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The unemployment rate in Australia is modelled as an asymmetric and nonlinear function of aggregate demand, productivity, real interest rates, the replacement ratio, and the real exchange rate. If changes in unemployment are big, the management of of demand, real interest rates and the replacement ratio will be good policy instruments to start bringing it down. The model is developed by exploiting recent developments in automated model-selection procedures.

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This paper estimates a simultaneous‐equation model of wages and prices for Australia, underpinned by a competing claims framework of imperfect competition. Two separate co‐integrating relationships for wages and prices are identified by imposing the economic hypotheses implied by the theory. The steady‐state relationships for wages and prices are then embedded in a parsimonious, dynamic wage‐price model. The final model is both simple and parsimonious and able to describe the process of wage and price inflation in Australia.