Monday, February 20, 2012

4% unemployment a sustainable target?

The LNP have previously announced a 4% target for the Queensland unemployment rate within 6 years. Campbell Newman did seem to equivocate on this subsequently, however has reiterated the 'promise' again today as the campaign begins.

The number is certainly technically feasible given that the associated employment target of 420,000 jobs is really just consistent with historcal averages for such periods and we are now starting from a lower base. This is a chart comparison from OESR of the Qld v Australia unemployment for the last 30 years:

Yes, we have been below 4% before quite recently and we got there from a far higher starting point. However, periods where Qld has been below the state average have mostly been an aberration. The most recent was a period where resources boom Mk1 combined with cheap money and bouyant property construction.

The particular confluence of that period is unlikely to return anytime soon. However the question I have is whether it was sustainable anyway or would be again? This chart from the RBA of inflation measures shows the large inflation spike that was associated with that period:

Had it not been for the GFC it is reasonable to presume that the RBA would have hiked rates higher to induce a more conventional slowdown. Is memory really so short that the issues of 2007 are already forgotten? The LNP have also committed to lowering the cost of living which may be a contradiction?

There is at some point a trade-off between employment and inflation referred to as NAIRU. Current estimates are that this is around 5% unemployment for Australia which seems consistent with recent experience. It was interesting to see the evidence of senior Treasury official  Dr David Gruen to Senate estimates this week.
''In a well-functioning economy like ours, with unemployment close to its lowest sustainable rate, it is not the case that individual industries are creating jobs, they are simply re-distributing them … there really isn't a multiplier.''

The real question shouldn't be whether 4% unemployment is achievable, but under what conditions it would be sustainable? That is the question that should create an agenda for Guvmint policy. Certainly it can't be achieved in Queensland unless the unemployment rate can be sustained significantly below a national average without inflationary outcomes.

Update: More learned commentary than my own at Queensland Economy Watch.

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