An Estimate of the Range of Equilibrium Rates of Unemployment for Australia

This paper estimates the range of equilibrium rates of unemployment for Australia. The estimation technique nests a unique equilibrium rate of unemployment as a special case. It is found for the period 1965–97 that a range of equilibria of at least 6.6 percentage points of unemployment exists in Australia. The lower limit of this range, which is the minimum rate of unemployment consistent with non-increasing inflation, was 2–3 per cent in the 1960s, jumped in the early 1970s and was about 5.6 per cent during the 1990s.     

The Economic Situation

Throughout the first nine months of 1976 the Australian economy has remained virtually stagnant, with output and employment increasing only marginally and unemployment rising also. With the government following a severely contractionary policy in an attempt to break inflation the economy seems poised for a further modest downturn in the next nine months so that a self-sustaining recovery from the current recession does not seem to be in prospect before the second half of 1977. On the basis of existing policies our forecasts indicate a rate of growth of real GDP of only about 1.0 per cent in 1976–77, implying a further significant rise in unemployment during the financial year. There have been some hopeful signs in recent months of a reduction in inflation — the consumer price index increases in the first three quarters of 1976 were modest and wage rate increases remain closely in line with the wage indexation guidelines — but three factors have emerged to cast doubt on whether this improving trend will continue. The first is the effect of the recent drought on prices of foodstuffs, particularly meat, and the second is the expected 1.5 to 2.0 per cent increase in the consumer price index as a result of the changes in the method of financing hospital and medical services. These two factors mean that the December quarter increase in the consumer price index may be more than 5 per cent, threatening a further stimulus to inflation in 1977. Thirdly, present government policies could easily lead to a breakdown of the wage indexation system and a return to some form of collective bargaining over wage rates. Assuming nevertheless, a de facto continuation of partial indexation in 1977, we expect increases in male award wages and male average earnings of about 13 per cent during 1977, these increases being similar to those during 1975 and 1976 but much below the increases of 36 per cent and 28 per cent respectively recorded during 1974. Our forecasts also indicate increases in the consumer price index of 14 per cent during 1976 and 11 per cent during 1977, following increases of 16.3 per cent and 14.0 per cent during 1974 and 1975 respectively. These forecasts indicate that the government's fiscal, monetary, exchange rate and wage policies are likely to come under heavy challenge early in 1977, and decisions taken at that time are likely to be major determinants of economic developments in Australia in the next few years. The Institute would again urge a shift to a co-operative package including full wage indexation, with cuts in indirect taxes and public sector charges to wind down inflation and expand the economy. On current indications, labour productivity will be no higher in 1976–77 than in 1973–74, because of the weakness of total output, so that the whole burden of wage increases in that three year period has fallen on unit costs of production. It is our belief that the twin problems of inflation and unemployment will only be defeated in Australia when both cuts in indirect or direct taxes and increases in productivity are applied to reducing inflation in the context of an orderly system of wage and price determination.     

The Macroeconomic Outlook

A slow recovery, commencing in the December quarter of 1997, is expected from the current recession. Overall, gross domestic product (GDP) may increase by 2.8 per cent in the year to the June quarter of 1992, and continue to increase at a similar rate thereafter.
This subdued recovery is likely to see the unemployment rate at over 70 per cent to the end of 1992, before moving down slowly to around 8.5 per cent by the mid-1990s.
Consumer price index (CPI) inflation may fall sharply from a peak of 8.0 per cent in 1989-90 to a trough of under 3 per cent in 1997-92, due to the recession and movements in oil prices. With a slow recovery, inflation may then increase to 5 per cent per annum in the medium term.
The current account deficit has fallen from 6.0 per cent of GDP in 1989-90 to 4.7 per cent in 1990-91, despite a fall in the terms of trade of 5 per cent. However, this has been due to the cyclical downturn. With a slow recovery in demand, and rising real labour costs hampering expansion in export and import-competing industries, the current account deficit may once again reach 6 per cent of GDP by the mid-1990s, implying steady increases in the foreign debt-to-GDP ratio.
This forecast assumes monetary policy targets an inflation rate of 5 per cent per annum. Any further easings in monetary policy may undermine the credibility of the inflation objective with the result that the trade weighted index (TWI) exchange rate may drop sharply from 59.     

