So how, after all this time, did the rate of unemployment suddenly drop to the level of full employment? It was perhaps the only benefit from all the trouble we had using lockdowns to restrict the spread of COVID-19.
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Federal and state governments spent hugely to hold the economy together during the lockdowns and so, when they ended and people were let loose in the shops, restaurants and live entertainment venues with all the money they’d be unable to spend, the economy boomed.
Employment grew enormously and unemployment fell, with most of the new jobs being full-time. It helped that, at the time, our borders were still closed, so none of the new jobs went to people who’d come to Australia just to take the job.
All this happened under the Morrison government, with unemployment bottoming out at 3.5 per cent just three months after the May 2022 election. So then-treasurer Josh Frydenberg gets the credit for our return to full employment.
By then, however, the booming economy had caused consumer prices to take off. So the Reserve Bank did what it always does to slow the rate at which prices are inflating: it starts jacking up interest rates to force people with mortgages to cut their spend on other things. As people spend less, businesses don’t raise their prices as much.
The Reserve Bank slowed the rate of price rises by pushing up interest rates to force people with mortgages to cut their spend elsewhere. Credit: Dominic Lorrimer
But here’s the trick. Normally, the Reserve loses little time in pushing interest rates way up. Spending takes a big hit, businesses lay off workers, unemployment shoots up and the rate of price inflation quickly falls back to normal, after which the Reserve soon cuts interest rates back to normal.
Normally, but not this time. Treasurer Jim Chalmers and the Reserve agreed that this time care would be taken to limit the rise in unemployment and thus not stray far from full employment. To this end, the Reserve would raise interest rates slowly and no higher than absolutely necessary.
We can now see this softly, softly approach has worked. As interest rates have risen, employment has continued growing, with the rate of unemployment rising only to about 4 per cent, where it’s stayed for 14 months.
By now, however, the rate of inflation has fallen back to the Reserve’s target range of 2 or 3 per cent, so it’s slowly cutting interest rates back to a more normal level.
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So how did this effort to hang on to full employment affect the election? Had the cost-of-living crisis been accompanied by many people losing their jobs, the pain would have been much greater, and the likelihood of Labor itself being shown the door would have been high.
Instead, almost everyone kept their job, while some were able to move to a full-time job or a second job to help make ends meet.
Our avoidance of recession – unlike other countries, starting with New Zealand – has come at a price, however. Although our smaller and slower increase in interest rates didn’t hurt so acutely, the period of high rates – about three years – kept homebuyers in pain for longer.
But I think it was well worth it. If you think coping with of the cost of living is tough, try doing it on the dole. A well-functioning economy is one that provides jobs for (almost) everyone who wants one. And that’s what our fully employed economy has provided us with for the past three years.
The proportion of all working-age people with a job is 64 per cent, its highest ever. That’s the solid proof we’re fully employed. Women have done best in gaining jobs in recent years. Fifty years ago, only 36 per cent of women were participating in the paid labour force. Today it’s 63 per cent.
It’s strange we could have passed judgment on the performance of the Albanese government this month without most people realising how well the jobs market has done on its watch.
Ross Gittins is the economics editor.
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