Wednesday, 8 November 2017

Unemployment targets

Grant Robertson wants the Reserve Bank to follow a dual mandate, targeting both inflation and unemployment.

RBNZ already weighs unemployment, both because inflation targeting requires having a sense of the slack available in the economy, and because policy targets agreements have required that the bank minimise unnecessary variability in the unemployment rate while targeting inflation.

I expect a formal dual mandate is riskier than Rob Hosking at the NBR suggests. A sound governor backed by a good board will recognise that the long-run Philips curve is vertical and seek to minimise longer run unemployment by providing stable inflation rates around the middle of the inflation band. But if a governor and board are chosen explicitly by the Minister to focus on unemployment, that could be decidedly worse. Policy targeting lower unemployment while taking an eye off of inflation will succeed in delivering permanently higher inflation while doing nothing to reduce long-run unemployment.

And where Robertson says he wants unemployment down below 4%, where it was in 2005-2008, we should remember that there are a few ways of doing that. The labour force participation rate in 2005-2008 never reached 78% in the June quarter annual figures (for those aged 15-64, so isolating from changes in retirement behaviour). It has been above 78% since 2014 and sat at 80.4% in the 2017 June annual figure. The employment rate, 2005-2008, was 74.8 in those annual June figures; in 2017's figures, it was 76.2%.

As I read the figures, we've had strong population growth and strong employment growth. Together those mean that a new tranche of workers enter the market, start looking for work, find jobs, and a new tranche of incoming job-seekers follow on behind. At the same time we've had a strong push to get people from benefits into work. All of those have boosted the participation rate and the employment rate - and the churn from new entrants coming in has pushed up the unemployment rate a bit.

Getting the unemployment rate down by a point would be pretty easy: stop work-testing things at MSD, and slow the arrival of new migrants who bring partners who spend a couple quarters looking for work before landing a job. The labour force participation rate would drop, as would the employment rate. But if all you care about's the unemployment rate, that'd do it.

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