We can and should keep unemployment below 4%, say top economists

Australia’s leading economists believe Australia can sustain an unemployment rate as low as 3.75% – much lower than the latest Reserve Bank estimate of 4.25% and the Treasury’s latest estimate of 4.5%.

This finding, in an Economic Society of Australia poll of 51 leading economists selected by their peers, comes ahead of next month’s release of a government employment white paper, and an expected direction from Treasurer Jim Chalmers that the Reserve Bank quantify its official employment target.

Asked what unemployment rate was most consistent with “full employment” under present policy settings, the 46 respondents who were prepared to pick a number or range picked an average rate of 3.75%.

The median (middle) response was higher, but still below official estimates – an unemployment rate of 4%.

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Significantly, only two of the economists surveyed picked an unemployment rate of 5% or higher, which is where Australia’s unemployment rate has been for most of the past five decades.

The 3.75% average implies either that the Reserve Bank and government have lacked ambition on employment for much of the past half-century, or that the sustainable unemployment rate has fallen.

Australia’s unemployment rate dived to 3.5% in mid-2022 and has remained close to that long-term low since.

The survey result suggests the government can lock in the present historic low and need not – and should not – allow unemployment to climb too far from its present rate.

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Many of the experts surveyed questioned the idea of a “magic number” or non-accelerating inflation rate of unemployment (NAIRU) used by the Treasury and the Reserve Bank as a guide to how low unemployment can go without feeding inflation.

Former OECD official Adrian Blundell-Wignall said the concept was not helpful “even in the short run, and certainly not the long run” because NAIRU kept changing depending on what else was going on in the domestic and global economy.

Any rate of unemployment would have a different implication for inflation depending on what the government was doing with tax and spending policy.

Geopolitical events and climate change have probably pushed up the rate of inflation to be expected from any given domestic unemployment rate.

3.5% unemployment, yet falling inflation

Craig Emerson, a former minister in the Rudd and Gillard governments, said NAIRU was best described as the lowest unemployment rate consistent with inflation not taking off. Given Australia’s inflation rate is now coming down, NAIRU is clearly below the present unemployment rate of 3.5%, he argued.

The University of Queensland’s John Quiggin said Australia can be considered to have full employment when the number of job vacancies matches the number of unemployed people. This is the case at present, suggesting “full employment” means an unemployment rate of 3.5%.

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Alison Preston from the University of Western Australia said industrial relations changes have given workers much less power to obtain higher wages than before, suggesting the “non-inflation accelerating rate of unemployment” was either lower than before or an irrelevant concept.

Curtin University’s Harry Bloch says there will always be a mismatch between the jobs on offer and the skills available – an academic can’t do the work of a plumber, or vice versa, for instance. But even so, he says it ought to be possible to get unemployment down to the 2% achieved repeatedly during the 1950s and 1960s.

Consulting economist Rana Roy says in normal times “full employment” probably meant an unemployment rate near 1%, but the business cycle meant there would always be brief – “and I stress brief” – periods when governments might have to accept an unemployment rate of nearer 2%.

Fix education, job-matching and childcare

Asked to select the three measures from a list of 11 that would do the most to bring down the sustainable rate of unemployment, the 51 experts overwhelmingly backed improving the quality of school education (55%), followed by improving employment services (39%) and cutting out-of-pocket childcare costs (39%).

There was also strong support for relaxing industrial relations to give employers greater flexibility (33%) and winding back taxes and regulations facing businesses (24%) as well as boosting enrolments in tertiary education (27%).

There was very little support for cutting immigration or the JobSeeker payment.

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Labour market specialist Sue Richardson said a high-quality job-matching service would both reduce unemployment and boost productivity because Australians would be matched to jobs for which they were best suited.

The unemployed who would benefit the most would be those further down the queue who were the least successful in finding jobs.

Industry economist Julie Toth said digital technologies and working from home were already making it easier to match Australians with jobs across a range of industries, and it was important to preserve these recent gains.

One of the panellists, Peter Tulip from the Centre for Independent Studies, rejected all the options offered for lowering the achievable unemployment rate, and said the only one that might have some effect was restraint when increasing minimum wages.

Another, Brian Dollery from the University of New England, said much of Australia’s unemployment had been generated by unemployment benefits that were too high.

Together, the results of the survey call for the government and the Reserve Bank to be ambitious about unemployment, and not to accept a rate above 4%.

The government’s employment white paper is due by the end of September.

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Beyond Barbie and Oppenheimer, how do cinemas make money? And do we pay too much for movie tickets?

I’ve got two questions about blockbuster movies like Barbie and Oppenheimer.

1. Why aren’t the cinemas charging more for them, given they’re so popular?

2. Why are they the same price, given Oppenheimer is an hour longer?

The opening weekend for both films saw an avalanche of Australians returning to the cinema. Extra staff had to be put on (although probably not enough) to manage queues, turn away pink-clad fans who couldn’t get in, and clean up mountains of popcorn trampled underfoot.

An obvious solution to such a rush of demand is to push up prices. Airlines do it when they are getting low on seats. When more people want to get a ride share, Uber makes them pay with “surge pricing”.

Even books are sold at different prices, depending on the demand, their length, their quality and how long they’ve been on the shelves.

But not movie tickets, which are nearly always the same price, no matter the movie. Why? And how much has the cost of a trip to the movies risen over the past 20 years?

Why not charge more for blockbusters?

