2. The Causes of High Unemployment
2.1 Economic growth
The Green Paper on unemployment (Committee on Employment Opportunities
1993), and the resultant Working Nation policy (Keating 1994), strongly emphasised the
importance of the rate of economic growth as a determinant of the rate of unemployment,
and its main conclusion was that the rate of economic growth needed to be increased to
substantially reduce unemployment. Its main prescription as a result (alongside a
considerable expansion of labour market programs), was to maintain or increase the rate
of microeconomic reform, in order to raise the rate of economic growth.
Since that time, the unemployment debate appears to have reflected a growing view
that while raising the rate of economic growth is a good aim, we should not place too
much emphasis on this as a solution to the unemployment problem (see for example
Borland 1997).
One paper in this conference, however, that strongly asserts the importance of growth
is Dungey and Pitchford (1998). They point out that:
‘Historically, periods of high activity and growth such as in World War 2 and during 1945–75
were accompanied by low unemployment. It would be surprising if growth were not the cause
of such favourable employment experience’.
They also emphasise the benefit to be had from less drastic recessions. Nonetheless,
they point out that higher growth is not a panacea because it brings with it the potential
for rising inflation. They suggest that we should aim to achieve as high a rate of growth
as is possible without causing rising inflation. They also provide an estimate of the
‘steady inflation rate of growth’ (SIRG) for Australia, since the floating of the Australian
dollar, of 4.37 per cent per annum. They suggest that, as a result, it may be possible to
get unemployment down to 5 or 6 per cent over the next four years, without causing rising
inflation.
How optimistic their scenarios are, depend partly on the assumed rate of wage
inflation. If real wages increase at half the rate of economic growth, we get about a one
per cent lower unemployment outcome in four years than if they increase at the same rate
as output growth. This highlights how both economic growth and real wages are
influential in determining the rate of unemployment.