The Australian labour market plays a crucial role in the overall economic health of our nation. To monitor this aspect of our economy, policymakers closely monitor the unemployment rate. However, this has become a rising concern in light of recent economic events. As of the most recent data, the unemployment rate currently stands at 3.5% - a significant recovery from the 7.5% rate in July 2020. Although the recovery of the unemployment rate allowed for an improvement and stimulation of economic conditions, it is important to analyse underlying factors and implications of a low unemployment rate in an economy.
Specifically, unemployment and inflation are viewed to have an inverse relationship, which is recognised through the Long Run Phillips Curve. When unemployment is low, it will generally lead to increased competition amongst workers, driving wages up. This itself can fuel cost-push inflation as firms must pass on the increase in labour costs to consumers.
This is a relevant concern given the current economic landscape. As Australia recovers from the pandemic-induced disruptions, there is a delicate balance between curbing inflation and fostering employment growth. To address and achieve balance between these two objectives, the government must endeavour to achieve “full employment”, wherein the employment rate is the NAIRU rate. As defined by the RBA, the NAIRU is the lowest unemployment rate that can be sustained without causing wages growth and inflation to rise. It cannot be observed directly and statistical models and other economic indicators are used to infer how much spare capacity is in the labour market at any point in time. For instance, if wages growth is picking up and inflation is increasing, the unemployment rate is likely below NAIRU.
Accordingly, with little loosening in our drum-tight labour market and high inflation rate of 7%, unemployment must rise to a sustainable level to curb inflationary pressures, avoid higher interest rates and a deep recession in the future. In particular, it is believed that the sustainable level of unemployment (NAIRU) is around 4.5%. It is believed that this can be achieved if unemployment and the economy grows at a below trend pace for a while. This will enable policymakers to bring demand and supply into a better balance and increase the chances of securing sustainable full employment into the future.