can see why the RBA would prefer to focus on the flawed and narrow indicator of unemployment to argue we are near full employment, even though 1.3 million people are looking for more work.

Last year Lowe made what is perhaps the largest prediction error in modern Australian economic history, when he made clear that the RBA wouldn’t increase interest rates until real wages started to grow strongly. In reality, despite the fact that real wages subsequently fell faster than ever recorded in Australia, he increased interest rates faster than any of his predecessors.

Luckily for Australia, Treasurer Jim Chalmers is currently reviewing the role of the RBA. The sooner a report is out, the better. The RBA places far too much emphasis on measurement concepts from the 1960s and theory from the 1980s to manage the Australian economy of the 2020s. Using interest rates to slow economic growth when millions of people need more work isn’t good economic or social policy. And given that most of our inflation is being caused by world energy prices and the cost of building new houses, high interest rates won’t even do much to rein it in. 

John Hewson is on leave.

This article was first published in the print edition of The Saturday Paper on January 21, 2023 as "The 63-year-old number setting interest rates".

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