Where is full employment?

Mcdonald, Ian Martin (2007): Where is full employment? Published in: Dialogue , Vol. 26, No. 2 (July 2007): pp. 81-92.

Abstract

Unemployment in Australia is now at its lowest in over 30 years. This experience of low rates of unemployment has prompted a number of statements that the Australian economy is at or very close to full employment. However, even though unemployment is low in comparison with the previous 30 years, it is greater than the rates experienced in the 1950s and 1960s, during which the average was slightly below two per cent. Furthermore, the 4.4 per cent rate of unemployment in April 2007 included 84,000 who had been unemployed for more than a year. These doubts about whether the Australian economy is currently at full employment are supported by findings of a body of research reported in this paper. This research suggests that, given current policy settings on labour market regulation, microeconomic reform and welfare support, full employment may occur at a rate of unemployment as low as 2.5 per cent. The estimation of this low rate of unemployment is based on a model of a range of equilibrium rates of unemployment.

• Item Type: MPRA Paper
• Institution: University of Melbourne
• Language: English
• Keywords: full employment; range of equilibria; Keynesian economics
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General

References

Bhaskar, V (1990). ‘Wage Relativities and the Natural Rate of Unemployment’, Economic Journal, 100: 60-66

Cai, Lixin and Gregory, Robert (2005). ‘Unemployment Duration and Inflows onto the Disability Support Pension Program: Evidence from FaCS LDS Data’, Australian Economic Review, 38, 3: 233-252, September.

Corden, WM (1979). ‘Wages and unemployment in Australia’, Economic Record, 55, March, 1-19

Fraser, BW (1993). ‘Some aspects of monetary policy’, Reserve Bank of Australia Bulletin, April: 3

Friedman, M (1968). ‘The role of monetary policy’ American Economic Review, 58: 1-17

Isaac, JE (2007). ‘Reforming Australian Industrial Relations?: The 21st Foenander Lecture, 28 August 2006’, Journal of Industrial Relations, 49: 410-435

Kahneman, D and Tversky, A (1979). ‘Prospect theory: An analysis of decision under risk’, Econometrica, 46: 263-91

Keynes, JM (1936). The General Theory of Employment, Interest and Prices, London, Macmillan

Lye, JN and McDonald, IM (2006a). ‘Union power and Australia’s Inflation Barrier, 1965:4 to 2003:3’ Australian Journal of Labour Economics, 3: 287-304.

Lye, JN and McDonald, IM (2006b). ‘An evaluation of unemployment policy in Australia using the range of equilibria’, Australian Economic Review, 9, 3: 239-56 McDonald, IM and Solow, RM (1981), ‘Wage bargaining and employment’, American Economic Review, 71: 896-908

McDonald, IM (1993). ‘Long Term Unemployment and Macroeconomic Policy’ Australian Economic Review, 2: 31-4

McDonald, IM and Sibly, H (2001). ‘How Monetary Policy Can Have Permanent Real Effects With Only Temporal Nominal Rigidity’, Scottish Journal of Political Economy, 48, 5: 532-46

McDonald, IM and Sibly, H (2005). ‘The diamond of macroeconomic equilibria and the non-inflationary expansion’, Metroeconomica, 56, 3: 393-409

Phelps, E (1967). ‘Phillips curves, expectations of inflation and optimal unemployment over time’, Economica, XXXIV, 135: 254-81.

Robinson, J (1937). Essays in the Theory of Employment, Oxford, Blackwell (1947 edition)

Wilkins, R (2007) ‘The consequences of underemployment for the underemployed’ Journal of Industrial Relations, 49: 247-75