Full employment, skills boost will set up a fairer future

With the onset of large price rises triggered by supply shocks, the Reserve Bank has turned its attention to inflation with aggressive tightening of monetary policy. Picture: NCA NewsWire / Christian Gilles

Expansionary fiscal and monetary policy resulted in unemployment coming down to 3.4 per cent earlier this year. It hasn’t caused significant wage inflation. So “full employment” or the “non-accelerating inflation rate of unemployment” is no higher than and possibly below 3.4 per cent. Full employment with unemployment below 2 per cent was achieved after World War II until 1974. Returning to full employment would be hugely beneficial for economic output, federal and state budgets, productivity growth and equitable distribution of income.

With full employment, workers can leave jobs that do not suit them and quickly find others – often moving to higher-productivity firms. Employers put significant effort into training and retaining. Labour income is secure and can support a loan to buy a house. Businesses that cannot afford rising wages close and release their workers into more productive employment. Steadily rising real wages encourage economisation on labour, lifting productivity.

Full employment also provides the best social security for people who are able to work. The Australian Jobseeker benefit in 2022 may be adequate if its role is to provide sustenance briefly while recipients are looking for their first jobs or moving quickly from one to another. It is too low to support people for longer periods. The long-term unemployed become employable. This encourages participation of those who have spent long periods out of the labour force; the infirm and old; the poorly educated. And newly qualified young people, without prior experience, find it easier to get a foothold in the skilled labour market.

Full employment is harder work for employers when recruiting labour. But in reality it has advantages for them. It brings larger and more stable demand for consumer goods and services for business. And for employers who identify as Australians, it brings enjoyment of a more cohesive and successful society.

Last year the Reserve Bank was focused on achieving full employment. This year, with the onset of large price rises triggered by supply shocks, it has turned its attention to inflation with aggressive tightening of monetary policy, alongside similar actions by other central banks. It has shown a willingness to allow unemployment to rise over the next year in countering inflation.

The bank needs to be careful to avoid triggering a recession. A wage-price spiral is very unlikely and Australians are expecting inflation to fall in the years ahead. Taking one more year to get back to its target range would be a small price to pay to avoid a recession.

In October, pleasingly, the bank has slowed the increase in interest rates and mentioned full employment again in its monthly statement. It would now be wise to pause the tightening and observe the impact of current settings before any more interest rate changes, and be willing to relax monetary policy again, if necessary, to avoid a recession and to resume the pursuit of full employment. Fiscal consolidation would help. The Treasurer is right to be talking about responsible budgeting. We need a better balance between fiscal policy and monetary policy settings.

The level of domestic demand required to achieve full employment without accelerating inflation can involve varying combinations of fiscal and monetary policy. If reductions of demand are achieved with tighter money and looser budgets, the real exchange rate will be higher. More of the growth in employment will come in domestic and less in trade-exposed industries. Full employment would be achieved with larger amounts of public and international debt. That will reduce future relative to current living standards. At a time of peacetime record highs in public debt and facing immense fiscal challenges, we are relying too little on fiscal and too much on monetary tightening to reduce demand.

In tandem with achieving full employment, the government will need to focus on raising productivity and participation.

Enhancing workforce skills should be a centrepiece of the productivity agenda. The establishment of the Jobs and Skills Agency foreshadowed at the Jobs and Skills Summit is an important step in getting federal and state governments, business and unions, vocational and higher education working together on a national skills agenda.

The government is wise to start thinking about tax reform. For example, shifting the base for corporate income taxation from conventional accounting income to cash flow would allow an increase in taxation of economic rents while increasing incentives for corporate investment and productive innovation.

Increasing labour force participation will be another priority. Investing in childcare and early childhood education is a key element to raise the labour supply of parents and enhance our human capital in the longer term by improving early childhood development. The interaction of our tax and transfer system still leads to high effective marginal tax rates for low-income families. The government should consider an overhaul of the income support system to improve workforce incentives while providing more robust guarantees to low-income families. Full employment with higher productivity and participation, real wage growth and a fairer distribution of income is within our grasp in Australia in the years ahead. An agenda of the kind we propose would help us get there.

Peter Dawkins and Ross Garnaut are emeritus professors of economics at Victoria University and the University of Melbourne respectively. This article is based on their chapter in the forthcoming Melbourne Institute Compendium. The Melbourne Institute and The Australian will hold the Economic and Social Outlook Conference, Opening Doors of Opportunity, on November 2.