Beware of all the growth spoilers

22 November 2018

This opinion article by Business Council chief economist Adam Boyton was published in the Australian Financial Review on Thursday 22 November 2018.

Australia is well placed to lower the jobless even further. But it is threatened by those who don't understand this success.

Australia is on the cusp of a trifecta of low unemployment, inflation in check and solid growth in real wages. That would be a remarkable performance.

Yet some are ready to tear up the framework that has delivered this.

Before we do, let's just remember that the unemployment rate is only 5 per cent. At the same time, the inflation rate is just 1.9 per cent.

Just how impressive that combination is can be captured in the 1970s and 1980s concept of the "misery index". This simply added the unemployment rate to the inflation rate to provide a simple snapshot of how an economy was performing. With a 1.9 per cent inflation rate and a 5 per cent unemployment rate, the misery index stands at 6.9. To put that in context, Australia's misery index averaged about double that over the 1980s and 1990s.

That makes the current unemployment and inflation combination an outcome that policymakers in the 1980s and 1990s could only dream about. It means Australians are living in a much less volatile economy than used to be the case.

But let's also look forward. After all, the fact that we have managed to get the unemployment rate to 5 per cent with little inflation suggests we can drive it even lower.

And sustainably.

This isn't just a pipe dream. Many other countries have found it possible to get to lower and lower unemployment rates without much of a lift in inflation.

In the United States, the unemployment rate is just 3.7 per cent, while inflation remains low at 2.5 per cent. The United Kingdom also has a low inflation rate while the unemployment rate there is just 4.2 per cent. And in Germany, the unemployment rate is at its lowest levels since reunification.

Inflation there is running at just 2.5 per cent.

That lack of inflation is seen by some as a problem. Little inflation has meant interest rates around the globe have stayed low and well away from what would be considered normal levels. That's also been true in Australia. With inflation below the bottom of the Reserve Bank's target band, it is hard to see Australian interest rates at more normal levels anytime soon. But to the extent that is a negative, it needs to be considered against a very clear positive. Namely, being able to sustainably drive the unemployment rate to levels not seen in a very long time.

Of course, there has been a missing link to the Australian labour market. Real wages growth. But even here there are some early signs that things are starting to improve.

The most recent read on wages showed a modest lift in the yearly pace of wages growth to 2.3 per cent. But if you include bonuses then wages are now growing by 2.7 per cent.

That gives a real wage increase over the past year of 0.8 per cent.

And despite what the wages conspiracy theorists would have you believe, that is a pace of real wages growth broadly consistent with trends in productivity growth over the past year.

It's at this point that those who want to throw out the modern Australian economy and return to a 1980s industrial relations system need to seriously stop and think.

The unemployment rate is at 5 per cent.

Inflation is contained. We are on the cusp of sustainably pushing the unemployment rate into the "fours". Real wages are showing some early signs of growing.

And let's not forget the lower we can push the total unemployment rate, the more youth unemployment will fall. That's because trends in youth unemployment are ultimately driven by movements in the overall unemployment rate.

But for some, unemployment rates around generational lows, contained inflation, near record labour force participation and early signs of real wages growth reflect a failure. Or a lack of fairness.

What exactly is unfair about having a record number of Australians in jobs?

What's unfair about trying to drive the unemployment rate into the fours and being able to keep it there sustainably?

What's unfair about young people entering a strong labour market and not a weak one?

What's unfair about labour productivity and real wages (the consumer real wage) having both risen by a little over 50 per cent since the last recession? And what's unfair about real wages over the past year showing growth roughly in line with productivity?

The modern Australian economy has delivered impressive outcomes. Part of that includes enterprise bargaining and a more flexible labour market.

Before we tear those up, it might be worth reflecting on just what is at stake.


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