Three main explanations of inflation. Australian inflation & unemployment: an overview. Three main measures of inflation in Australia

Transcription

1 GENC1 An Introduction Australian inflation : an overview Three main measures of inflation in Australia The consumer price index - or CPI. This the main measure used in media and business transactions. Issued quarterly. Gross non-farm product deflator. This broader than CPI as it includes prices of capital goods and exports, rather than just consumer prices. Thus of greater interest to economists. Issued quarterly in the National Accounts (ABS 5) The "underlying" rate of inflation. This is simply the CPI, with the more volatile prices excluded: eg. petrol, vegetables, government taxes and charges. Issued quarterly. Used for Reserve Bank's inflation target. Three main explanations of inflation In simple terms Keynesian: Inflation simply caused by demand for goods and services outpacing growth in their supply : Monetarist: " Inflation is "always and everywhere a monetary phenomenon". (M. Friedman) ie. unsuitable increases in money supply the cause of inflation Supply-siders: Emphasize cost-push inflation - particularly wage growth Copyright David Clark 1

2 No simple relationship between inflation Australia But note: is lower than early 199s Unemployment(%) ABS Inflation (%) GENC1 An Introduction Why simple wage rise- trade-off story broke-down Supply side shocks - quadrupling of world oil price in sent cost inflation skyrocketing Higher inflation set in. But Phillips Curve had been based on a world where this did not happen - where, if inflation did rise, it would not be expected to remain high. Big policy implication: higher inflation would not guarantee higher growth and lower. Hence, inflation had to be taken more seriously than Keynesians had argued Wage growth the CPI: a close relationship % change on a year earlier Note how crazy wage policy was in early 19s! Average weekly earnings NB: Wage growth> CPI = rise in real wages Consumer price index ABS 3/ Copyright David Clark

3 Main reasons for restraining inflation Inflationary expectations will be kept low, thereby helping to keep interest rates down. (The reason? - the higher the expected inflation rate the greater the interest rate charged.) GENC1 An Introduction. With low inflation, asset prices do not rise as quickly and capital gains are generally less. This should produce reduced interest in purely speculative investment. Lower inflation also reduces the attractiveness of borrowing. In eras of high inflation, such as the late 19s, debt servicing was easier as borrowers were paying back their loans with dollars which were falling sharply in real value. Hurts lower income groups the most Why inflation unlikely to return to late 19s levels Domestic reasons: Sharp rises in service sector productivity from job shedding will restrain cost rises Unions more restrained than 19s losing influence Consumers and business expectations of inflation now much lower than early 199s International: Asian industrialisation sharp fallsin their currencies will keep import price growth low. World manufacturers will keep investing in lowest cost areas. In sum: key reasons for restraining inflation Inflationary expectations will be kept low, thereby helping to keep interest rates down. (The reason? - the higher the expected inflation rate the greater the interest rate charged.) With low inflation, asset prices do not rise as quickly and capital gains are generally less. This should produce reduced interest in purely speculative investment. Lower inflation also reduces the attractiveness of borrowing. In eras of high inflation, such as the late 19s, debt servicing was easier as borrowers were paying back their loans with dollars which were falling sharply in real value. Copyright David Clark 3

4 GENC1 An Introduction Unemployment: key facts trends Unemployment: some views "A recession is when your neighbour is unemployed; a depression is when you too join the dole queue." " The rate of is 1 per cent if it is you that is unemployed". "A man willing to work, and unable to find work, is perhaps the saddest sight that fortune's inequality exhibits under this sun." (Thomas Carlyle, nineteenth century Scottish historian) Unemployment: stocks flows Employed Successful job searchers Laid off Recruits Retirees Drop outs Unemployed Out of workforce New entrants Copyright David Clark

5 Structural Unemployment which is a product of a mismatch between the needs of employers and the skills and training of the labour force. GENC1 An Introduction This can be a product of many factors Frictional Unemployment resulting from the fact that employees must move from one job to another, whenever demand changes from one product - or service - to another. This category of can never be eliminated or reduced to zero Cyclical An excess supply of labour over demand for labour Most marked in recessions and depressions when demand for goods and services falls And demand for labour falls Copyright David Clark 5

