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Does low unemployment have to come with a high price?

By Fred Argy - posted Friday, 16 November 2007

Our unemployment rate is at a 33 year low. This achievement is far from unique. It is a global phenomenon and Australia has benefited from the world boom more than most because of the impact on our export prices. That said, it is quite possible that some of the Howard Government policies, such as its tough welfare to work regime, its well targeted immigration policies and perhaps even Workchoices, have contributed to our strong employment performance.

This opinion piece is not about where the credit lies for our low unemployment. Rather I want to ask the question: does low unemployment of the order of 4 per cent or less come at a high price?

This seems to be the view of Howard Government Ministers. We are being told that: (a) the low unemployment outcomes would not have been possible without the removal (through WorkChoices) of long standing regulatory protections for disadvantaged workers; and (b) increased inflation and rising interest rates are an unavoidable outcome of low unemployment.


Ministers are effectively saying that low unemployment comes with a very big sting in the tail - reduced workplace security for vulnerable workers and high and rising interest rates, and that if we want further reductions in unemployment, we must accept more of the same on industrial relations reform and interest rates.

One could question the logical consistency of the government position. If Workchoices was designed to make low unemployment more compatible with low and stable inflation, then our low unemployment should not have produced an acceleration in underlying inflation. Mr. Costello cannot have it both ways.

Logic aside, if one accepts the basic “trade off” argument of Howard Ministers, many Australians (perhaps a majority) might wonder if low unemployment is worth having! They might well prefer having, say, 5 per cent unemployment and more workplace security and lower interest rates.

In truth, however, the Government argument is largely fallacious.

First, it assumes that fiscal policy plays a passive role - both in a contra-cyclical sense (e.g. running a fixed 1 per cent surplus whatever the state of aggregate demand) and in a structural sense (e.g. ignoring the potential supply side effects of specific spending programs).

One could legitimately criticise Costello’s failure to save more of the revenue windfall from the commodities boom in recent years. Measured by the change in the fiscal balance over recent years, the past three Federal Budgets have done very little to dampen aggregate domestic demand, relieve inflationary pressures or improve our external account deficit. Fiscal policy should have done more to take some of the load off monetary policy.


Again, if Costello had done more to overcome skill shortages and infrastructure bottlenecks instead of splashing money on middle class welfare, there would have been rewarding supply side effects.

With an improved fiscal stance, the hike in interest rates of recent months could have been avoided.

As for the claim that low unemployment is only possible because of WorkChoices, it is far too early to read this from the fall in unemployment in the last two years, as low and falling unemployment has been a global phenomenon in that period.

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First published at Club Troppo on 9 November 2007.

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About the Author

Fred Argy, a former high level policy adviser to several Federal governments, has written extensively on the interaction between social and economic issues. His three most recent papers are Equality of Opportunity in Australia (Australia Institute Discussion Paper no. 85, 2006); Employment Policy and Values (Public Policy volume 1, no. 2, 2006); and Distribution Effects of Labour Deregulation (AGENDA, volume 14, no. 2, 2007). He is currently a Visiting Fellow, ANU.

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