Transcript of Question & Answer Session Watching the Invisibles

Okay. Thank you, Luci. I'm Roger Wilkins, Deputy Director of the Melbourne Institute and I'd like to thank Luci for a very stimulating discussion, and for demystifying just what these invisibles are and, more importantly how we can possibly still watch them even though they are invisible. So we have some time for some questions from the audience.

Thank you, Luci, that was very informative. I see that NAIRU is basically estimated on expectations and employment rates are obviously an actual. I'm concerned about the level of inequality that's growing within the economy. Obviously since the trickle-down effect we've discovered hasn't worked and the inequality has grown. As a result of that, are we seeing that NAIRU is falling because people's expectations are falling because the rate of inequality is growing and henceforth, they're willing to accept a job at any price as opposed to a job they really want?

Thanks for the question. It's an important issue and the distributional effects of any policy, whether a monetary policy or any other policy, are important, and important considerations for policy makers to take into account. That said, the level of inequality is in some sense a choice variable because if you look at some Gini coefficients or any other distributional metric, there is no relationship between the pre-tax and transfer Gini coefficients across countries and the post-tax. So while it is possible that, as I mentioned in the talk, concerns about job security, could be part of the story.

One of the things that I find quite extraordinary, and this is one of those little known facts, actually job tenure / job turnover / job-to-job has actually come down. There are fewer people losing their jobs involuntarily than at any time in recent decades. People stay in their jobs for longer. Now that might be because they sort of falsely, they have a false belief that their jobs are at risk, but the actual evidence around job turnover says something different. And again, this is where, coming down to what's observable versus what's an abstract concept.

The level of inequality in Australia has not increased. There's a really good assessment of the evidence by the Productivity Commission and it's been a while since I read it so I'm not going to be able to cite the exact conclusions, but I think again it's important to be cautious about the sort of assertion that inequality has exploded in this country because a lot of that is really a story about what the Tax Transfer System are doing.

Hello Luci, two quick questions, in relation probably to data. How do you factor in under-employment and secondly, you talked about improvements over time for something like education. How is that factored in? Thank you.

Thank you. Well, this is where I fess up that there has been a clear demarcation about who is going to talk about what. The Governor is giving a speech about spare capacity in the labour market next week. So I'm talking about the NAIRU and he gets to talk about under-employment and I'm not going to steal his thunder. So, if I can, we do think about it, and more detail will be revealed next week in the Governor's speech.

In terms of the education level, I mean, I think there is a little bit of, there was a really good Bulletin article we did not so long ago, where we talked about the youth labour market and there is this question about whether people are kind of overqualified for the jobs they're doing. There may be some evidence of that, but you know, certainly education levels have increased a lot, in a trend sense, over many decades. But where I think you'd see that is more in the productivity statistics, rather than in the NAIRU itself. It's worth thinking about, but I'm not 100 per cent sure what the causal mechanism would be from the increase in educational attainment versus … If anything, I think that would make people better matches.

So, maybe it would reduce the NAIRU in the sense that, as people's average educational attainment increases, that means that more people have better job matches for the jobs of today. But, more research would definitely be needed about that.

So you're not prepared to speculate on whether rising part-time employment in the economy, which creates greater scope for, I guess, under-employment, might be a factor in lowering the NAIRU?

Again, I don't want to steal the Governor's thunder, but the reality is: yes, Australia has a very high rate of part-time employment. A lot of those are students. We have a very high rate of employment contiguous with full-time study. Four out of five people working part-time are satisfied with their hours; these numbers are in the Labour Force Survey so we actually do have a fair bit of information about that. So, the rate of underemployment is basically directly proportional to the share of part-time employment. It hasn't increased that much as a share of part-time employment. And four out of five people who are part-time, working part-time, do so because that's what they want to do because they have caring responsibilities, because they're combining it with full-time study, or some other commitment.

So, I think it's really important to get away from this idea that part-time jobs are bad jobs. We've got this real mentality that the only worthwhile jobs are full-time. I mean, there's also a view that part-time employment is growing massively, and there's no full-time jobs. Well, actually, over the last year, almost all of the employment growth, more than 2 per cent of employment growth, almost all of that was full-time employment. So beware of fake news.

Luci, thanks for that. A question that I've wondered about, in thinking about the NAIRU in the last couple of decades, and so I'll ask if you think about it too and that's the effect of changing degrees of integration of the domestic and international labour market. During the resources boom, we saw a very large increase of immigration into categories of labour that were subject to very strong demand, especially the mining sector, but not only the mining sector.

Now, our measures of unemployment are based on measures of domestic demand and supply of labour but part of the potential labour force is an international one. Didn't used to be; there was a very big structural change in Australia, change in immigration policy, over the past couple of decades, making it much easier for temporary employment demand-related immigration. So, I've wondered about whether this structural change in the labour market related to immigration is part of the story of a changed relationship between price pressures in the labour market and measured levels of unemployment.

Well, once someone's a resident, they'll still be counted as unemployed if they don't have a job and they're actively looking for one, regardless of whether they're a permanent resident or not. You're right that the increased fungibility of particular groups of workers across borders has made a big difference, and that, in terms of the ability to absorb capacity from elsewhere, that is true. We do think that's changed the dynamics of the labour market. But I think the way that I would frame it is that it's not just about migration; it's about, more generally, about the fact that the labour market is now more flexible. So there's a lot of work we've done about how firms are now using the hours margin rather than just sacking people when their need to vary …, when their labour demand varies. They're using more flexibility.

