After 50 years, we're back to the glory days of full employment

I promise I’ll stop talking about the surprising election result if you let me make one last point. There was a hidden factor that helps explain why Labor did so well despite all our grumbling about the cost-of-living crisis.

It’s a factor for which the Morrison government, the Albanese government and even the Reserve Bank deserve more thanks than they’ve received. A factor without which it’s highly likely Labor would have been tossed out.

Long before most of us were born – even I am only just old enough to remember it – Australia enjoyed something called “full employment”. In the years between the end of World War II in 1945 and the early 1970s, the rate of unemployment rarely got above 2 per cent of the labour force.

When it did rise above 2 per cent for some months, it was called a recession. For the long period in which it was rarely above 2 per cent, it was called “full employment”.

Full employment has never meant an unemployment rate of zero. Why not? Because at any time there will always be many thousands of workers moving from one job to the next, and education leavers taking a month or so to find their first proper job. So, that’s nothing to worry about.

But the unemployment rate started edging up from the beginning of the 1970s, and by the time the Whitlam government was dismissed in November 1975, it had reached 5.4 per cent. For reasons far more complicated than the various mistakes of Gough Whitlam, the era of full employment was over.

And although economists kept a return to full employment as their ultimate objective – as did the Reserve Bank – it was never seen again. Well, not until August 2022, when unemployment got down to a low of 3.5 per cent for several months. That was its lowest in “almost 50 years”.

That’s higher than 2 per cent, but the labour market has changed a lot in half a century, and these days there’s probably a lot more “structural” unemployment – where the unemployed live in different cities to the job vacancies.

There’s general agreement among economists that 3.5 per cent is now a good level to regard as full employment. Remember that, over the past 50 years, unemployment has averaged about 6.5 per cent.

So how, after all this time, did the rate of unemployment suddenly drop to the level of full employment? It was perhaps the only benefit from all the trouble we had using lockdowns to restrict the spread of COVID-19.

Federal and state governments spent hugely to hold the economy together during the lockdowns and so, when they ended and people were let loose in the shops, restaurants and live entertainment venues with all the money they’d been unable to spend, the economy boomed.

Employment grew enormously and unemployment fell, with most of the new jobs being full-time. It helped that, at the time, our borders were still closed, so none of the new jobs went to people who’d come to Australia just to take the job.

All this happened under the Morrison government, with unemployment bottoming out at 3.5 per cent just three months after the May 2022 election. So then-treasurer Josh Frydenberg gets the credit for our return to full employment.

By then, however, the booming economy had caused consumer prices to take off. So the Reserve Bank did what it always does to slow the rate at which prices are inflating: it starts jacking up interest rates to force people with mortgages to cut their spend on other things. As people spend less, businesses don’t raise their prices as much.

But here’s the trick. Normally, the Reserve loses little time in pushing interest rates way up. Spending takes a big hit, businesses lay off workers, unemployment shoots up and the rate of price inflation quickly falls back to normal, after which the Reserve soon cuts interest rates back to normal.

Normally, but not this time. Treasurer Jim Chalmers and the Reserve agreed that this time care would be taken to limit the rise in unemployment and thus not stray far from full employment. To this end, the Reserve would raise interest rates slowly and no higher than absolutely necessary.

We can now see this softly, softly approach has worked. As interest rates have risen, employment has continued growing, with the rate of unemployment rising only to about 4 per cent, where it’s stayed for 14 months.

By now, however, the rate of inflation has fallen back to the Reserve’s target range of 2 to 3 per cent, so it’s slowly cutting interest rates back to a more normal level.

So how did this effort to hang on to full employment affect the election? Had the cost-of-living crisis been accompanied by many people losing their jobs, the pain would have been much greater, and the likelihood of Labor itself being shown the door would have been high.

Instead, almost everyone kept their job, while some were able to move to a full-time job or a second job to help make ends meet.

Our avoidance of recession – unlike other countries, starting with New Zealand – has come at a price, however. Although our smaller and slower increase in interest rates didn’t hurt so acutely, the period of high rates – about three years – kept homebuyers in pain for longer.

