Full employment and low inflation: Chalmers says we can have both

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Treasurer Jim Chalmers says unemployment can be driven lower without putting pressure on inflation, rejecting claims that the government’s attempts to deliver full employment will increase prices and interest rates.

Chalmers used a speech in Brisbane on Wednesday evening to push back at critics of the government’s employment white paper, arguing that helping people gain the skills needed to deal with sweeping global changes would reduce inflationary pressures and strengthen the nation’s poorest communities.

Treasurer Jim Chalmers says the government’s plan for full employment will not come at the cost of higher inflation.Credit: Alex Ellinghausen

The government released the white paper last week, setting out a broad policy agenda it said would help bring the jobless rate down to a sustainably low level. The white paper in effect commits the government to full employment, an objective first set by the Labor Chifley government in the mid-1940s.

That prompted concerns in some economic circles that this would put pressure on the Reserve Bank to lift interest rates to deal with inflation generated by a very tight jobs market. The RBA’s own charter requires it to hold inflation between 2 and 3 per cent while achieving full employment.

Chalmers, speaking at Queensland’s Griffith University, said the government wanted to drive down the jobless rate to the point at which it starts to put upward pressure on inflation.

This, he said, required broadening opportunities for work, lowering barriers to employment and cutting the proportion of people who wanted to work more, which is almost double the jobless rate. The unemployment rate is currently 3.7 per cent.

“Sustained full employment is about minimising volatility in economic cycles and getting employment as close as possible to the current maximum level consistent with low and stable inflation,” he said.

“Inclusive full employment is about broadening opportunities, lowering barriers and reducing structural under-utilisation over time to increase the level of employment in our economy.”

The treasurer said lifting productivity would be a key part of reducing unemployment without increasing inflation pressures.

He said the debate about productivity had been “needlessly and mindlessly narrowed” to industrial relations in a throwback to the 1980s, rather than dealing with the need to invest in people to improve their skills base.

Chalmers said the globe faced five large shifts that were already under way. These included the shift from hydrocarbons to renewables, and information technology to AI, the ageing of the population, the move from an industrial economic base to the caring economy, and from globalisation to fragmentation.

He said these challenges meant building the ability of all Australians to deal with them.

“Our goal is to ensure people can thrive through the energy transformation, the increasing use of digital and advanced technologies, a growing care economy, and geopolitical change and conflict,” Chalmers said.

“That’s how we’re going to make sure that more Australians have the freedom and the resources to pursue lives that they value in the 2020s and beyond.”

Inflation remains elevated around the world, with unemployment in almost all major developed nations around 50-year lows. This has forced central banks, including the Reserve Bank of Australia, to aggressively lift official interest rates at the risk of rolling recessions around the globe.

Research released on Wednesday by the International Monetary Fund (IMF) suggests central banks could deliver economic soft landings by better communicating their thoughts on the outlook for inflation.

IMF economists Silvia Albrizio and John Bluedorn said where information about prospective inflation was scarce or central bank communications were unclear, most people tended to rely on their own experience of inflation to guide them on the direction of price increases.

Labelling this group “backward-looking learners”, they said people who were “forward-looking” were more likely to realise that interest rate increases would eventually quell inflationary pressures.

Central banks can deliver an economic soft landing, in part, by speaking more clearly about inflation and its future direction, according to the IMF.Credit: Bloomberg

According to Albrizio and Bluedorn, if more people were backward-looking learners, this made central banks’ jobs more difficult, probably forcing them to take interest rates to a level that would slow the economy more than necessary.

“A higher share of backward-looking learners means that the central bank must tighten more to get the same decrease in inflation. In other words, reductions in inflation expectations and inflation come at a higher cost to output when there is a higher share of backward-looking learners,” they found.

Improving communications with the public could increase the chances of a central bank not driving an economy into recession with unnecessarily high interest rates.

“One way central banks can improve their communications is by simple and repeated messaging about their objectives and actions that is tailored to the relevant audiences,” they said.

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