Crikey peered into its economic crystal ball and saw an elephant in the RBA boardroom with the word “unemployment” painted on its side.
In fighting inflation, how high will the unemployment rate climb? How politically uncomfortable will it become for the government? And although Treasurer Wayne Swan thinks the non-accelerating inflation rate of unemployment (or NAIRU) is economic claptrap, is it a theory his advisors should familiarise themselves with?
Crikey asked a group of leading economists where they expect the unemployment rate to settle over the next few years, and whether it will surpass inflation as the number one issue in the national economic debate. Just to give the discussion some sort of human reference point, unemployment is running at 4.3% at the moment. That’s 473,800 people out of a job.
Saul Eslake, ANZ Chief Economist. It depends on the extent to which the RBA is able to finely calibrate its policy response to slow domestic demand, rather than to stop it. And that’s not an easy task, not least because you don’t actually know when you’ve reached the level of interest rates that will crunch the economy until you reach it. There’s no way of telling in advance what that level is. If the RBA is to achieve the slowing in domestic demand that they have forecast, then it should be possible to achieve that without the unemployment rate rising significantly above 5% — I’m predicting somewhere between 4.75% and 5.5%. If the RBA is wrong and the economy does slow to somewhere more than 3%, then it’s by no means impossible that unemployment rate could move above 6%, especially if they get it wrong, or the other factors, like the US credit crunch, slow the economy more than the RBA expects.
Josh Williamson, Senior Strategist TD Securities. If the RBA sees unemployment go from the January level of 4.1% to around 4.5%, that’s not a failure of government economic policy or a failure of the economy. It’s still incredibly low by historical standards. The other thing the unemployment rate will be affected by is the participation rate. If you start to get a stronger response from the labour supply and migration stays strong, you could actually see the participation rate rise. What that will do is push the unemployment rate higher because you’ve got more members of the labour force looking for work. Even if the unemployment did rise to around 4.5%, I’d argue that we shouldn’t be overly concerned because it’s still below the average unemployment rate over the generation.
Professor John Quiggin, University of Queensland. The RBA is assuming the labour market will stay tight. If we see a significant rise in unemployment then that will turn things around in terms of the balance of concerns. Looking at the domestic situation, the pressure on labour markets is still tightening. The potentially threatening situation is if a downturn arises from a crunch in credit markets while inflation remains high. One theory I don’t subscribe to is a moderate increase in unemployment bringing inflation back under control. I think either the tightening we’re seeing will be just enough keep inflation somewhat in check, or things will slip out of control quite quickly. But the notion that unemployment will rise above 5% seems unlikely to me. I think we’ll see a backing off from the tightening of monetary policy before we see that.
Alan Oster, NAB Chief Economist. We have forecast unemployment will stay 4%-4.25% until the end of the year, and then start to track up to around 5% by the end of 2009, and that is basically the outcome of what the RBA is trying to do. It’s a natural consequence of slowing domestic demand. If you slow domestic demand sufficiently you will by definition increase unemployment. It’s like saying the sun comes up in the morning. That’s reality. While it’s very well to slow the economy to fix inflation in the short term, in 12 months’ time they are going to have to reverse that. So we have rate cuts starting somewhere in the middle of 2009 and we’re projecting the best part of 100 points. We think it has to go back to 6%. Unemployment is a 2009 issue, and clearly an issue.
Bill Evans, Westpac Chief Economist. My feeling is that employment is going to stay fairly resistant. We still see our customers assessing the major constraint on their business as the shortage of labour, particularly skilled labour. If we are to see a slow down in sales and spending associated with rate hikes and credit difficulties, I expect that we’ll see a large degree of labour hording. So, I wouldn’t be looking for any significant rise in unemployment in the next twelve months. In our forecasts out to 2009, we don’t have unemployment rising to as high as 5%. If we’re right in forecasting unemployment reaching around 4.5%, it won’t become a major issue. It will be good thing in the sense that labour shortages will no longer be pressuring inflation. But, no, I don’t think unemployment will become a headline issue over the next 12 months. Inflation will hold centre stage for the next year or so.