But I think it was well worth it. If you think coping with of the cost of living is tough, try doing it on the dole. A well-functioning economy is one that provides jobs for (almost) everyone who wants one. And that’s what our fully employed economy has provided us with for the past three years.

The proportion of all working-age people with a job is 64 per cent, its highest ever. That’s the solid proof we’re fully employed. Women have done best in gaining jobs in recent years. Fifty years ago, only 36 per cent of women were participating in the paid labour force. Today it’s 63 per cent.

It’s strange we could have passed judgment on the performance of the Albanese government this month without most people realising how well the jobs market has done on its watch.

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Whether you eat alone is a good predictor of happiness

By MILLIE MUROI, Economics Writer

If you’re sharing a meal with someone this Easter, chances are you’re happier.

In fact, it’s as strong an indicator of how happy you are as the amount of money you’re raking in and whether you’re holding down a job.

That’s according to this year’s World Happiness Report, which examined data from a survey across 142 countries and 150,000 people, finding the link between meal-sharing and happiness holds regardless of age, gender, country or culture.

There are well-established links between income, employment and happiness: someone holding down a job is more likely to be happy than someone who is unemployed. And the more money a person makes (at least until a certain point), the happier they tend to be.

You won’t see the rate of meal-sharing cited by many politicians or economists, but it’s a great indicator of happiness – and in some ways, more so than income.

How much you’re paid and whether you have a job is a stronger indicator of the level of negative emotions you experience, but how often you share meals has a stronger link both to the level of positive emotions you experience and how highly you rank your life satisfaction.

It’s the places where residents share more meals that tend to report greater average life satisfaction.

And while Latin America and the Caribbean are the global leaders in meal-sharing frequency, the link to happiness is stronger in Australia, North America and New Zealand than for any other region in the world. Starting to share most of our meals – meaning eight or more a week – can boost our wellbeing by the same amount as doubling our income.

We’re also a lot more likely to eat dinner with other people than we are to share lunches in Australia, sitting around the dining table with others for five dinners a week on average. Levels of meal-sharing generally are low in south and east Asian countries such as Japan, India and South Korea, where people share less than one meal out of three on average.

But wherever you look, it’s the places where residents share more meals that tend to report greater average life satisfaction.

Part of what makes the rate of meal-sharing such a good measure is that it’s relatively objective. It’s easy to ask and answer, it’s not something people are likely to hide or lie about (like they might for income), and it can be easily compared across countries, cultures, individuals and across time.

Of course, it has its limitations. For instance, how do we know whether sharing meals makes people happier, or if people share more meals when they’re happy to begin with?

We can’t say for certain, but chances are it goes both ways, at least to some extent.

Other factors can muddy the water. For example, are people more likely to share a meal if they have the money to go out and meet people at a restaurant?

These factors, at least, can be accounted for, and researchers found the relationship between meal-sharing and happiness held even after considering income, education, employment and a buffet of other indicators. The more meals you share, the happier you tend to be.

Those who shared 13 meals with others in the previous week reported the highest average life satisfaction. That tumbles the fewer meals respondents shared in the past week. But the biggest jump is between those who ate all meals alone and those who ate at least one meal with someone else.

While the relationship holds across demographics, there are some differences in the ways meal-sharing tendencies affect different cohorts.

Both men and women who eat more frequently with others report higher life satisfaction and feeling more positive emotions, but when we look at the negative impact of dining alone, it tends to hit women harder.

By age, both young and old people report higher levels of negative emotions if they dine alone. But there are much bigger gaps in life satisfaction and the level of positive emotions reported for young people dining alone compared with older adults. The good news is that young people tend to share more meals than their elders.

One strong explanation for why meal-sharing might be linked with happiness is that eating with other people is a way of strengthening social connections.

Decades of research has shown social connectedness is key to our happiness, mental and physical health. People with stronger social connections are also more likely to be promoted, less likely to commit crimes and tend to live longer lives, while those who are socially isolated or lonely tend to experience more negative life outcomes.

