You can rely on the Reserve Bank to miss or downplay a major factor or two when it strays into what’s actually happening in Australia, as demonstrated on Tuesday by the Deputy Governor in a speech titled Achieving Full Employment.
Having finally achieved full employment for the first time in half a century, the RBA is determined to get back to excess labour.
In short order Michele Bullock said the infamous NAIRU (non-accelerating inflation rate of unemployment) wasn’t what the RBA is really on about in trying to achieve full employment, before finishing up with the clear message that the NAIRU was indeed the elusive beast the bank was hunting as it seeks to drive unemployment up to 4.5 per cent.
In between there was a simplistic rendering of why the female participation rate has risen so markedly and the healthy aspects of a shortage of labour forcing employers to bid for workers were ignored.
This is in keeping with the many years it took for the bank to admit the loss of workers’ bargaining power might have been bad for wages growth and overlooking the role in the housing crisis of governments abrogating their public housing responsibilities.
1960s textbook mindset
The RBA has demonstrated for many years now that it is clueless when it comes to the labour market and wages. It’s a very safe bet that whatever the RBA (ditto Treasury) forecasts for wages will be wrong.
That’s partly the result of a mindset apparently locked in 1960s economics textbooks and oblivious to the ground that is always shifting beneath it.
After initially downplaying the NAIRU and saying nice things about “maintaining full employment” being just as important to the RBA as getting inflation down, Ms Bullock concluded it was the RBA’s ambition to get unemployment back up to 4.5 per cent by late next year and that would be a job well done.
Never mind that the bank has repeatedly stated the current level of wages growth has been in keeping with its inflation target, Ms Bullock stated: “Our assessment is that, for the first time in decades, firms’ demand for labour exceeds the amount of labour that people are willing and able to supply. That is, employment is above what we would consider to be consistent with our inflation target.”
So ignore what has been happening, stick to the old textbook, impoverish people with mortgages until their lack of money so weakens the economy that unemployment rises to make sure there are excess workers to satisfy employers’ demand.
Simple, eh?
More simply, the RBA’s real “blunt instrument” for reducing inflation isn’t the price of money – it is unemployed people, poor people. Moving interest rates is only the handle used to turn the unemployment ratchet.
The alternative story
There is an alternative story that is not entertained. On less-considered pages of the textbooks, when firms can’t obtain the workers they need, they are forced to invest more capital to become more productive.
Yes, that productivity thing which, like the weather, everyone discusses but does nothing about.
Remember that Australian businesses have been dragging the chain on investment as a share of GDP for a decade – and longer if you exclude the resources industry.
And the other thing that happens with a shortage of labour is that the better, more productive firms can afford to bid more for workers, taking them from the less productive firms which then either improve or fold their tent – in both cases helping the economy.
It seems the laws of supply and demand – letting the market set prices –are sacrosanct except when it comes to wages and the price of money, the price of the latter controlled by the central bank to weaken the former.
Inflationary effect
Another aspect of the RBA’s operator’s manual that goes unchallenged is that putting up the price of money is inflationary. That reality is avoided by not including interest rates in the CPI. (“If we don’t measure it, it hasn’t happened.”)
By making money more expensive, the central bank is exerting pressure on people to seek higher wages and providing an excuse for landlords to seek higher rent.
Guess what businesses do when their interest bill rises? They try to put up prices, just as they do when any other cost increases.
Higher oil prices and higher interest rates are quite similar. Both suck money out of consumers’ pockets and exert pressure on business to pass on the extra cost – but only one of them is measured as “inflation”.
Ms Bullock’s speech rightly rejoiced in the rapid growth of employment and fall in unemployment as the massive fiscal and monetary policy stimulus washed over the economy opening up after COVID shutdowns.
Particularly fine has been the reduction in underemployment and long-term unemployment. And the participation rate is at a record high.
“The rise in participation since the onset of the pandemic is mostly attributable to women entering (or re-entering) the labour force in large numbers,” the Deputy Governor said.
“This has been underpinned by strong labour market conditions, more flexibility in working arrangements and a continuation of long-run trends.”
Sheer necessity
Here the RBA misses another important factor: Sheer necessity. Our policy-driven housing crisis, both rent and dwelling prices, is forcing people to “participate” – and so are the RBA’s rate rises. D’oh.
As the Governor advised in tone-deaf language, get another job to handle higher interest rates.
The finer details of ABS household labour force figures throw up some intriguing numbers. Among them, one of the biggest percentage movements in employment/participation rate/unemployment has been for lone parents with a child under 15.
Two years ago, their unemployment rate was 9.5 per cent. In April, it was 5.5 per cent. Their participation rate over the same time has jumped from 67.4 per cent to 72.5 per cent and all the job growth has been in full-time positions.
The biggest single category of people in the workforce household relationship figures is “husband, wife or partner, with children under 15” – 3.937 million of them. Their unemployment rate is down to 2.1 per cent and their participation rate is 86.5 per cent.
The numbers are smaller for husband, wife or partner with dependent students but no children under 15, but the unemployment rate is just 1.7 per cent and the participation rate 88.4 per cent.
That’s a picture of middle Australia that, according to the RBA manual, should have caused a wage explosion by now – but hasn’t.
No problem
The unemployment rate for that biggest household category – basically couples with young children – has been under three per cent for two years without a wages problem emerging.
The RBA is determined to give such households – the most typical mortgage holders – dire pain anyway.
There are other oddities in the details. Ms Bullock touched on one because she was speaking in Newcastle – the unemployment rate there is 3 per cent, compared with Greater Sydney’s 3.8 per cent.
The Newcastle figure only matches the total figure for NSW outside Greater Sydney.
Regional NSW has had a lower unemployment rate than the Big Smoke for most of the past year, markedly so in the first four months of this year.
That’s catching up with a Victorian trend – regional Victoria has had lower unemployment than Greater Melbourne for some years. In April, 3.4 per cent versus Melbourne’s 4.2 per cent.
But forget such subtleties, the RBA wants its NAIRU, even though it hasn’t known what that might be for years.
