Lowering the NAIRU
Among the relatively few points the opposition has scored in this Parliament has involved the unwillingness (or, in the Opposition’s telling, inability) of Treasurer Wayne Swan to respond substantively to a question from Malcolm Turnbull about the level of the NAIRU (non-accelerating inflation rate of unemployment), AKA “the concept formerly known as the natural rate”.
At this point I was going to refer readers to Wikipedia but, as with quite a few economics articles, it’s not entirely satisfactory. However, rather than complain, I’ve edited it to include a slightly better explanation.
Coming back to Australia, the fact that inflation is rising suggests that, if the NAIRU exists, we are now below it. It doesn’t seem as if there is much scope for fiscal and monetary policy to be tightened further. Given the risk of a breakdown in global credit markets, raising interest rates any further seems very dangerous. And the tax cut promises (which should be kept – the credibility of political processes is more important than the risk of inflation) mean that the scope to tighten fiscal policy is limited.
What remains is the possibility of reducing the NAIRU by improving the performance of labour markets. Education and training will help in the long term, but not so much in the short run. What is needed is to take advantage of the tight labour market to reduce long-term unemployment and to bring discouraged workers back into the labour market. At this phase of the cycle, the best policy instrument to achieve this goal is a targeted wage subsidy. Employers who take on workers moving off unemployment and disability benefits, or re-entering the labour force after a long absence should receive a subsidy for a period of say, three to six months. I’ll try to post a bit more on this, and why it’s superior to suggested alternatives like cutting minimum wages, before too long.