More good economic news. Export volumes seem finally to be rising after several inexplicable years of stagnation.

The labour market continues its recent march. The Roy Morgan Unemployment Estimate, known for providing a more realistic picture of “real unemployment” moved sharply lower in the second quarter of 2007. Compared with the first quarter, unemployment is now 1.6% lower at 5.6%.

Gary Morgan highlights the driving factors behind the jobs boom:

With the latest Roy Morgan Unemployment estimate falling sharply from 7.2% to 5.6% it is obvious that the new IR laws, combined with the mining boom, are having a significant effect on bringing many more people into the workforce – the ‘hidden and underemployed’ are getting jobs because of greater flexibility in the work place, good for them and good for Australia!

The Fair Pay Commission handed down its decision today:

The Australian Fair Pay Commission has announced its 2007 Minimum Wage Decision and has increased the standard Federal Minimum Wage and all Pay Scales up to $700 a week by $10.26 per week. The Commission has also increased all Pay Scales paying $700 a week and above by $5.30 per week.

There will be no fresh inflationary impetus from this, and of course this will help build employment at the low end of the market.

Global inflation is on the rise, but the rising value of the Aussie dollar is providing an offsetting influence. The RBA announced its “no rate change” decision yesterday with no further explanation but the smarties (such as Terry McCrann in today’s Herald-Sun) are saying the rising currency is a substitute for rate hikes.

So far as Henry is concerned this is the repetition of an old error, covered some time ago in our regular column of advice for the board of the RBA.

We repeat the point for convenience. Is the rising Aussie dollar a reason for holding back on interest rate hikes? In the 1980s RBA governor RA Johnston argued that a rising exchange rate was effectively a “tightening of monetary conditions”.

This led the Reserve to go easy on monetary policy at some vital times, and this in turn led to an overheated boom, rising inflation, eventual large interest rate hikes and then the “recession we had to have”.

McCrann argues that a rising exchange rate “acts like rate hikes already of at least 0.5 per cent; and by later in the year 1 per cent or more.”

If so, one would expect a strong negative correlation between CPI inflation and the value of the Aussie dollar. However, as the graph at the bottom of this article shows, there is no such correlation.

Is there not some old saw about learning (or not) from history? 

Read more at Henry Thornton.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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