Tuesday, 16 April 2024
    How to achieve full employment
    Australian Economy

    How to achieve full employment

    This is an edited extract from Ross Garnaut’s address to the jobs summit on Thursday night. Read other articles in The Conversation’s series about the summit here.

    I grew up in the 1940s, in a world of full employment. Workers could leave jobs that didn’t suit them and quickly find others – often moving from lower to higher productivity activities.

    Employers put large efforts into training and retaining workers. Labour income was secure and could support a loan to buy a house. Labour was scarce and valuable and not to be wasted on unproductive tasks.

    Businesses that could not afford rising wages closed and released their workers into more productive employment. Steadily rising real wages encouraged economisation on labour, which lifted productivity.

    The 1945 full-employment white paper discussed risks of inflation, yet the average unemployment rate went lower – to below 2% for two decades – without the high or accelerating inflation the authors had in mind.

    Employment keeps people employable

    As observed recently in The Conversation, low unemployment creates opportunities for people who long unemployment has made unattractive. Employment makes them employable.

    Full employment encourages women who had spent long periods out of the labour force, the infirm and old, the poorly educated, and those with little established engagement with the wage economy.

    It is hard work for employers. Many employers prefer unemployment, with easy recruitment at lower wages. Yet full employment has advantages for employers.

    Full employment brings larger and more stable demand for the products of businesses selling into Australia. And for employers who identify as Australians, it brings enjoyment of a more cohesive and successful society.

    We can take unemployment lower

    How low can unemployment go without accelerating inflation? During the decade leading up to COVID, our authorities acted as if the lower limit was 5% or more.

    In my book Reset: Restoring Australia After the Pandemic Recession, I said it was possible Australian unemployment could fall to 3.5% without generating accelerating inflation – the pre-pandemic rate in the United States.

    The absolute lowest unemployment can fall without accelerating inflation might be lower, or higher. There is no need to guess. We will know when it has fallen to the point that labour market pressures cause inflation to accelerate.

    Why aren’t real wages rising? There is no conundrum. It is because we do not yet have full employment. The Reserve Bank abandoned its pursuit of full employment before we knew how low the unemployment rate could go without becoming the source of accelerating inflation.

    A wage-price spiral is unlikely

    Will we see larger nominal wage increases if global energy and other prices continue to rise strongly? Probably. Would that tell us we have achieved full employment? Probably not. If wages rise more rapidly, but more slowly than average prices, they are not a source of accelerating inflation.

    The spectre of a virulent wage-price spiral comes from our memories, and not current conditions.

    If immigration increases whenever labour becomes scarce, real wages will not rise however much productivity increases.

    Yet immigration can help. It is much more likely to raise, rather than lower, average real wages the more if it is focused on people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian production, and which cannot be provided by training Australians.

    Immigration can hurt, and help

    Which immigrants are scarce and valuable? In Reset, I suggested a test: admitting skilled migrants only when they earn wages higher than the Australian average.

    Ignoring the links between migration and wages can have unwelcome consequences.

    Around the time our prime minister was in Fiji talking about recruiting nurses, Western Australia’s premier was trying to recruit nurses in Ireland.

    The premier sought a meeting with the Irish minister for health – unsuccessfully, because the minister was in Perth recruiting nurses.

    Low wages made Australia a promising recruiting ground. Australian nurses would be great for Ireland. But replacing Australians with Fijian nurses may not be best for Australia or Fiji.

    The mix of employment matters

    It matters how we get the jobs that take us to full employment. Increased employment comes from both domestic and trade-exposed industries.

    Employment in domestic industries is expanded by higher government expenditure, lower taxes and lower interest rates. Employment in exporting or import-competing industries is driven by competitiveness — by currency exchange rates, and Australian productivity and wages relative to overseas.

    Too much domestic demand and too little export growth can lead to full employment with unsustainable levels of debt. Strong growth in export industries depends on access to international markets for goods and services, as well as on competitiveness.

    Australia’s advantages in a zero-carbon world

    Here we face barriers from the breakdown of the global trading system and our relationship with our biggest trading partner, China, and the coming climate change-induced decline of coal and gas.

    Fortunately, we have advantages:

    the best combinations of solar and wind resources in the developed world, which with good policy and management can give us the lowest energy costs in the post-carbon world

    an abundance of the critical minerals required globally to build the machines and infrastructure of the zero-carbon world

    the largest endowments per person of land suitable and available for sustainable production of biomass as a zero-carbon industrial input and for sequestering carbon in plants and soils

    human skills and infrastructure from the established mining, minerals processing, forestry and agricultural industries, which have a high value in zero emissions industries and processes.

    Australian industry gets little competitive advantage from Australia being richly endowed with gas and coal. With the exception of Western Australian gas, these resources are made available to domestic industry at close to international prices.

    Our low-cost renewable energy is different. Transport costs mean Australia’s renewable electricity and green hydrogen will be at least twice as expensive in the countries that import them as in Australia. It will make sense to use Australian electricity and hydrogen to process resources here.

    Productivity growth needn’t always come from improvements in individual industries and firms. It can come from stronger specialisation in activities in which Australia has a natural advantage: putting a higher proportion of our labour and capital into activities where we have exceptional strengths.

    A long period of steady expansion of the zero-carbon industries will see costs falling and Australia’s comparative advantage strengthening. The restructuring of the economy to focus more strongly on these can be the source of sustained productivity, wages and employment growth.


    Ross Garnaut is Professorial Research Fellow in Economics, The University of Melbourne


    How to get to full employment: Ross Garnaut’s address to the jobs summit (The Conversation)


    Ross Garnaut ACTU presentation (YouTube)