Unemployment not the only fix for inflation

Earlier this year, incoming RBA governor Michele Bullock used a speech to predict that the RBA expected unemployment to rise to 4.5 per cent, in order for inflation – currently at six per cent – to return to the central bank’s target of two to three per cent.

The economic argument being that if the current rate of 3.5 per cent persists, inflation expectations “will rise”, she said at the time, “which will make it that much harder for the monetary authorities to bring inflation back down”.

A rise to 4.5 per cent would be higher than the “full employment” rate of 4.25 per cent.

The RBA’s prediction that upwards of 120,000 jobs would be lost in the year ahead to curb inflation stands in stark contrast to the $20 billion surplus the government is expected to have finished the financial year with, at least 40 per cent of which is attributable to a strong labour market.

While some economists fear that a sustained low unemployment rate will put pressure on wages and create a spiral, Dr Chalmers said the past decade had shown that the unemployment rate and wages outcomes had “been largely decoupled”.

“There have been times in the last decade where the unemployment rate has been quite low, and times where it’s been lower than what we have understood to be full employment – or the (non-accelerating inflation rate) definition of full employment – and we still haven’t for most of the last 10 years had decent wages growth,” he told Sky New.

“We shouldn’t just assume that the old mechanical connection between low unemployment and wages growth feeding employment … that hasn’t really been the case for all of the last 10 years, so we need to be careful about that.”

In coming months, Dr Chalmers will release an employment white paper, with the first priority to be engaging with full employment

He said beyond employment, there were other significant determinants of inflation at play.

“We’ve had a challenge for much of the year … that obviously hasn’t been driven by wages growth or by the unemployment rate being low, that the Albanese government has actually overseen the creation of more jobs in the first year than any new government on record,” he said.

“But what’s been driving our inflation challenge hasn’t been in that – it’s been the supply chain issues coming out of Ukraine, and some of the issues closer to home post pandemic.”

He said that the services economy was also putting pressure on inflation, particularly rent, which is why the government had invested into building more supply to ease pressure.

Originally published as Jim Chalmers says employment rate and wages outcomes ‘decoupled’