This is good news for policymakers who might be looking for new, cost-effective and practical ways to boost happiness. Funding for initiatives or new programs centred around meal-sharing could be a realistic way to help strengthen social ties and well-being.

As a bonus, the research also found that sharing meals was linked to higher enjoyment of the food consumed or prepared. Put simply, eating your food with other people probably makes your food taste better.

While the findings certainly have implications for high-up decision-makers, it’s also something which individuals can think about in their everyday lives. If sharing meals is linked to higher life satisfaction and happiness, it could be worth finding ways to increase the number of meals you share with those around you.

So when your parents drag you to the table for dinner, or when you’re deciding whether to go eat your lunch alone or with colleagues, there’s a good argument for why you should step away from your room or desk and break bread together. It could just make you happier.

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Are you better off now? That's Dutton's trick question

For most people, the simple answer to Peter Dutton’s repeated question – are you better off today than you were three years ago? – is “no, I’m not”. But if Dutton can convince us this is the key question we need to answer in this election, he’ll have conned us into giving him an easy run into government.

Why? Because it’s the wrong question. It’s the question of a high-pressure salesman. A question that makes the problem seem a lot simpler than it is. A question for people who don’t like using their brain.

And it’s a question that points us away from the right question, which is: which of the two sides seems more likely to advance the nation’s interests in the coming three years?

Economists have a concept called “sunk costs” – money (or time) that you’ve spent, and you can’t unspend. Economics teaches an obvious lesson: you can’t change the past, so forget it and focus on what you can change, the future.

But, since it’s become such a central issue in this election, let’s dissect Dutton’s magic question. For a start, it’s completely self-centred. Focus on what’s happened to you and your family and forget about what’s happened to anyone else.

Similarly, the implication is to focus on the monetary side of life. Forget about what’s happened to the natural environment, what we’ve done to limit climate change, and what we’ve done about intergenerational equity – the way we rigged the system to favour the elderly at the expense of the young.

Next, Dutton’s question is quite subjective. He’s not asking us to do some calculations about our household budget or to look up some statistics, just to say whether we feel better or worse off.

Guess what? This subjectivity makes us more likely to answer no. As we’ve learnt from the psychologists, humans have evolved to remember bad events more strongly than good events.

This is why most people believe that inflation is much higher than the consumer price index tells us. As they do their weekly grocery shopping, they remember the price rises much more clearly than any price falls. And in the personal CPI they carry in their heads, they take no account of the many prices that didn’t change – which they should, and the real CPI does.

Humans find the bad more interesting and memorable than the good because the bad is more threatening, and we have evolved to search our environment for threats.

In this case, however, objective measurement confirms that most people are right in thinking their household budgets are harder to balance than they were three years ago. There are various ways to measure living standards, but probably the best single measure is something called “real net national household disposable income per person”.

Between June 2022 and March 2024 (the latest quarter available), it fell by 3.6 per cent. It may have recovered a bit in the 12 months since then, but not by enough to stop it having fallen overall.

But that’s just an economy-wide average. We can break it down into more specific household categories. Those dependent on income from wages are worse off because consumer prices rose a little faster than wages – though wage rises fell well short of price rises in the couple of years before Labor came to power. This is a shortfall wage-earning households would still be feeling in their efforts to balance their budgets.

The rise in interest rates since the last election means the households feeling by far the most pain over the past three years are those with mortgages.

This also means those who own their homes outright have felt the least pain. Most people on the age pension have done OK because most of them own their homes and the age pension is fully indexed to the rise in consumer prices.

As for the so-called self-funded retirees, they’ve been laughing. Not only do they own their homes, their super and other investments earn more when interest rates are high.

True, it’s common for elections to be used to sack governments who’ve presided over tough economic times. Be in power during a recession and you’re dead meat. So elections are often used to punish governments, on the rationale that the other lot couldn’t possibly be worse.

But the side that benefits from such circumstances, taking over when everything’s a mess, won’t have it easy getting everyone back to work and having no trouble with the mortgage in just three years.

