Policy Impact

Full Employment

One of the charter goals of the RBA is to maintain full employment. As such, it is very important that we are able to assess how successful they have been at achieving this goal. The impact on full employment is similar to the impact on economic growth.

Interest rates represent both a supply and demand factor affecting full employment. When interest rates fall, the discretionary income of individuals and businesses will increase, and a percentage of this will be spent. This will lead to an increase in aggregate demand. Interest rates also represent a common cost of production for many businesses, and as such can affect the level of aggregate supply in the Australian economy. It is important to recognize that as the increase in aggregate supply will come about due to a fall in the cost of production (rather than an increase in productivity) this allows for the possibility of falling unemployment. Some employers may use their surplus funds to expand their businesses by employing more people.

However, it is also very important to recall that the impact on aggregate demand is likely to be stronger than the impact on aggregate supply. As such, it becomes possible that the Australian economy will experience inflation. As the RBA will always seek to minimize the incidence of inflation in the Australian economy, it is very likely that they will tighten monetary policy as soon as inflation becomes a possibility, even if the goal of full employment is not currently being achieved.

After the introduction of the GST in 2000, the cash rate fell steadily, and as a result so did the unemployment rate. By mid 2006 the unemployment rate had fallen to 4.9%, a figure that has not been seen in Australia since the 1970's. By 2007 it had fallen to 4.3%. At the same time the rate of inflation was creeping above 3% - in August 2006 a figure of 4% for inflation was recorded. As such the RBA recognised that it was no longer appropriate to use monetary policy to try and achieve a lower rate of unemployment at that time. Instead, they needed to begin adopting a contractionary stance and tackle the increasing inflation.

As a result, the cash rate was increased three times in 2006, and twice more in 2007. Allowing for the impact lag which is generally seen after a change in the cash rate, by early 2008 the unemployment rate had started to increase very slightly. In January of that year the unemployment rate increased to 4.5%. Although this is only a slight increase, it is consistent with the change that we would expect to see after the implementation of the restrictive monetary policy stance adopted in the eighteen months leading up to this time.

Current Page: Full Employment