Reserve Bank dismisses Labor on full employment

Reserve Bank economists are internally dismissing a political push to substantially alter their assumptions about the inflationary impact of the jobs market, threatening a fresh conflict with Jim Chalmers.

Reserve Bank governor Michele Bullock, above, last month warned that the jobs market was showing signs of tightening again, threatening to delay further rate cuts. Picture: NewsWire / John Appleyard

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Reserve Bank economists are ­internally dismissing a political push to substantially alter their assumptions about the inflationary impact of the jobs market, threatening a fresh conflict with Jim Chalmers, Treasury and the union movement.

Days before Labor’s fourth budget, the admission is likely to inflame the debate around so-called “full employment”, which refers to the maximum level of employment consistent with holding inflation within the RBA’s 2 to 3 per cent target.

The lowest unemployment rate that achieves this is called the “non-accelerating-inflation rate of unemployment”, or NAIRU, which the central bank estimates to be about 4.5 per cent. Its experts believe a jobless rate below that level is probably incompatible with its inflation-fighting mandate.

The Treasurer, some economists and the ACTU have argued that the historically low unemployment rate, which measured 4.1 per cent in February, can be sustained without rekindling wage and inflation pressures, which are moderating.

But internal RBA research, which considers various cases for the central bank to reduce its measure of full employment, reveals that its economists view the merits of those arguments as “not enough to suggest a substantially lower NAIRU”.

The arguments for the RBA to alter its assumption include recent consumer price figures for the December quarter, which showed the underlying inflation rate nudging the RBA’s target band at a time when unemployment remains low.

That view has been voiced by Dr Chalmers, who signalled earlier this year that the NAIRU could be even lower than the RBA’s assessment and that of the Treasury Department, projected at 4.25 per cent.

“If you look at the data and … what has been delivered in our economy, we see that we’ve had unemployment in the high threes and in the low fours for some time now at the same time as inflation has come from its peak … to within the Reserve Bank’s target band,” he said in January.

“What that tells us is that we can make this very substantial, very sustained progress on inflation at the same time as we maintain very low unemployment.”

Although underlying inflation in the December quarter eased faster than the RBA had predicted, its economists rejected the argument that the decline was enough to change its view, saying the fall had been partly driven by factors “likely to unwind in the medium term”, pointing to government subsidies and a temporary reduction in housing costs.

“Furthermore, the (December quarter trimmed-mean inflation) outcome is only one data point, which is not sufficient basis for assessing slow-moving structural change,” said the research, obtained by The Australian.

The ACTU has argued for the NAIRU to be dumped, labelling the measure a “detriment of working people” and accusing the RBA of trying to engineer job losses to cool inflation.

RBA governor Michele Bullock has said the central bank is alert to the possibility its measure of full employment could be lower than it estimates, but last month warned that the jobs market was showing signs of tightening again, threatening to delay further rate cuts.

In the previously unreleased documents, the RBA’s economists dismissed other arguments for lowering their NAIRU assumption, including the claim that anaemic productivity gains were in fact stronger than official figures would suggest, meaning wage growth was not excessive.

The economists claimed, however, that productivity needed to be lifted from its current level to ensure existing rates of wages growth were sustainable.

Similarly, they rejected the argument that supply-side shocks had accounted for a larger share of the recent spike in inflation, meaning the central bank was over-estimating the inflationary impact of the job market.

But modelling by the RBA’s economists found that essentially all inflation over the past three years had to be caused by supply-side shocks if the NAIRU was in fact 4 per cent.

The central bank’s economists also rejected the argument that recent strength in wages growth had been largely supported by the “non-market sector” – covering education, the public service and the care economy – arguing pay pressures were more broadbased.

The RBA research found that had the NAIRU been 4 per cent, rather than its current estimate of 4.5 per cent, underlying price pressures would have eased faster in late 2023 and early 2024.

It forecast that its preferred trimmed-mean inflation measure – which strips out more volatile price changes – would have been almost half a percentage point lower last year, the research shows.

A similar story follows for growth in pay packets, as measured by the ABS’ wage price index, which would have been almost a third of a percentage point lower using a NAIRU assumption of 4 per cent, compared to the RBA’s 4.5 per cent baseline.