MNI: RBA To Look At Underutilisation In NAIRU Revamp

The Reserve Bank of Australia will consider incorporating underutilisation data into its labour force models, such as its estimate of the non-accelerating inflation rate of unemployment (NAIRU), following the publication of an employment white paper by the Treasury this week, according to academics and former staffers.

The Treasury released its Working Future: The Australian Government’s White Paper on Jobs and Opportunities report earlier this week, laying out several recommendations aimed at redefining full employment. The paper called on policymakers to acknowledge underemployment and underutilisation, and to incorporate hours worked, skills utilisation and inclusivity into labour metrics. The paper also criticised use of NAIRU, which it said failed to capture the full extent of spare capacity or the full potential of the workforce. “The NAIRU should not be confused with, nor constrain, longer-term policy objectives,” the paper stated.

Mark Wooden, professorial fellow at the Melbourne Institute at the University of Melbourne and former Fair Work Commission Annual Wage Review panel member, noted the RBA will likely incorporate alternative measures of underutilisation in future, and largely ignore the rest of the paper. He said the bank already tracks underemployment to some extent, but the white paper will push it to add the metric more formally into its models.

“That would be useful, but whether it leads to any change in policy as a result is questionable,” he added. “Will NAIRU using underemployment be any different to NAIRU using unemployment? I don’t think so and I can’t see the rest of the report being incorporated in any way. It’s just not practical.”

MNI reported earlier in the year that the RBA's 4.5% NAIRU estimate had not changed since 2019 despite its pre-Covid downward trajectory (see chart) and was likely overdue for an update. (See MNI: RBA Needs To Cut NAIRU Estimate - Ex-Staffers)

NAIRU FIT FOR PURPOSE?

Tim Robinson, senior research fellow at the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne and former RBA economist, questioned the suitability of NAIRU as a measure of labour market slack, noting the Reserve needed a broader metric. “More adjustment today appears to be in hours worked than in the past,” he argued. Studying the underutilisation rate may help understand wage developments better, he added. "It’s still necessary to estimate what’s a sustainable underutilisation rate, which is unobserved just like the NAIRU," Robinson noted.

Underutilisation and unemployment followed similar trends in the past, but that has likely changed over the last decade, he continued. This could help explain wages growth, a key area of RBA concern, he added.

Robinson said the paper's distinction between the NAIRU and its full and inclusive employment target could also lead the RBA to focus on the unemployment or underemployment gap in the near term due to its influence on inflation. "The white paper mainly is focused on supply-side reforms. These should improve the NAIRU or its equivalent for the underutilisation rate, but well in the future. Addressing some of the issues raised is not simple or quick.” He said, as long as the government focuses on the supply-side, the white paper’s recommendations will likely compliment monetary policy.

The white paper follows this year's RBA Review, which proposed a dual mandate that targeted price stability and full employment, with each given equal consideration. (See MNI BRIEF: RBA Review Targets Less Meetings, More Transparency) The Federal Government and the RBA have committed to implement most of the recommendations, however, authorities have not released full details of the changes.

An RBA spokesperson said the Reserve believed the government’s approach was complimentary, but declined to comment on the white paper further.