Full Employment

Policy Approach

The goal of full employment is specifically mentioned in the charter of the Reserve Bank of Australia. A second charter goal also states that the Bank should aim to improve the general prosperity of Australians. That is, the Bank should make policy to maximise the standard of living of Australian consumers.

As such, monetary policy is now the main weapon used to tackle the problem of unemployment. The impact of changing interest rates is relatively direct. When interest rates fall, consumers and businesses will need less funds to repay existing loans, they will be more likely to take out new loans, and they are also less likely to save (due to the lower rate of return). As such, it is likely that we will see higher levels of consumption spending (C) and investment spending (I). This will lead to higher levels of aggregate demand. To satisfy this demand, suppliers may need to employ extra staff. If this occurs then the unemployment rate will fall.

The supply side impact of a change in interest rates will also assist in the pursuit of full employment. As interest on loans and overdrafts represents a significant cost of production to businesses, any fall in the cash rate will eventually flow through to mean lower costs overall. As such, when demand for the goods and services produced by the business increases, lower overall running costs will mean that the manager is more likely to consider taking on new staff.

The impact of monetary policy in this way can be seen during recent years. During 2008 it became apparent that the unemployment rate was likely to increase due to changing circumstances in the external sector. The RBA slashed the cash rate during the second half of that year, and continued this process in the first half of 2009. It was clear that the goal during this phase was to prevent the unemployment rate from increasing. Despite predictions that the unemployment rate could increase to be as high as 10%, the effective use of monetary policy helped to ensure that the rate did not climb above 5.8% during the economic crisis.

At this time, monetary policy was supported by a strong fiscal injection. The federal government ran a significant budget deficit, including two separate stimulus packages to try and guarantee as many jobs as possible. For example, in the first quarter of 2009 the government spent $42 billion in an attempt to increase demand in this country. The policy was effective, because (as mentioned above) unemployment remained at an acceptable level during this period.

The impact of microeconomic reforms on the unemployment rate should be considered in two ways. In the short term, the unemployment rate may increase. This is because in striving to become more efficient businesses may well increase the productivity of some workers while others lose the positions. This is certainly true of Telstra during the early part of the reform process in the telecommunications industry.

However, in the long term the government believes that structural reform of the Australian economy is necessary to ensure that the international competitiveness of Australian goods and services can be improved. If this is the result, then improved international competitiveness should lead to growth in the Australian economy due to the demand for exports. As such, the short term problems associated with the microeconomic reform process may be necessary to improve the long term outlook for employment.

Current Page: Policy Approach