6 1 Unemployment has improved dramatically relative to US rate rate, % GENC1 An Introduction 1 Australia Germany USA UK Japan But note: the dramatic improvement relative to US OECD Economic Outlooks Forecasts How is measured In Australia, persons categorised as unemployed are persons aged 15 and over who were not employed during the survey weekand who had:. Actively looked for full-time or part-time work at any time over the previous month or were available for work in the survey week or would have been available except for temporary illness or waiting to start a new job within a month from the survey week and would have started if the job had been available to them or waiting to be called back to a job from which they had been stood down without pay for less than four weeks. Australian different to a decade ago A higher % of the unemployed is now concentrated in the middle-aged groups - lower in under 1 groups. The average duration of is much longer. Female rates did not rise as much in the early 199s downturn as in past recessions and generally have been lower than male. Copyright David Clark

7 Blue collar males suffered biggest retrenchments GENC1 An Introduction Blue-collar men 9 Blue-collar women White-collar men White-collar women ABS Total number of retrenchments, , millions Job growth lags labour force growth Millions of persons Labour force Employment Note gap Year ended June figures 's of persons unemployed Unemployment numbers have fallen,despite rise in workforce Source: RBA Australian Economics Statistics, 199/5 to 199/95/ABS Participation rate rise made it harder to decrease rate 5 % Participation rate 3 NB: trend rise 1 1 MJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDM NB: trending downwards - 1 especially since mid 9s MJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSD RBA Australian Economics Statistics, 199/5 to 199/95/ABS Copyright David Clark 7

8 Female participation rate rise, meant job creation had to be greater 9 % GENC1 An Introduction Males 7 Note rise Married in married females females rate ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' 5 Total females 3 Males ' Married Unmarried Total females females females Data source: RBA Occasional Paper No.. Participation rate = % of working age population either in work or actively seeking it. ' ' Unmarried females Some key characteristics of the unemployed ) Sixty-four percent did not have post-school qualifications. Those who had completed the highest level of secondary school had an average duration of of weeks compared with 71 weeks for those who had not. ) Of the long-term unemployed, 1, persons (or 9%) were without post-school qualifications. Of these, 7% had not completed the highest level of secondary school. ) Unsuitable hours and difficulties with child care or other family responsibilities were not major problems for female unemployed persons. Only 9% of female unemployed persons reported one of these as the main difficulty in finding work. ABS, Job Search Experience of Unemployed Persons, July Slowdown in profits often sees rise Annual av. rate, % Unemployment rate (left axis) Corporate profits, $s, millions Profits (right axis) 1 Note slackening of profit growth, saw rise in in early s and 9s Year ended June Source: ABS 5. "Profits" = corporate gross operating surplus 1 1 Copyright David Clark

9 1 1 Wage growth : no simple relationships % annual av. rate, % Note wage explosions followed by sharp rise in AWE, % annual change 3 5 GENC1 An Introduction But wage slowdown 15 in 199s did not produce immediate 1 fall Unemployment rate (left axis) 5 AWE, % annual change (right axis) Source: RBA Australian Economics Statistics, 199/5 to 199/95/ABS 3 But high earnings growth upped in early 19s 199s.1 ratio Earnings/employment *Unemploy. rate (right axis) 75/7 77/7 79/ 1/ 3/ 5/ 7/ 9/9 91/9 % of workforce * real wages, salaries supplements/employment Professor Tom Valentine, UWS Importance of wage levels? There is now general agreement that the sharp rises in in most Western countries - including Australia - in the early 19s were related to "wage explosions". However, wage rises were far less dramatic in the early 199s and cannot simply explain current levels of. Indeed, Bob Gregory of the ANU has estimated that to restore full employment in Australia would require a drop in average real wages of 35 per cent. Such a cut would be politically impossible. Copyright David Clark 9

10 Even if wages did fall sharply they would still be well above those of our Asian neighbours GENC1 An Introduction However, the countries with the greatest differentials between youth and adult wages have the lowest youth rates But merely lowering wages will not guarantee that jobs will be created for all who want them - has to be sufficient demand Govt. spending : no simple relationship 1 1 % annual change Australia - - Comm. govt outlays Unemploy. rate (RHS) Year ended, June 3 Budget Papers/ABS 135./RBA Occasional Paper No. Has the Howard Government's fiscal tightening helped? Overseas and Australian experience shows that sharp fiscal tightenings do not guarantee significant labour market improvement. However, they do not guarantee deteriorations either. For example, in our last two fiscal tightenings and the rate rose by one percentage point in the first and fell by the same amount in the second, The fiscal tightening appears to have had an impact in helping to reduce - via lower interest rates and inflation. But impossible to argue it the sole or even main cause of fall in. Copyright David Clark 1