I can remember when the Morrison government was tossed out in 2022, smarties among the Liberals telling themselves this probably wasn’t a bad election to lose. Why? Because they could see consumer prices had taken off and had further to go. Using higher interest rates to get the inflation rate back down would be painful and protracted, possibly inducing a recession.

This is why Dutton’s question is so seductive to people who don’t follow politics and the economy, and don’t want to use their grey matter. “If I felt the pain on your watch, it’s obvious you’re to blame and you get the sack. Don’t bother me with the details.”

Remember, however, that all the rich economies suffered the same inflation surge we did, all of them responded with higher interest rates, and most suffered rising unemployment and even, like the Kiwis, a recession. But not us.

So let me ask you a different question: over the past three years have you ever had cause to worry about losing your job? Have you spent a lot of time unemployed while you find one? Have more people in your house been able to find work?

Our employment rate is higher than it’s ever been. Our rate of unemployment is still almost the lowest it’s been in 50 years. This has happened because the Albanese government and the Reserve Bank agreed to get inflation down without a recession.

But the price of avoiding recession is interest rates staying higher for longer. If you think Labor jumped the wrong way, kick the bastards out.

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Our jobs market is booming, but the RBA needn't be so worried

Despite the economy only just popping its head up after 21 months of “per-person recession”, our jobs market has been going gangbusters. How can it possibly be so strong? It’s this strength that has made the Reserve Bank so reluctant to cut interest rates.

This week we learnt from the “national accounts” that the economy – real gross domestic product – grew by a princely 0.6 per cent during the three months to the end of December. This caused its annual rate of growth to jump from a very weak 0.8 per cent to a not-quite-so-weak 1.3 per cent.

Trouble is, until now, the economy’s growth hasn’t been enough to keep up with the growth in our population. So real GDP per person fell by 1.7 per cent over the seven quarters to last September, but – thank heavens! – rose by 0.1 per cent during the December quarter.

If we’re lucky, GDP per person will now keep going forward rather than backward in 2025.

But the weakness in economic growth – caused by the Reserve keeping its foot on the interest-rate brakes since May 2022, as it fought to get inflation down – simply doesn’t fit with our roaring jobs market.

Professor Jeff Borland, of the University of Melbourne, is probably the nation’s top expert on the labour market. So I asked him to explain this paradox.

To show just how strong the jobs market has been, Borland notes that, although the total number of people in Australia with jobs grew at a rate averaging about 2 per cent a year over the previous two decades, it grew by 3.5 per cent over the year to this January. It grew almost as fast over the past two years.

Of course, the rate at which the number of jobs increases is normally closely related to the rate at which the economy’s growing. Borland calculates that, had the usual relationship between the two held, you’d expect employment to have grown by 3.4 per cent since the end of 2021. Get this: the actual growth is 9.5 per cent. That’s gangbusters.

But why has employment been growing at such an extraordinary rate? Borland says it’s all to do with growth in the “non-market” part of the economy, which covers public administration and safety; healthcare and social assistance; and education and training.

Now, if you were Donald Trump or Elon Musk, you’d think this meant a massive increase in public servants sitting round drinking tea and not doing anything of any use to anyone.

If you had more sense, you’d know it’s mainly the growth in the “care economy” we keep hearing about. More people being employed in aged care, disability care and childcare. You’d know these women work their butts off helping our oldies, our kiddies and our disabled cousin.

The care economy’s growing because of the ageing of the population, because we need our women in the paid workforce not at home minding kids, and because we’ve decided the disabled should no longer be hidden away being looked after by some poor rello.

You’d remember the various royal commissions exposing the scandalously poor treatment of people in care, how neglected they were by the previous Liberal federal government, and how much the Albanese government has had to spend trying to catch up. (Note, “non-market” means many of these workers deliver a service you don’t pay for over the counter. But most of the extra workers would be working for private sector providers.)

Borland calculates that, had non-market sector employment grown at the same rate as the market sector, total employment would be almost 700,000 lower than it is.

