RBA: You Push Neighbour Unemployment as Full Employment Shifts
The Reserve Bank of Australia says trust in its ability to control inflation is weakening. Deputy Governor Andrew Hauser’s speech also raised questions about what “full employment” means today and how the public can hold the bank accountable.
The Reserve Bank of Australia says trust in its ability to control inflation is weakening, as Deputy Governor Andrew Hauser’s remarks renew questions about whether the bank’s definition of full employment is clear to the public.
The bank says it is taking the loss of confidence seriously. Trust can shape people’s expectations for inflation, which in turn affect the bank’s ability to bring price rises under control.
Hauser discussed the issue in a speech last week. He said the effect of an interest rate increase depends partly on whether people believe the bank will keep raising rates until inflation falls.
“In simple terms, do they expect us to return the economy to balance, with on-target inflation and full employment, in the long run?” Hauser asked.
How the bank defines full employment
Full employment does not mean that everyone has a job. The modern definition refers to a level of unemployment and other indicators consistent with demand and supply in balance, and wage growth steady enough to keep inflation manageable.
Depending on economic conditions, that level could coincide with unemployment around 5 per cent, 6 per cent, 7 per cent or higher.
That differs from the meaning many older Australians associate with the phrase: unemployment of roughly 2 per cent, plentiful jobs, mostly full-time work and predictable career progression.
The shifting definition raises an accountability problem. During a question-and-answer session after Hauser’s speech, an audience member said inflation had a target band people could check, while full employment had no similarly observable measure.
“And when your estimate of [full employment] changes … that can look like [you’re] moving the goalposts,” the audience member said, asking how the public could hold the bank accountable for that part of its mandate.
A mandate dating to 1945
Hauser delivered the annual Sir Leslie Melville Lecture. He said Melville helped shape clause 8 of the Commonwealth Bank Act 1945, which established the bank’s dual mandate of price stability and “the maintenance of full employment.”
“That mission remains fundamentally unchanged. It shapes everything we do,” Hauser said.
The Reserve Bank says trust affects whether its inflation message influences spending decisions. Hauser described public belief that the bank would act to meet its inflation target as one factor in that process.