The Macroeconomic Outlook

A slow recovery is expected from the current recession. Since reaching a trough in the September quarter of 1990, real gross domestic product (GDP) has followed a flat path which is likely to continue through to the September quarter of 1991. A slow recovery may then commence in the December quarter of 1991. This is consistent with real GDP growth of -0.9 per cent in 1990-91 followed by 2.4 per cent in 1991-92 and around 3 per cent per annum to the mid- 1990s compared with 'normal' growth of 2.5 per cent per annum.
This recovery is likely to see the unemployment rate at over 10 per cent for most of 1991-92, before moving to around 8 per cent by the mid-1990s.
Inflation may fall sharply from a peak of 8.0 per cent in 1989-90 to a trough of 3 to 4 per cent in 199 1–92, due to the recession and movements in oil prices. With a slow recovery, inflation may increase to 4 to 5 per cent per annum in the medium term.
The current account deficit has fallen from 5.9 per cent of GDP in 1989-90 to a likely level of 4.1 per cent in 1990-91, but part of this gain is cyclical rather than structural. Thus the deficit is expected to increase to around 5 per cent during recovery and remain flat to the mid- 1990s, implying steady increases in the ratio of foreign debt to GDP.
Looser monetary policy would erode part of the forecast sustained reduction in inflation. Looser fiscal policy would lead to a higher current account deficit.     

Why Has Australian Wages Growth Been So Low? A Phillips Curve Perspective

Wages growth in Australia has recently been the lowest in two decades. One possible explanation is a decline in the non‐accelerating inflation rate of unemployment (NAIRU). We examine this hypothesis by estimating a wage Phillips curve including a time‐varying NAIRU. Our findings are: (i) the NAIRU has recently been around 5.5 per cent; (ii) our approach increases the precision of the NAIRU estimates; (iii) low inflation expectations have been an important contributing factor; and (iv) the long‐run annual wages growth is nearly 3 per cent. We also find that the underutilisation rate suggests greater slack exists, but is less useful in explaining wage developments.     

Structural change in the United States' social preference function, 1953–88

Many studies have used Gallup Poll data to estimate the relationship between presidential popularity, and inflaion and unemployment. Typically these estimates are made over the terms of several presidents. The only time-varying effect included in these studies is an intercept dummy. No account is taken of the possibility that there may be changes in the positions or slope of the indifference curves between inflation nd unemployment. Within this paper, we estimate the US public's social preference function between inflation and unemployment as a quadratic within a sets of equations framework. A series of F-tests leads us to believe that there is structural change in the economic variables as well as in the intercepts over time. Thus, estimating each administration individually or in the sets of equations format is superior to constraining slope coefficients to be equal across administrations by simply estimating the function over the entire time period. We hypothesize that the public has become somewhat more accustomed to high rates of inflation; this hypothesis is consistent with the observed changes in the social preference function.     

Quantifying the Effect of the GST on Inflation in Australia's Capital Cities: An Intervention Analysis

This article examines the magnitude and duration of the effect of the Goods and Services Tax (GST) on inflation in Australia's eight capital cities using the Box and Tiao intervention analysis and quarterly data spanning from 1948:4 to 2003:1. We found that the GST had a significant but transitory impact on inflation only in the September quarter of 2000 when this new tax system was implemented. In this quarter inflation showed an additional increase of 2.6 per cent in Sydney (minimum effect) and 2.8 per cent in Australia as a whole, and the figure for Hobart was 3.3 per cent (maximum effect). Based on Wald test results, we also found some evidence that there is no significant (or substantial) difference in the average price changes among capital cities. We could not reject the null hypothesis that the GST increased the consumer price index by 2.8 per cent across the board in various cities. These results are also consistent with previous studies and surveys.     

