The 4% unemployment rate target – achievability vs sustainability

There is a good post at Loose Change on the sustainability of the Opposition’s 4% unemployment rate commitment, which links to my previous post showing that the commitment is feasible, in an arithmetic sense at least. On its sustainability, my feeling is that 4% is getting close to the so-called frictional rate of unemployment. This is the rate of unemployment associated with normal labour market frictions only, and without any unemployment due to a deficiency in demand (cyclical unemployment) or a mis-match between skill requirements in vacant jobs and the skills unemployed workers have (structural unemployment).

The unemployment rate will never be zero because people who lose jobs won’t typically find jobs straight away, and even in a well-functioning economy some businesses will still fail and some people lose jobs. Also, school, TAFE and university leavers won’t always find jobs immediately.

While Queensland’s unemployment rate fell to around 3.5% in 2007, this was associated with a booming pre-GFC economy and a tight labour market that was generating inflationary pressures. So in my view 4% is most likely close to the lowest rate unemployment could reach in Queensland with the economy growing at a sustainable rate. Given that a future downturn or recession could conceivably send the unemployment rate  to around 8-10%, it doesn’t seem possible that the unemployment rate could average 4% over the long-term – so in this sense 4% unemployment, while achievable, isn’t sustainable. (Please note I’m not forecasting a recession anytime soon, just noting that the business cycle will always be with us and the probability we’ll have a recession or downturn sometime in the next ten years remains significant).

To have an unemployment rate averaging around 4% over the long-term we’d probably have to experience periods in which the unemployment rate had a 2 in front of it. While I recall from an old RBA publication that, sometime prior to the economic crisis in the seventies, Australia did have an unemployment rate around 2%, this was at a time when Government effectively acted as an employer of last resort, and even the most unemployable youth could get a job as a porter in the State-owned railway.

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3 Responses to The 4% unemployment rate target – achievability vs sustainability

  1. Pingback: Can Queensland Unemployment Rate Goes Below 4%? | Infoplains

  2. Pingback: Can Queensland Unemployment Rate Go Below 4%? | Infoplains

  3. Pingback: Pollies should be careful with jobs promises | Queensland Economy Watch

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