But why hasn’t this massive growth in the workforce led to higher wage rates as workers were bid away from other employers? Borland says one reason is that there’s been a downward shift in the level of wage inflation for any given degree of tightness in the labour market. (Reserve Bank please note.)

He says workers in the non-market sector don’t push for pay rises the way workers in mining or the utilities or construction did in earlier times.

But for so much growth in employment to be possible, there has to be a supply of extra workers available. This extra supply means workers don’t need to be bid away from their present employer.

Guess what? Since the pandemic, we’ve had strong growth in the population due to high immigration. Borland calculates that population growth explains about half the employment growth from late 2021 to late 2022, all the employment growth from late 2022 to early last year, and since then, it’s been about three-quarters of the story.

What can’t be explained by population growth is explained by people already in Australia who didn’t have paid employment deciding that, since so many new jobs were available, they’d take one and make some money.

It’s no surprise that many of these extra workers are women. What’s surprising is there are now more blokes working in the care economy.

Further delving by Boland finds that a lot of the extra jobs have gone to people under 24, suggesting many education-leavers have been finding it easier to find work.

Cost-of-living pressures may have prompted people to take a job. And the rise of working from home seems to have enabled more people to take a paid job or work more hours.

And get this: older people have been more inclined to keep working or even return to the workforce from retirement. Since the early noughties, the proportion of people over 64 who are still working has risen from 6 per cent to 15 per cent (don’t look at me).

The Reserve Bank has made no secret of its reluctance to cut interest rates when the jobs market is so “tight”. It worries that, if the economy starts growing more strongly, we might soon run out of workers, which would set inflation off again.

But I think you could just as easily conclude from our recent experience that the economy has shown its ability to find all the extra workers it needs.

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Women still being kept in the home, but not by what you think

By MILLIE MUROI, Economics Writer

It’s a topic that, despite its horrific consequences, makes us avert our eyes, close the tab, and turn the page.

Usually, sadly, it’s only when there’s a death that readers – and the click-hungry media – pay attention. But before I lose you, I want to reassure you that it’s not all bad news. And I want you to hear from people who have defied the odds.

We already know domestic violence kills one woman every 11 days in Australia.

But for the first time, Dr Anne Summers, domestic and family violence professor at UTS, has put cold, hard numbers on the effects of domestic violence in Australia on women’s careers and how likely they are to finish their uni degrees.

When you think about it, the effect isn’t surprising. But Summers’ research exposes the gap between women who endure violence and those who don’t: it’s costing not just lives but our economy.

We’ve come a long way in getting women into work and pursuing university degrees. In 2024, three in five women were working or looking for work. Compare that to just one in three 60 years ago.

Similarly, only 8 per cent of young women had walked across the stage at a graduation in 1982. Today, that figure exceeds 50 per cent.

But those numbers should be higher, Summers says.

She looked at women born between 1989 and 1995 and found there was a nearly 15 percentage point difference between women who had experienced domestic violence and those who hadn’t when it came to the proportion who had finished a university degree by the time they hit 27.

For Laura McConnell, getting a degree was especially difficult after enduring family violence. “Even getting through required incredible resilience,” she says. “But I couldn’t afford to fail because I would have to go back to an abusive family.”

McConnell is now a co-founder of the social enterprise GoKindly, which supports women experiencing housing stress, but she left an earlier career at a big four consulting firm after she found they were unable to support her with her complex background.

“The fallout of coming from violence just follows you through your career,” she says.

While McConnell moved away from her abusive family, Summers says it’s also common for abusers, particularly partners, to prevent women from studying or cause them significant stress – a leading reason for dropping out.

“It’s no accident that employment and education, the pathway to better employment, are targeted by perpetrators,” Summers says. It’s a prime way to crush a woman’s ability to be financially self-sufficient and keep her under her partner’s thumb.

More than 280,000 women, or 5 per cent of the female population aged 18 to 64, have had a partner who has controlled or tried to control them from studying through everything from forced pregnancies to destroying school supplies, stalking them or making them feel guilty about their academic efforts.