Macroeconomic Determinants of Crime: Evidence from India

This paper examines the relationship between crime, inflation, unemployment, and real GDP per capita in India. Based on the national-level data, the Johansen cointegration test confirms the presence of cointegration relationship between the variables. The Toda–Yamamoto Granger causality test suggests that macroeconomic indicators, especially unemployment, can significantly affect crime in India. Based on the state-level data, the ordinary least squares results corroborate the effect of inflation on crime even after controlling for governance. However, they fail to verify the relationship between crime, unemployment, and real GDP per capita.

     

THE EVOLUTION OF INFLATION AND UNEMPLOYMENT: EXPLAINING THE ROARING NINETIES

This paper analyses the relation between US inflation and unemployment from the perspective of ‘frictional growth,’ a phenomenon arising from the interplay between growth and frictions. In particular, we focus on the interaction between money growth and nominal frictions. In this context we show that monetary policy has not only persistent, but permanent real effects, giving rise to a long‐run inflation‐unemployment tradeoff. We evaluate this tradeoff empirically and assess the impact of productivity, money growth, budget deficit, and trade deficit on the US unemployment and inflation trajectories during the nineties.     

Incentives to Work: Replacement Ratios and the Cost of Job Loss among Indigenous Australians

The relationship between the social welfare system and employment incentives has received considerable attention in the literature. This paper uses data from the National Aboriginal and Torres Strait Islander Survey to consider these issues for indigenous Australians. Two measures are calculated: the replacement ratio which measures the expected gains from employment for those not in work; and the cost of job loss which measures the expected costsof becoming unemployed for those in employment. The estimates presented here show that the replacement ratio is higher for females than males and for those in a married or de facto relationship compared with single people. About 5 per cent of single males and females could expect a higher income from social security than from non-Community Development Employment Projects (CDEP)scheme employment. Among those with dependent partners 24 per cent of males and 40 per cent of females looking for work could expect a higher income from social security than from non-CDEP employment. The estimates of the cost of job loss, which include the effects of the duration of unemployment and the replacementratio, show a high cost for some indigenous Australians because of their expected longer duration of unemployment.     

A Clustering Approach to Some Monetary Facts: A Long-Run Analysis of Cross-Country Data

Long-run dependencies among inflation, growth rates of money, real output and real output per capita are analysed. For a cross-section of 119 countries, clusters are obtained, and correlations among these variables within each cluster are calculated. Unlike the correlations obtained using data from the full sample, correlations of growth rates of real output and real output per capita with money growth and inflation are dissimilar across clusters. In particular, for some clusters of countries positive long-run relationships of money growth and inflation with growth rates of real output are observed.
JEL Classification Numbers: E5, F01, C69.     

NAIRU Estimates for Germany: New Evidence on the Inflation–Unemployment Tradeoff

Meaningful estimates of the non‐accelerating inflation rate of unemployment (NAIRU) within a Phillips curve framework require an identified tradeoff between inflation and unemployment. However, observations of inflation and unemployment are equilibrium points giving rise to a simultaneity problem. We assess conventional identifying assumptions in the literature on the German NAIRU in a general bi‐variate equations system of inflation and unemplyoment. We use a data‐driven method for identification based on shifts in the relative volatility of shocks to unemployment and inflation to identify the tradeoff for Germany. Our results support models which estimate a contemporaneous effect of unemployment on inflation and those which model inflation and unemployment jointly.     

The long-run Phillips curve and non-stationary inflation

Modern theories of inflation incorporate a vertical long-run Phillips curve and are usually estimated using techniques that ignore the non-stationary behaviour of inflation. Consequently, the estimates obtained are imprecise and unable to test the veracity of a vertical long-run Phillips curve. We estimate a Phillips curve model taking into account the non-stationary properties in inflation and identify a small but significant positive relationship between inflation and unemployment. The results also provide some evidence that the trade-off between inflation and the rate of unemployment in the short-run worsens as the mean rate of inflation increases.     