And, you know, talking about the mining boom, it wasn't just about people coming from overseas. It was also the fact that we now do fly in/fly out. There were all these really creative ways to meet that demand for labour, that very strong demand for labour, which everybody knew wasn't going to be forever, in ways that didn't then result in ghost towns with people who were stuck there and didn't have jobs. So, I would say it's part and parcel of the increased flexibility in the labour market more generally that we seem to be seeing in Australia. And yes, that general increased flexibility does seem to be this driver of why Australia now can have lower unemployment sustainably.

How concerned should we be about currently a zero-inflation rate?

About a zero-inflation rate? Well, it's positive. I mean, it's one and a bit now. I mean, you know, depending on the measure you choose. So we're not that far below two. We are below two, and that is both a reason to try to meet our goals, but also one of the pieces of evidence that is entering into our assessment that the NAIRU has fallen. Zero-inflation is not something that we're currently seeing. On average the CPI is rising.

Thank you. I'm no economist, but my understanding is that a society can have as low unemployment as it wants, as long as it's willing to put up with the consequences. As evidence, you only have to travel to countries where there is no safety net, for example, welfare safety net. So, it's a matter of what are you willing to put up with? What are the consequences you're willing to put up with? Your comments on that, please.

I completely agree. I mean, the NAIRU is a concept we use to say, that's the rate of unemployment we can have without inflation getting out of hand. So you could go lower, as long as you were happy with, you know, galloping inflation. And, as a society, I mean, our enabling legislation wouldn't have the text it has. You know, we wouldn't have the statement on the conduct of monetary policy that we do if society had not, as a principle, said: ‘look, really high and variable inflation is not good for us – it actually impedes our ability to grow, it impedes our living standards – and so one of the things we want to achieve is, you know, low stable inflation’. So you're absolutely right. You could go lower, as Friedman pointed out, as long as you were willing to tolerate, among other things, ever higher inflation. Or indeed some of the things you would need to get there, like perhaps changing the safety net.

Yeah, well, presumably, that underpins a lot of the differences between Europe and the US in their …

Well, I think that's the total Euro area number. Let's go back to that graph. Yeah, that's the Euro area number. But if you look at Germany, I mean, Germany's got an unemployment rate of three point something at the moment – don't quote me on the one on the decimal place, because you know, month to month, I don't remember – but if the big figure is starting with a three, in both the US and Germany, it's, this idea that Europe's … and similarly, it's also about 3.7 in the Netherlands. So there's actually a real variation. And in fact, even in Ireland, which had this enormous increase in unemployment during the crisis and it got up to sort of 15 or 20 percent; it's now down to five point something, I think. Don't quote me on that one, I am now going from memory.

But yeah, actually some, some countries in Europe have incredibly low unemployment and in every country, you're actually seeing a trend down, even Italy and France, where unemployment is high, it is coming off a bit. There's only so many panels you can show in the graph. So I didn't show all the individual Euro-area countries; that would have been a little mosaic. But some of the big countries in Europe actually have really low unemployment rates at the moment. I think that would have been a surprise to people 10 years ago.

Thank you. Thank you, Luci, for your lucid comments and wonderful results on the Australian graph. Well done. Coming from students and friends of Milton Friedman's, he would always say that monetary policy is very powerful. But also, as you just said, delayed, and he would often use the word blunt in its effects and not so precise, where we couldn't manage it that way.

Also, things come along, like current world conditions, that could affect, particularly for Australia, its employment rate, maybe before it affects its inflation rate, which could change expectations. So, the general question arising is, how do you as a monetary authority officially in Australia, how do you address these short term impacts, right, to, say, employment and then employment expectations here?

Well there are two parts here. One is, well actually, the way we think about how the economy works is that one of the primary ways you get inflation up, for example, if it's low, is to get the labour market tighter, get wages growth rising, and get demand going so that firms raise their prices and workers get higher wages. So, yes, unemployment precedes inflation; that's exactly how we think the world works.

But you also make a very valid point that there can be temporary factors, and the exchange rate being one of them, that hits inflation before we can, in some sense, and that's why you have an on average target. That's why we're not … we are not mandated to promise that inflation will always, every year be between two and three percent. Why, ever since inflation targeting was adopted in Australia in the '90s, it's always been framed as an average over a longer period. Because we think that's what can realistically be delivered.

Certainly, in a country like Australia, where you have these enormous terms of trade swings, these very big changes in the exchange rate, those are going to affect prices in the Australian economy before we can. So, that's why you have to take an average.

What I'm thinking of also is the current trade dispute, and how that could affect Australian employment very quickly in the short run, even before it might affect inflation.

Well, specifically, it could affect growth. Now, it is fair to say that Australia has probably been less affected by the global trade disputes than many other economies. But in the end, it comes down to the risk that we have already publicly identified: that the trade disputes that are proceeding at the moment could harm global growth. That would then matter for our terms of trade for the demand for the things we export. It's fair to say that a lot of the things we export are much more leveraged to domestic demand in China, more so than global trade. It is plausible that we may be less affected by that than some other countries. But we have identified this for quite some time now as the trade disputes are a material risk to global growth and we think it's really important to have a rules-based trade system and we are very concerned about that as something that could happen. Noting, of course, that the exchange rate is an important automatic stabiliser when shocks from abroad happen.