The federal government will redefine ‘full employment’ to reflect a modern labour market, the Employment White Paper has found

The federal government will put “full employment” at the heart of Australia’s policy frameworks and institutions, to drive down structural unemployment over time and keep unemployment as low as possible.

In its Employment White Paper, released on Monday, it says the current definition of full employment is too narrow.

It says policymakers needs to acknowledge the reality of underemployment and under-utilisation in the economy, and the impact they’ve had on communities across the country.

In its paper, the government says it plans to use the policy tools available to remove barriers to work, to help Australians acquire the skills they need, and to ensure people have secure jobs that are fairly paid.

It says that will help to drive down structural unemployment, and help the economy sustain much lower levels of labour market under-utilisation over time.

It will help the Reserve Bank to sustain much lower levels of unemployment, it says.

What is full employment?

The white paper says how we define, measure, and pursue full employment has significant consequences for people.

And talk of full employment needs to account for the reality of underemployment and under-utilisation in the economy.

It says for every person in Australia who is classified in the labour force statistics as unemployed, there are four others who want to work but aren’t working, or who want to work more hours.

In Australia right now:

• 0.5 million people are officially classified as unemployed. That is, they want to work, have been actively seeking work, and are available to work.
• But an additional 1.3 million people want to work but have not been actively looking, or are not immediately available to work, for various reasons. Along with the unemployed, these workers are classified as “potential workers”.
• And 1 million workers in jobs, would like to work more hours, but cannot get access to them. These workers are classified as being underemployed.

Together, the hours those people would like to work represent the equivalent of 1.4 million full-time jobs.

The government makes it clear in its white paper that it wants to broaden the concept of full employment to include the reality of that labour market under-utilisation.

It says discussions of full employment have been too often narrowly focused on statistical estimates — such as the non-accelerating inflation rate of unemployment (NAIRU).

It says the NAIRU is a technical estimate of the maximum level of employment that can be sustained in the short-term without adding to inflationary pressures, but it does not capture the full extent of space capacity in the economy, nor the full potential of Australia’s workforce.

For example, the unemployment rate has been sitting near a 50-year low for the last 12 months (it’s currently 3.7 per cent), and some economists have been pointing to their current estimate of the NAIRU to suggest that the unemployment rate is far too low, saying it needs to rise to 4.5 per cent to where full employment really is.

But that definition of full employment ignores the reality of what’s happening on the ground.

“That is why our policy objective for full employment is broader than achieving a low unemployment rate and why it needs to have a higher level of ambition than is implied by statistical measures, such as the NAIRU,” the white paper says.

“The NAIRU should not be confused with, or constrain, longer-term policy objectives,” the paper says.

What is the new definition of full employment?

The government says its objective is “sustained and inclusive full employment”.

It says everyone who wants a job should be able to find one without searching for too long, and people need decent jobs that are secure and fairly paid. It recognises that the quality of a job and having enough hours of work matters to people. 

It says it “objective” for full employment has two parts:

1. 1.Sustained full employment: this refers to using different policies to reduce volatility in economic cycles and keep employment as close as possible to the current maximum sustainable level of employment that is consistent with low and stable inflation.
2. 2.Inclusive full employment: which is about broadening labour market opportunities, lowering barriers to work, and reducing structural under-utilisation to increase the level of employment that can be sustained in the economy over time.

“This is a broader and longer-term objective than achieving the current maximum sustainable level of employment consistent with low and stable inflation,” the white paper says.

“The first step towards operationalising this definition of full employment is to understand and measure the underlying concepts.

“History has shown that significantly misjudging the current maximum sustainable level of employment, or failing to take adequate account of short-term constraints, can lead to serious policy mistakes that cause higher under-utilisation rates in the economy,” it says.

How will it be achieved?

In reality, the government wants to broaden our modern conception of full employment to include an awareness of labour market under-utilisation, so we have a clearer understanding of the pressures workers face.

But it doesn’t want to disrupt the RBA’s methods.

It accepts that the RBA uses a narrower concept of full employment — that is, the NAIRU — to make decisions about monetary policy.

So, it wants to use the tools available to government to lower the barriers to employment for “potential workers,” to lower the structural level of unemployment over the long-term, so that technical estimates of the NAIRU can be sustained at much lower levels than they have been in recent decades.

That way, the RBA’s “independence” will not be curtailed. It will be free to continue lifting or cutting interest rates to control inflation through the cycle.

But the RBA’s job will be complemented by government policies that are aimed at driving under-utilisation lower over time.

The government says a “range of fiscal policy tools” can be employed to achieve longer-term increases in the level of full employment that can be sustained over time.

“Government has a role in supporting people through their life cycle to ensure they have the skills needed, and reducing barriers to employment they face, to finding and maintaining decent work,” it says.

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