11 Immigration intake adjusted according to rate GENC1 An Introduction Unemployment rate % 1 Net migration, year to June Unemployment 1 rate Net migration Note fall in, rise in intake Source: RBA ABS 31 Role of social welfare? Professor Richard Layard of the London School of Economics found: the countries with the highest levels of long-term tend to have the most open-ended generous benefits, whereas the countries with lower levels of long-term tend to have dole payments that cut out after a set period. The equation Copyright David Clark 11

12 Key factors behind job growth Expected demand for output of goods and services GENC1 An Introduction. 5. Existing capacity utilisation Existing and expected wage levels Existing and expected interest rates The availability of suitable labour. The natural rate of Even during peak years, the rate never reaches zero. Its lowest resting spot is called the natural rate of, Historically, it has fluctuated between and 5 percent of the labour force in industrial countries. But this "natural rate" impossible to measure with any accuracy. Some economists believe it simply an ideological construct. Recently,however, the rate has lingered well above 5 % in many industrial countries, suggesting that the unemployed have been taking longer to find a new job or have dropped out of the labour force entirely. Effects of a high natural rate of Labour market tightens inflation rises With high natural rate, when falls Authorities forced to slow economy sharply, raising again Copyright David Clark 1

13 Trouble is, estimates of Australia's NAIRU vary greatly 1 Estimated natural rate of, % GENC1 An Introduction 9, 7,,,,,,,,, 5 Ie. All over-estimated the natural rate - inflation still under control, despite 5% rate Crosby Olekains(199) Debelle Vickery (1997), OECD (1995) Treasury Debelle, G. Borland, J. (199), Unemployment and the Australian Labour Market, RBA What is the "hysteresis effect'? ) Based on claim that the troughs of recessions are associated with successively higher levels of recorded. ) Those who are unemployed become progressively less employable, or are so perceived by potential employers. ) Thus, it is important to avoid recessions, because a proportion of the extra short-term which goes with them will turn into long-term. ) This ratchet effect makes the prospect of a return to full employment even more remote than it otherwise would be. 1 The "hysteresis effect": academics wrong! Av. rate, %. year ending June 1 Unemployment rate ie. Academic argument that the rate,when the economy picks up again, will not fall back to previous trough level. But has done so! ABS Copyright David Clark 13

14 Causes of "hysteresis effect"? Technological change reducing jobs for unskilled employees GENC1 An Introduction Public and private sector now much "leaner" Real wage rises in upturns means that employers face higher wages thus are encouraged to replace labour with machines Surveys of employers also suggest the following important "On-costs" - eg. superannuation contributions, workers' compensation contributions, payroll taxes etc. Add an average 1% to cost of employment Work attitudes - particularly among the young. Hence strong preference given to married women and to increasing overtime for existing staff Penalty rates - but these have been reduced in 199s How industrial relations changes have helped cut 199 IR Act Greater flexibility for employers More jobs lower labour costs Less trade union power Means skilled will be better off, unskilled likely to be main victims More competitive economy Improved balance of payments, higher growth lower interest rates Copyright David Clark 1

15 Growth : no simple relationships Unemployment rate difference between * Spain GENC1 An Introduction 1 RBA Bulletin, June 1997 * Finland *France * Belgium * Germany * Canada * Italy * AUSTRALIA * New Zealand * Japan * US 5 5. GDP per capita, av. growth 19-9 Unemployment rate lags changes in GDP growth rate 1 1 Av. rate, %. year ending June Unemployment rate Message: Strong growth crucial if is to fall further GDP growth rate Recent lag has been 9-1 months Program % of places taken up by long-term unemplo yed Net impact (percent age points) Net unit cost to Govt., $s Net cost per net impact, $s Net impact and costs of major Australian labour market programs Job Start Job Clubs Skillshare Job Train Job Skills The net impact levels shown were estimated in 199 for JobStart and Job Clubs, 1991 for SkillShare, 199 for JobTrain and 199 for JobSkills. NB: Cost this much to place one unemployed person! Message: job programs no simple solution to Source: Copyright David Clark 15

16 Why do economists disagree about what should be done about? GENC1 An Introduction Have different views about what causes it and use different models to back up their views - can be Monetarists, Keynesians, New Classicals, Post-Keynesians etc. Have different interests and objectives - can be interested in short-run or long-run policy measures, place different emphasis on inflation versus, on role of government Unemployment: the core problem Generally, the economy has to grow fast enough to match the trend increase in the labour force Structural and technological change has also reduced demand for more unskilled labour If the workforce keeps growing at around 5 % and productivity at 5- %, this will require annual average GDP growth of at least 5 per cent to stop rising again.. Like it or not, policy has to encourage employers to create more new jobs - no other mystery solution. Copyright David Clark 1