The efficacy and cost of regime shifts in inflation policies-Evidence from New Zealand and Sweden

In this paper a comparative study of the regime shift in inflation policies in New Zealand and Sweden is performed. A nonparametric regression method is used to decompose the inflation time series into three components of variation: a long-term trend, a medium-term (cyclical and transient variations) trend and a short-term shocks component. This allows study of the transition process from the high inflation characterizing the end of the 1970s and the 1980s to the low inflation observed during the 1990s. It is found that in New Zealand, although it is initially delayed, the decrease in inflation happens at a faster pace than in Sweden. This may indicate that reforms were more efficient in New Zealand. A clear link is also shown between the rising unemployment and the transition from high to low inflation. Furthermore, while in New Zealand a downward adjustment of the unemployment rate happens directly after the transition period, in Sweden there seems to be persistence in high unemployment.     

Policy implications of a non-linear Phillips curve in a stochastic environment

When the Phillips curve is non-linear, fluctuations of the unemployment rate below the mean will have a larger impact on the inflation rate than fluctuations above the mean. This paper shows that this causes conventional measures of the “natural unemployment rate” to underestimate the mean unemployment rate consistent with stable inflation in the long run. More importantly, it reveals a potential long-run trade-off between unemployment and economic stability.     

Taylor rules and the Great Inflation

Can US monetary policy in the 1970s be described by a stabilizing Taylor rule when policy is evaluated with real-time inflation and output gap data? Using economic research on the full employment level of unemployment and the natural rate of unemployment published between 1970 and 1977 to construct real-time output gap measures for periods of peak unemployment, we find that the Federal Reserve did not follow a Taylor rule if appropriate measures are used. We estimate Taylor rules and find no evidence that monetary policy stabilized inflation, even allowing for changes in the inflation target. While monetary policy was stabilizing with respect to inflation forecasts, the forecasts systematically under-predicted inflation following the 1970s recessions and this does not constitute evidence of stabilizing policy. We also find that the Federal Reserve responded too strongly to negative output gaps.     

A Time Series Analysis of the Relationship between Inflation Uncertainty and Unemployment

This paper examines the empirical relationship between inflation uncertainty and unemployment rates. We find supportive evidence of a significant positive association between inflation uncertainty and unemployment, but this relationship depends critically on three factors. First, the inflation uncertainty-unemployment relationship is not significant before the mid-1970s. Second, the inflation uncertainty-unemployment relationship does not hold across all single digit SIC industries. And third, the inflation uncertainty-unemployment relationship is concentrated at business cycle and long-run components of the data, rather than high-frequency components.     

Labour Market Inefficiency and Frictional Unemployment in Australia and its States: A Stochastic Frontier Approach

This paper provides estimates of labour market inefficiency and the frictional unemployment rate for Australia and its States over the period January 1978 to December 1997. These estimates are derived from parametric statistical models of employment growth in which technical inefficiencies are accounted for. The mean estimate of the (technically efficient) frictional unemployment rate for Australia over the sample period is S3 per cent of the labour force. Technical inefficiency in the labour market matching process is significant and contributes around 13 per cent to the mean steady-state (naturaľ) unemployment rate. Investigation of the factors explaining the levels of inefficiency suggests that inefficiencies vary countercyclical, are related to which political party is in power and the time of year and that only Western Australia and Queensland have exhibited a significant decline in inefficiency over the period.     

Unemployment–inflation trade-offs in OECD countries

Inflation and unemployment reduce welfare of individuals and should be as low as possible in any economy. Cointegration and Granger causality tests suggest that there are long run relations between these two variables among the OECD economies. While rates of unemployment vary significantly among these economies, rates of inflation have stabilised at lower rates as a result of inflation targeting policies adopted in them during the last two decades. The Phillips curve phenomena are still empirically significant for 28 out of 35 of these OECD economies in country specific regressions; in fixed and random effect panel data models and in a panel VAR model for 1990:1 to 2014:4. Country specific supply curves and Okun curves are consistent to thin Phillips curve relations. Leftward shifts in the Beveridge and Phillips curves require labour market reforms balancing between job creations and destructions. Complementing macro stimulations by microeconomic structural and institutional reforms can bring efficiency in bargaining for wages and employment among firms and workers to make unemployment–inflation trade-offs more significant and relevant in these economies.