The Evolution of Employment and Unemployment in Australia

This paper poses two questions: why did the equilibrium rate of unemployment rise so much in the 1970s, and why does unemployment increase rapidly during recessions, but decrease so slowly in the subequent recovery, i.e. why is unemployment persistent? We find that equilibrium unemployment rose because of the economy’s inability to adjust to the adverse shocks of the time; employment contracted in some sectors but did not expand sufficiently in others. In answer to the second question, we find that the sources of persistence are different for men and women. Male unemployment has been persistent because, following a recession, employment is created in female dominated sectors, rather than the male dominated sectors which experienced the greatest decline in employment. Female unemployment has been persistent because the growth in the demand for female labour has been matched by the growth in its supply. Finally, we find that recessions appear to have a permanent effect on the sectoral composition of the economy; i.e., recessions are periods of accelerated structural change.

Indicators of Inflationary Pressure

This paper examines the statistical properties of a number of leading indicators of inflation, using Australian data over the period 1966 through 1991. We pay particular attention to the much-discussed P*, as well as measures of capacity utilisation, the cyclical rate of unemployment and the growth rate of a monetary aggregate (currency). Our results show that, up until mid 1990, the gap between trend and observed velocity of currency, as well as the growth rate of currency performed well as inflation indicators. Since then, the rapid decline in inflation has been best predicted by variables such as the level of capacity utilisation, the rate of cyclical unemployment, and the gap between output and its trend value.

Inflation in Australia: Causes, Inertia and Policy

This paper examines the determination of inflation in Australia and its four major trading partners – Japan, the United States, the United Kingdom and New Zealand. Also examined is the degree of inertia in the inflation rate i.e. the extent to which observed inflation deviates from its equilibrium rate. We find that, in each country, nominal wage growth clearly dominates the growth rate of money as the fundamental cause of inflation. We also detect the presence of substantial inflation inertia. For Australia, these findings have two implications for policy. The first is that a policy to reduce the inflation will have the desired effect only after the elapse of a considerable period of time. The second is that such a policy can succeed only if aggregate nominal wage growth is reduced commensurately.

Some Tests of Competition in the Australian Housing Loan Market

In this paper we investigate the degree of competition in the market for housing loans by examining a new data set, the asset composition of individual banks. We construct a Herfindahl index of concentration in this market, and estimate a model of conjectural variations to examine the reactions of each bank to changes in the value of loans made by other banks. Certain forms of competition are nested within this framework. Our findings lead us to decisively reject the hypotheses of perfect competition and perfect collusion. We are unable to reject the hypothesis that this market can be characterised as a Cournot oligopoly.

Capital Constraints and Employment

This paper considers whether capital is a significant constraint on employment in Australia. We calculate the level of capital-constrained employment for ten sectors of the Australian economy. The calculations suggest that the manufacturing; mining; transport, storage and communication and recreation, personal and other services sectors have sufficient capital installed to increase employment. In another sector, wholesale and retail trade, the potential for increases in employment through increased capital utilisation may be constrained by surplus labour (as of June 1993). While some sectors, e.g. community services, are capital constrained at the moment, we find that the investment requirements to increase employment in these sectors are not onerous. We also project investment requirements in each of the sectors for employment growth over the next five years. These projections suggest that a jump in investment followed by relatively modest growth is required to sustain growth in employment.

The Unemployment/Vacancy Relationship in Australia

One of the most important features of the Australian economy in the past two decades has been the structural deterioration of labour market performance, reflected in both an increase in the average rate of unemployment and an outward shift in the Beveridge Curve, which depicts the relationship between unemployment and vacancies. This paper attempts to uncover some of the causes for this structural deterioration, in terms of the factors affecting the UV relationship. We find that the Beveridge Curve shifted out around 1974, consistent with an increase in the equilibrium rate of unemployment which is generally agreed to have occurred around that time. Using gross labour market flow data, we also investigate the determinants of the equilibrium Beveridge Curve in the 1980s. We find that the Beveridge Curve shifted further outwards in the 1980s. The most important determinant of this shift was the decline in the search effectiveness of the unemployed, reflected in the increasing incidence of long-term unemployment. Offsetting this influence during this time was the declining labour force participation of men, and the very large increases in female employment.

Wage Dispersion and Labour Market Institutions: A Cross Country Study

This paper examines the issue of wage flexibility in an international context using sectoral wage dispersion data from fourteen OECD countries. An emphasis is placed on the evaluation of Australian institutions and data. We draw comparisons between a measure of wage dispersion and the degree of centralisation of a country’s wage setting institution to determine whether decentralised wage setting institutions are necessarily associated with more flexible wages. Inter-country comparisons are drawn among the levels of wage dispersion over time, and the relationship between wages and demand conditions for labour, including productivity and relative prices, are examined. We observe that no strong systematic relationship exists between wage dispersion and the degree of centralisation of labour market institutions. We also find that relative to most other OECD countries for which data are available, Australian wages were strongly correlated both with labour demand conditions and productivity growth over the period 1975–90.

Wage Contracts, Sticky Prices and Exchange Rate Volatility: Evidence from Nine Industrial Countries

In this paper, I investigate the link between real wage rigidities, nominal wage and price rigidities, and nominal exchange rate volatility. Using a model of overlapping wage contracts and monopolistic price-setting, where prices are costly to change, I find sticky nominal prices and wages to be a feature of all the major industrialised countries. However, I also find real wage rigidities to be absent for most of these countries. In the face of rigidities to nominal wages and prices, flexibility in the real product wage comes about through the dynamics of prices, wages and exchange rates, and the indexation of wages to consumer prices.

Optimal Wage Indexation, Monetary Policy and the Exchange Rate Regime

The optimal (labour market clearing) degree of wage indexation is derived from a simple neo-classical model, and is shown to be conditional on the variance of a number of supply and demand shocks, as well as the exchange rate regime. The model is estimated for nine industrial countries over the period 1973 through 1988. In no case was the actual degree of wage indexation found to be significantly greater than the optimum, suggesting that mechanisms other than “excessive wage indexation” were responsible for the increases in unemployment in these countries over this period.