In the midst of a catastrophic drought the Australian economy has grown at 3.8% over the past year, its fastest rate for 3 years. The non-farm sector in the March quarter grew at the phenomenal rate of 4.6%. As the drought ends growth rates will improve further.
Australia is in the longest expansion in its history with record low unemployment of 4.2% (the lowest in 33 years) and low inflation. The number of part-time jobs has fallen, the number of full-time jobs has risen strongly and the participation rate has continued to rise to 65%. An extra 10,000 workers are getting jobs each week. Moreover the boom is not restricted to the ‘resource’ states alone as Labor Party would suggest – the biggest reduction in the jobless occurred in NSW.
If anyone doubts the value of unemployed people getting a job, or of part-timers getting a full-time job, read this heart rendering account. The story touched me.
Peter Costello’s views on the situation are here. The RBA’s graphs of recent developments in the Australian economy are here. The ABS figures are here.
Labor argues that what Australia really needs now is a change of government that will end a decade of economic mismanagement. It argues we urgently need to reestablish ‘fairness’ in labour markets. Only if we assign a more substantial role to Australia’s trade unions can economic prosperity be sustained and unemployment kept low. As Mr. Swan warned us yesterday our productivity growth is woeful and the employment growth we have enjoyed is due to Labor’s economic reforms more than a decade ago. Paul Keating attributes the gains to the Labor reforms of the 1980s. Good grief - I'll settle for this state of misery thanks!
One thing we should do is to reassess lame duck theories of natural rates of unemployment and non-accelerating inflation rates. With inflation less than 3% and unemployment about to fall below 4% these theories should be consigned to the rubbish bin – inflation creates unemployment and the way to keep unemployment low is to allow the RBA to do its job and to keep inflation low. I have never believed natural rate theories. If they were valid why were exceedingly low rates of inflation and unemployment possible in Australia for 20 years after the Second World War? Why are we enjoying record low unemployment and inflation simultaneously now?
The natural rate apologists say that the natural rate is falling due to structural changes in the economy (such as the abolition of pattern wage agreements) so that the economy can exist with a comparatively lower level of unemployment with a given inflation rates. Every time both inflation and unemployment unexpectedly fall they say a structural shift has occurred. This is unhelpful.
These ‘natural rate’ theories have a dangerous impact on policy thinking – this morning’s Age, reverts to true form when it complains that the recent surge in employment will have the harmful effect of requiring an interest rate rise. But why given that there are no prospects of inflation?
Macroeconomists should find better things to do with their time. Fostering growth, allowing the RBA to do its job, allowing labour markets to operate as freely as possible and getting the disguised unemployed among the ranks of the macroeconomics profession to study microeconomics.