Tolerate unemployment, but blame the unemployed

The contradictions of NAIRU policy-making in Australia
Macroeconomics Unemployment Wages growth Inflation Australia

There is a contradiction between Australian macroeconomic policy—which deliberately maintains unemployment at 5% or higher—and a culture that blames unemployed people for their own unemployment and hardships.

This research from the Centre for Future Work shows that there is no statistical evidence for the long-held assumption that if unemployment falls below its so-called "natural" or non-accelerating inflation rate (the NAIRU)—currently thought to be around 5% unemployment—that inflation and wages will grow uncontrollably. The report concludes that Australia’s controversial NAIRU concept and it’s use in economic policy should be abandoned.

Key points:

  • Australian macroeconomic policy maintains elevated unemployment in order to restrain wage growth and inflation, this is known as the non-accelerating inflation rate of unemployment (NAIRU).
  • There are around 3 million Australians who would like to work, or more work, but can’t: that’s more than four times higher than the official unemployment estimate.
  • The economic benefits of reducing unemployment are enormous. Every one-percentage point reduction in unemployment results in 134,000 new jobs, $10 billion in additional output, and billions of dollars in revenue for governments.
  • Monetary and fiscal policy should aim to steadily reduce unemployment to as low as possible, rather than targeting a certain minimum unemployment rate.
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