An Evaluation of Unemployment Policy in Australia Using the Range of Equilibria

Abstract

The major failures of macroeconomic policy in the last 40 years are the huge increases in unemployment and inflation in the 1970s and the persistence for 25 years of the former. This article uses econometric estimates of a model of the range of equilibria for Australia for the period 1965:4 to 2003:3 to evaluate the role of macroeconomic policies in these failures. Our analysis distinguishes the roles of aggregate supply policies and aggregate demand policies. We conclude from our analysis that macroeconomic outcomes would have been better over this period had monetary policy been guided by a hierarchical inflation target, which is to be set so as to achieve the highest level of activity subject to satisfying the inflation target.

John Maynard Keynes, Joan Robinson and the prospect theory approach to money wage determination

“…The positive influence of profits on wages found in empirical investigations such as Krueger and Summers () supports Robinson’s theory. Many scholars have put forward this relation, see Forder ().…”

“…However, as Keynes and Robinson emphasised, a persistent downward movement in money wages is never observed, which suggests that in practice, even at very low rates of employment the economy is still within Bhaskar's range. This is supported by the empirical investigations of this model for Australia, Lye and McDonald (2006), and the United States, Lye and McDonald (2008). Those investigations find little evidence supporting a strong persistent downward movement of money wages.…”

Australian Unemployment in the Long Run, 1903-2007*

“…Defined as trade union membership as a proportion of employment. Sources: (i) 1901(i) and 1906(i) -1984(i) : Withers et al (1985(ii) 1990and 1992-2006: ABS (cat no. 6310.0) - Table: Trade Union Membership Time Series.…”

“…Pissarides, 1991;Groenewold & Hagger, 1998). A third focus is to track changes in the NAIRU by directly estimating a time-varying NAIRU or by allowing for regime shifts in the Phillips Curve (Debelle & Vickery, 1998b;Gruen et al, 1999;Lye & McDonald, 2006;Kennedy et al, 2008;Lim et al, 2009).…”

Examining Full Employment in Australia Using the Phillips and Beveridge Curves

“…17 17 Australian estimates of NAIRU or the natural rate of unemployment include Crosby and Olekalns (1998), Debelle and Vickery (1993), Groenewold and Hagger (1998), Hagger and Groenewold (2003), Huay and Groenwold (1992), Johnson and Downes (1994), Lye and McDonald (2006), McDonald (2002), Trivedi and Baker (1985), Turner et al (2001) and Watts and Mitchell (1991). …”