Monday, November 10, 2003

We'll all be NAIRUned, said Hanrahan

Treasurer Peter Costello’s statement yesterday that nearly every Australian who wants a job can get one, and so "full employment" is in sight, produces two kinds of response in me.

One is mocking incredulity. Yeah, the national unemployment rate may have recently fallen to its equal-lowest rate in 22 years (although I note that the rate actually rose in my home state of Victoria). Anyway, whatever the stats are, the reality on the ground is that there are still multiple qualified (often over- so) applicants for every vacancy. As I wrote here in September, a baggage-handler job I went for had 12 applicants for every vacancy. That is not a multiple of applicants “on paper”; that is the number of people who fronted up in person, to an outer-suburban location unreachable by public transport, during weekday daytime, and with all applicants having had a maximum of 24 hours notice of the interview. And no, it wasn’t a reality TV kind of thing – fabulous perks and all that – the job’s wages were just above the absolute minimum wage floor, at $13 per hour (permanent equivalent), and its hours were casual-only, harsh-starting and few. There was one “Big Brother” connection, admittedly – one of that show’s alumnus was among the queue of desperate applicants.

My other response is to do with Treasurer Costello’s implicit smirking comfort with an unemployment rate (forecast) of 5%, with any lower rate being highly likely to “lead to damaging wage rises and inflation”. This is the dreaded NAIRU, or more accurately, NIARU ("non-inflation-accelerating rate of unemployment”), which The Economist charmingly defines as the Natural Rate of Unemployment.

To be fair (to it, at least) The Economist does immediately alert its readers to the many controversies over the NAIRU; Treasurer Costello, in contrast, has no such qualms.

Personally, I can’t see how an unemployment rate that has, say, only an average of eight, instead of 12, applicants for every vacancy might lead to an inflationary spiral. The ordinary workers of Australia (and elsewhere) would appear to be well-cowed by decades of job insecurity. The Economist indeed admits this in another fashion, when it suggests that the NAIRU, or “natural” unemployment rate has gone down in recent decades because of job-hogging by baby boomers:

Older people have lower unemployment rates than younger ones. In the 1970s, when large numbers of young people and women entered the workforce, the NAIRU rose. In the 1990s, as the workforce has aged, it has fallen.

In other words, only baby boomers (and their slightly more demographically spread partners-in-greed, senior executives and politicians) have, and have had, the leverage to get inflation-threatening wage rises. For the rest, the NAIRU serves as a mythological beast, aka economic anxiety, a creature who is a bogeyman in most grown-up’s subconscious.

For the unemployed, this bogeyman is one step more real – the hallucination of being an unnatural part of a “natural” rate; of being forced to play in “a cruel game of musical chairs”.


I accept the concept of the NAIRU in some form; that labour shortages can exist, so causing inflation. Whatever such a “natural” rate may be, I’d suggest that it certainly would NOT be above 2% (which was thought to be a concerning level of unemployment 60 years ago). A better test, in any case, is probably the ratio of applicants to job vacancies. Even allowing for the residual truly “unemployable”, I can’t see why this ratio should ever have to be above 2:1 for the job market to be in stable equilibrium.

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