Full Employment in 21st Century Australia: a lode star policy in an age of uncertainty

December 15, 2022

Work and Workers

Per Capita welcomes the opportunity to make a submission to the Employment White Paper Consultation. In conjunction with the 2022 Jobs Summit and Prime Minister Albanese’s public commitment to full employment, the White Paper is a timely opportunity to address some of the pressing systemic economic and social issues facing Australia.

Our central argument is that the achievement of social objectives such as full employment, the transition towards net zero carbon emissions and reducing income and wealth inequality is constrained by the current New Consensus Macroeconomics derived policy frameworks, which prevent the effective coordination of monetary and fiscal policy.

Per Capita believes that the Federal Government should return to a genuine full employment framework, utilising coordinated fiscal and monetary policy for specific social objectives as was the case following World War II.

The 1945 White Paper on Full Employment was the founding document of Australia’s post-war prosperity, establishing a progressive and effective social contract between the government, businesses and workers. Full employment policies were seen as a central pillar of a new ambitious and optimistic social compact, aimed not only at providing more equitable policies in housing, health and unemployment insurance, but also at better utilising the potential national workforce for greater productivity and overall economic output.

However, for the past quarter century the definition of “full employment” used by the Australian Government has been determined by the Non-Accelerating Inflation Rate of Unemployment (NAIRU). This policy framework requires a portion of potential workers (around one in twenty) to remain unemployed to minimise the risk of wage-induced inflation: were the unemployment rate to go any lower, this theory argues, inflation would become uncontainable and could wipe out many of the economic gains from having greater economic participation.

This means that for decades Australian monetary and fiscal policy have structurally locked out of the labour market a significant proportion of the workforce, at the same time as unemployment benefits have declined in value and increased in punitive conditionalities. This rate of unemployment continued even when inflation was below the target rate between 2014 and the start of the pandemic in 2020.

As such, the NAIRU framework is inconsistent with a full employment objective.

Recent history has shown the NAIRU theory to have failed on its own terms. Rather than a smooth and stable relationship between unemployment and interest rates, the period prior to the pandemic was marked by many of the indicators of a Keynesian liquidity trap: central bank lending rates reached 0.75 per cent in 2019, but unemployment and underemployment remained stubbornly high. Meanwhile, “capital shallowing” indicated that businesses were unwilling to make investments, even while profits remained high and borrowing was at historically cheap rates.

The pre-pandemic “dog days”, as coined by Ross Garnaut, and the current low unemployment-low wage growth phenomena  indicate that the relationship between inflation, interest rates, wage growth and unemployment do not operate mechanistically, but are being determined to a greater or lesser extent by economic conditions and fiscal policy (non)responses.

Today’s inflation, which has a large supply-side component brought about by the Russian invasion of Ukraine and supply chain issues, has challenged the belief that excessive wage demands are the core inflationary battle for the RBA to fight, and led to questions over whether conventional monetary policy are capable of addressing such inflationary causes.

As the Federal Government reinterprets the 1945 White Paper on Full Employment for the 2020s, it is critical that the growth in uncertainty in our economy and society are effectively addressed. These include:

  • Uncertainty in global supply chains;
  • International conflict;
  • Accelerating climate change;
  • Rapid change in technologies and jobs; and
  • A decline of public faith in the democratic governance to provide citizens with a decent future.

A renewed commitment to full employment, with an amended relationship between fiscal and monetary policy, would have the potential to limit uncertainty and increase socially beneficial types of employment. It could provide a lode star for coordinated policy changes, reshaping employment services, facilitating greater investment in the nation’s transition to net zero and improving labour market outcomes. Full employment policies are inherently aspirational, providing a vision for the many Australians experiencing combinations of insecure work, precarious housing, financial instability, the existential dread of climate change and fear of being replaced in the labour force by machines and artificial intelligence (AI).