This can jeopardise a woman’s career and financial future because a university degree increases the odds of landing a job by about two and a half times and boosts lifetime earnings by as much as 41 per cent. Abuse can also leave them saddled with student debt that they may never earn enough to repay, shrinking their borrowing power.

Endurance athlete Amanda Thompson, who runs her own financial planning business, Endurance Financial, has worked with women experiencing abuse but never thought she’d go through it herself.

Thompson endured emotional abuse for some time before an out-of-the-blue display of physical aggression ended with a triple-zero call.

But it was the year after the scars and bruises healed that was worse.

“It was a year from hell trying to run my own business and keep up with clients,” she says. “I was diagnosed with PTSD, which makes you exhausted all the time. Your body goes into spending all its energy on protecting you.”

Thompson said specialist support and counselling were key to her recovery but that there needed to be more funding for these services and more education on exit strategies.

“In my work, I’m actually getting more and more women coming to me confidentially, saying, financially, where do I need to be to leave,” she said.

Women who have endured abuse in the past five years are less likely to be working. About three-quarters were employed compared to more than four in five for women who hadn’t faced an abusive partner.

While younger women tend to pull back on the hours they work, for older women, most of the fall in employment is driven by them leaving the labour force altogether.

With 1.6 million women having experienced economic abuse by a partner since the age of 15, these proportions significantly dent the workforce.

A form of violence called “economic abuse” has an especially destructive effect. The difference in employment rates between women who have experienced it and those who haven’t is nearly 10 percentage points.

Economic abuse is when a person controls their partner through, for example, preventing a partner from going to work, making frequent disruptive phone calls to them at work, and saddling a partner with debt.

It can also include cunning tactics like hiding transport cards or keys, damaging clothing, or changing calendar appointments so that they get a reputation for being unpunctual.

When a woman stops working, it’s harder for her to plan an escape from her violent partner as she’s not likely to have enough individual income.

This leaves the affected partner tired and stressed, embarrassed from constantly being late for work, or unable to concentrate on their work.

Even if the abuse doesn’t push a woman out of work completely, one in three who experience violence while holding down a job take time off work. The likelihood increases if they have dependent children or if the violence is very frequent.

This can lead to job loss, a significant fall (averaging about 9 per cent) in the woman’s income and a lower superannuation balance in retirement.

These consequences can affect their decision to stay or leave a violent relationship. Fear of ending up in poverty is a major roadblock to women leaving violent relationships, and women who have experienced domestic violence report much higher rates of financial distress, with 44 per cent facing a household cash flow issue.

When a woman stops working, it’s harder for her to plan an escape from her violent partner as she’s not likely to have enough individual income. Working is also a safeguard against domestic violence because it offers women support networks at work.

The most recent comprehensive estimate of the costs of domestic violence, prepared by KPMG, puts the dollar figure at up to $26 billion a year, including the cost of pain, suffering, premature death, reduced productivity and increased demand on the justice system.

There’s plenty that could be done to fight against domestic violence, but ANU research fellow Kristin Sobeck, who worked on the report with Summers, says it starts with collecting more data.

“It’s really been a struggle to quantify the impact of domestic violence on women’s lives because there’s a dearth of data,” she says. “The first thing that shows you care about something is that you measure it.”

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RBA is lost in the frightening territory of full employment

The Reserve Bank’s behaviour last week can only be described as bizarre. It’s a sign that it’s lost its bearings and isn’t sure what’s happening in the economy or where it’s headed. What has caused its befuddlement? Our unexpected return to near full employment. Sheesh. Whadda we do now?

The way “monetary policy” – the Reserve’s manipulation of interest rates – normally works is that, when the rate of price inflation gets too high, it raises interest rates to discourage borrowing and spending. Then, when the demand for goods and services has weakened and the rate of inflation has started slowing, the Reserve starts cutting interest rates back to their normal level.

But that’s not what began last week. After raising the official interest rate by 4.25 percentage points to 4.35 per cent and keeping it there for 15 months, the Reserve cut by 0.25 points, but made it clear it wasn’t sure it should have cut, and warned us not to assume further cuts would follow.

