Jobs key to reviving flailing economy
The Reserve Bank of Australia's recent decision to lower the official cash rate by 25 basis points to 0.75 per cent should be sounding alarm bells for the government. This latest cut is the third since May 2019 and reflects ongoing weakness in the Australian economy.
Treasurer Josh Frydenberg's attack on banks for failing to pass on the full rate cut to consumers is a political distraction. Frydenberg and his Treasury officials are well aware of the precarious state of the Australian economy, but they dare not name it for fear that any negative sentiment from the government could trigger further unravelling of the economy and their prized surplus.
There are two clear signals coming out of the RBA's latest cut. Firstly, monetary policy is not enough to spark a revival of the Australian economy. Secondly, it's now all about jobs. Frydenberg and his officials would be wise to heed these signals given that it was only 12 months ago that the RBA was considering lifting the official cash rates. The message for the government is jobs, jobs and jobs.
The last increase in official interest rates occurred in November 2010, which took the official rate to 4.75 per cent. There has been a steady reduction ever since. Prior to the global financial crisis, the RBA's focus was more on containing inflation than achieving full employment. However, since then, the RBA's attention has shifted to jobs and wages growth.
While the government might take some joy in an unemployment rate sitting at around 5.2 per cent, the rate of people looking for more hours of work sits at around 8.5 per cent. Combined, there are close to 1.9 million people being under-utilised because the economy is unable to deliver enough jobs or hours of employment.
The Australian Bureau of Statistics' labour force data shows that since about 2003, there are more people looking for additional hours of work than those who are unemployed. Underutilisation of labour is the sleeping giant in the Australia economy.
Underutilisation of labour in Australia is trending upwards, which is an indication that Australia's employment market is much softer than the official unemployment rate would indicate. This goes some way to explaining the ongoing issue of low wages growth in the economy.
"Frydenberg and his boss, Prime Minister Scott Morrison, need to think about fiscal stimulus and job creation programs, even if it comes at the expense of the budget surplus."
It also highlights whether the traditional measure of full employment being an unemployment rate of five per cent is appropriate. The RBA has made some noises on this, suggesting 4.5 per cent might be a more appropriate indicator, but some economists are suggesting that even this may still be too high.
While a revised target for full employment might be important for policy-makers, it alone will do nothing to address the soft labour market. The RBA is clear that unemployment and underemployment need to be addressed and, given the current global environment, now is the time to be looking at how best to do this. Frydenberg and his boss, Prime Minister Scott Morrison, need to think about fiscal stimulus and job creation programs, even if it comes at the expense of the budget surplus.
In terms of fiscal stimulus, the RBA and most economists have argued for increased infrastructure spending. Such a strategy needs to include supporting shovel-ready, small-scale infrastructure projects, including building new social and community housing stock. Next is to increase payments to those who will spend it. Here the government would be wise to lift Newstart and home in on families with children by increasing Family Tax Benefits. Finally, we should pilot a jobs guarantee program for those over 50 and people living in rural and regional Australia.
One of the fastest-growing cohorts moving onto Newstart are people over 50 and, unfortunately for many of these people, re-entering the workforce is proving very difficult. A program that allows this cohort, as well as the unemployed in rural and remote communities, to access minimum wage jobs, paid for by the government but provided for by local governments, charities and social enterprises, may prove to be the best counter-balance to a stalling economy.
A recent report by the University of South Australia with Centacare Catholic Country SA and Uniting Country SA found that for every dollar spent locally by these two agencies, the local economy achieved $2.30 return. Targeted stimulus through a job guarantee program may prove to be the tonic needed for our faltering economy.
The warnings are clear. In an economic downturn, the government will not be rewarded for their ideology; they will instead be punished if job losses are a consequence of their inaction.