Statement 4: Maintaining Low Unemployment in Australia
Statement 1 outlines the need to take early action to increase productivity and labour force participation in order to boost Australia’s medium-term growth potential and address the ageing of the population already underway. The rise in unemployment in Australia, commencing in the 1970s, meant that the contribution of labour force participation to real growth in GDP per capita fell over the past 40 years. Over recent years, Australia’s unemployment has been on a steady downward trend. Now below 6 per cent, it is around 23 year lows and is expected to remain low over the forecast period. Unemployment sustained around these levels marks an important breakthrough against the poor unemployment outcomes recorded from the mid-1970s. Policy reforms have helped to create the circumstances where unemployment has fallen steadily and sustainably. The labour market is now more flexible, and the economy is less prone to the boom–bust cycles of the past as a result of product market reforms and steadier macroeconomic policy settings. Further reform is announced in the 2004-05 Budget, which puts in place a package of major initiatives that address directly the objective of increasing economic growth by increasing participation and productivity. The package will assist with reducing welfare traps for those receiving family tax benefits and deliver tax cuts that will increase the reward from working. The Budget also contains initiatives that increase investment in education, health, innovation and infrastructure that will assist participation and productivity. These initiatives, together with the current solid macroeconomic environment, will enable Australia to achieve lower unemployment and higher labour force participation, provide a higher level of social wellbeing and help deal effectively and sustainably with the ageing of the population. |
Introduction
The unemployment rate is one of the most widely monitored partial indicators of a country’s economic performance and the wellbeing of its society. Australia’s unemployment rate has been sustained at around 23 year lows since late 2003, below 6 per cent, and there is scope for it to fall further over the medium term with appropriate policy settings.
Economic and social outcomes are enhanced when low unemployment is combined with high productivity in an environment where people can make sound decisions about participation in the labour force. This is evident in a number of ways. Average household incomes are likely to be higher and more stable than otherwise; income is likely to be more evenly distributed across the community, given that unemployment or non-participation in the labour force is a key contributor to relative poverty in the community; employed individuals and households tend to be more actively engaged in society and social activities; and a steady stream of income from regular employment provides individuals and households with greater opportunity to save, borrow and invest for their future and to contribute to the education of their children.
Unemployment sustained at around or below 6 per cent marks a major break from the past. Unemployment has averaged around 7½ per cent over the period since the late 1970s, but had only dipped to around 6 per cent briefly on two occasions prior to 2002. In the late 1980s, the decline in unemployment to around 6 per cent was accompanied by concerns about excessive strength in demand, a widening current account deficit and the prospect of rising inflationary pressure. A subsequent sharp slowdown in the economy saw unemployment rebounding to nearly 11 per cent over the next few years. In 2000, the decline to around 6 per cent saw only a modest push up in wage and price pressures, with unemployment rising to around 7 per cent for a short time as the economy slowed in line with weakening world growth and high oil prices, before resuming a downward trend.
The circumstances surrounding Australia’s current economic performance are quite different to those earlier episodes and point to unemployment rates of 6 per cent or less now being much more sustainable. Economic and employment growth has been steadier, avoiding a build-up of inflationary pressure, as evidenced from a wide range of indicators such as wage costs, participation rates, hours worked, and a more even regional distribution of employment growth and falls in unemployment.
The improving performance of the labour market reflects a payoff from the wide range of macroeconomic and microeconomic reforms implemented over the last decade. Consistent macro policy settings, in a medium-term framework, since the mid-1990s are contributing to steadier economic and employment growth. Coupled with the increased flexibility of the economy flowing from the long-term programme of microeconomic reform, this is making the economy less prone to the booms and busts of the past, which made it difficult to achieve a steady and sustainable approach to low unemployment levels. Flexible workplace relations and active labour market programmes, along with increased participation in education and training, have contributed to a more flexible, adaptable and responsive labour market. Better incentives to participate in the labour force and for the unemployed to actively seek employment have come through reductions in income tax rates and reforms to income support arrangements.
Australia’s current unemployment rate is not only low relative to the experience of recent decades, unemployment in Australia has been below the OECD average since late 2001, the first time it has been lower than the OECD average for a sustained period since the late 1980s. But there are several developed economies with unemployment rates below Australia’s, for example New Zealand and Ireland. Structural unemployment rates in the United States also seem likely to be lower than in Australia. This suggests there is scope to sustainably lower unemployment further in Australia over the medium term, with ongoing steady growth and further policy reform.
The first section of the Statement reviews the performance of the labour market in recent decades with a focus on unemployment. An emphasis in this section is placed on a comparison of the circumstances surrounding the decline in unemployment to around 6 per cent in the late 1980s, 2000 and the most recent period since 2002. The second section of the Statement surveys the changes in policy settings which have contributed to the improved labour market performance in recent years and considers where there may be scope for policy settings to be tuned to further reduce unemployment.
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