It would wait and see what happened. It didn’t say so, but it left open the possibility that, should inflation start going back up, it would resume raising the official rate.

Huh? What on Earth are these guys playing at? Are rates coming down or aren’t they? It was a case of bureaucratic arse-covering. Hosts of people – those with mortgages, the financial markets and many economists – were demanding a rate cut, and the Reserve didn’t want to get the blame should Anthony Albanese get tossed out at the looming election.

So it sent a signal that rates were coming down, then said it wasn’t a signal. It’s obvious the government was desperate for a rate cut, but note this: at all times Albanese and Treasurer Jim Chalmers have stuck to the agreed etiquette of never publicly expressing any opinion on what the Reserve should or shouldn’t do.

It’s not the first time the Reserve has engaged in arse-covering. Governor Michele Bullock admitted last week that the central bank waited too long before starting to raise rates in 2022. But it made sure it got the first increase in before the May 2022 election, at which the Morrison government got tossed out.

Had it waited until after the election, it would have been criticised for doing the Liberals a favour and, in the process, letting people think the inflation problem arose under Labor.

The point many otherworldly economists don’t get is that just because a central bank is independent of the elected government doesn’t mean it can escape politics. Why not? Because we live in a democracy.

The great contradiction of central bank independence is that, for the bank, it’s all care but no responsibility. If it stuffs up the economy, the governor doesn’t lose her job, the prime minister does. And that’s when the pollies – on both sides – tend to get vengeful.

When a central bank lacks independence, it can leave the politics to the pollies. But if it is independent, it has to do its own politics, which is what Bullock was doing last week.

But why is the Reserve so anxious about cutting rates when underlying inflation is heading down, isn’t far above the 2 to 3 per cent target range, and most economists think monetary policy should be eased? Short answer: because its boffins aren’t old enough to have lived in an economy that’s close to full employment.

Thanks to the excessive monetary and budgetary stimulus applied during the pandemic, the economy boomed and, just after the change of government, unemployment fell to 3.5 per cent, its lowest in almost 50 years. After more than two years of higher interest rates, it’s still only up to 4.1 per cent.

After the review of the Reserve Bank, it was decided to have the longstanding lip-service goal of full employment raised to equal status with the Reserve’s inflation target.

For the past five decades, we and the other rich economies have used a mathematical calculation called the “non-accelerating inflation” rate of unemployment, NAIRU, to give achieving low inflation priority over low unemployment.

This made it easy to get inflation down. You used interest rates to give the economy an almighty hit on the head, causing unemployment to shoot up and the rate of inflation to fall rapidly. Only small problem: you never got back to low unemployment.

This time, however, the Reserve sought to avoid a great worsening in unemployment by not hitting the economy too hard. The consequence has been a slower and less certain return to low inflation. And the jobs market has kept happily steaming along.

Despite flat consumer spending and weak business investment in capital equipment, employment’s still growing strongly and unemployment has risen only a little. The proportion of people with jobs is higher than ever, showing that supply has had no trouble keeping up with demand.

But this is scaring the pants off the Reserve’s boffins. With the labour market so “tight”, surely wages could take off at any moment, halting the fall in inflation – or worse, sending it back up. What’s unnerving them is an old ’70s-model NAIRU machine in the corner, with its red lights flashing and siren blaring. Panic stations. Assume the brace position.

This explains last week’s signal that the Reserve was cutting rates and not cutting them at the same time. When it says what it does next will depend on the data, it means “we’re not really sure what the hell’s going on”.

Trouble is, the world has changed a lot since the invention of the NAIRU machine in the 1970s. The unions used to be able to force excessive pay rises on their bosses, but globalisation, deregulation and the collapse in union membership have changed all that.

The Reserve’s boffins, however, have been so busy with their maths and modelling that they haven’t noticed how much the world has changed. They don’t even seem to have noticed that their regular forecasts of wage growth have been way too high for more than a decade.

No wonder they’re so worried. And until they get the memo, the Reserve will go on punishing everyone impertinent enough to have a mortgage.

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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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