In suburban Melbourne, Hoyts is charging $24.50 for the two-hour Barbie – the same as it is charging for the three-hour Oppenheimer, even though it could fit in far fewer showings of Oppenheimer in a day. It’s also the same price as it is charging for much less popular movies, such as Indiana Jones and the Dial of Destiny.

It’s also how things are in the United States, where James Surowiecki, author of The Wisdom of Crowds blames convention and says

it costs you as much to see a total dog that’s limping its way through its last week of release as it does to see a hugely popular film on opening night.

Australian economists Nicolas de Roos of The University of Sydney and Jordi McKenzie of Macquarie University quote Surowiecki in their 2014 study of whether cinema operators could make more by cutting the price of older and less popular films and raising the price of blockbusters.

By examining what happened to demand on cheap Tuesdays, and developing a model taking into account advertising, reviews and the weather, they discovered Australian cinemas could make a lot more by varying their prices by the movie shown. We turn out to be highly price sensitive. So why don’t cinemas do that?

‘There’s a queue, it must be good’

It’s the sort of thing that puzzled Gary Becker, an economic detective of sorts who won the Nobel Prize for Economics in the early 1990s. A few years earlier, he turned his attention to restaurants and why one particular seafood restaurant in Palo Alto, California, had long queues every night but didn’t raise its prices.

Across the road was a restaurant that charged slightly more, sold food that was about as good, and was mostly empty.

His conclusion, which he used a lot of maths to illustrate, was there are some goods for which a consumer’s demand depends on the demand of other consumers.

Queues for restaurants (or in 2023, long queues and sold out sessions, as crowds were turned away from Barbie) are all signals other consumers want to get in.

This would make queues especially valuable to the providers of such goods, even if the queues meant they didn’t get as much as they could from the customers who got in. The “buzz” such queues create produces a supply of future customers persuaded that what was on offer must be worth trying.

Importantly, Becker’s maths showed that getting things right was fragile. It was much easier for a restaurant to go from being “in” to “out” than the other way around. Once a queue had created a buzz, it was wise not to mess with it.

Cashing in from the snack bar

There are other reasons for cinemas to charge a standard ticket price, rather than vary it movie by movie.

One is that it is hard to tell ahead of time which movies are going to soar and which are going to bomb, even if you spend a fortune on advertising as the makers of Barbie did. In the words of an insider, “nobody knows anything.”

Another is the way cinemas make their money. They have to pay the distributor a share of what they get from ticket sales (typically 35-40%). But they don’t have to pay a share of what they make from high-margin snacks.

This means it can make sense for some cinemas to charge less than what the market will bear – because they’ll sell more snacks – even if it means less money for the distributor.

Rising prices, despite some falling costs

But cinemas still charge a lot. From 2002 to 2022, Australian cinemas jacked up their average (not their highest) prices from $9.13 to $16.26 – an increase of 78%.

In the same 20 year period, overall prices in Australia, as measured by the consumer price index, climbed 65% – less than the rise in movie ticket prices.

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A 2015 study found Australian cinemas charge more than cinemas in the US.

Yet some of the cinemas’ costs have gone down. They used to have to employ projectionists to lace up and change reels of film. Digital delivery means much less handling.

A now-dated 1990s report to the Australian Competition and Consumer Commission found the two majors, Hoyts and Greater Union/Village, charged near identical prices except where they were faced with competition from a nearby independent, in which case they discounted.

Whether “by design or circumstance”, the two cinema chains rarely competed with each other, clustering their multiplexes in different geographical locations.

Longer films no longer displace shorter films

I think it might be the multiplex that answers my second question: why cinemas don’t charge more for movies that are longer (and movies are getting longer).

In the days of single screens, a cinema that showed a long movie might only fit in (say) four showings a day instead of six. So it would lose out unless it charged more.

But these days, multiplexes show many, many films on many screens, some of them simultaneously, meaning long films needn’t displace short films.

Although we have fewer cinema seats than we had a decade ago (and at least until the advent of Barbie, we’ve been going less often) we now have far more screens.

Long movies no longer stop the multiplexes from playing standard ones. And because cinemas like to keep things simple, you pay the same price, no matter which movie you chose.

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Australia is about to set its first full employment target – and it will define people’s lives for decades

Stand by for one of the most important decisions Treasurer Jim Chalmers and the Albanese government will make.

That decision is to commit future governments and the Reserve Bank to full employment, and, more importantly, spell out what that means.

The Australian government hasn’t wholeheartedly and publicly committed itself to full employment since the 1945 Full Employment White Paper, released as the second world war was drawing to a close and Australia was gearing up for peace.

The definition Chalmers chooses – whether it specifies an unemployment rate of 3.5%, 4.5%, or the more ambitious target of 3% I would most like – could reverberate for as many decades as the white paper did in 1945.

Tuesday’s Reserve Bank decision not to increase interest rates further makes it more likely we could end up with a more ambitious target.

Australia’s daunting post-war challenge

The 1945 white paper was prepared for Prime Minister John Curtin by a committee led by the head of post-war reconstruction HC “Nugget” Coombs.

In the 20 years leading up to the war, more than 10% of workforce had been out of work, climbing to 25% during the depression. The committee wanted the all-out mobilisation necessitated by war to be continued into the peace.

Their challenge was to find jobs for the 1 million defence staff who would be returning to civilian life.

Achieving that would require governments to actively stimulate private spending, through their own spending and through monetary and other policies “to the extent necessary to avoid unemployment and the consequent waste of resources”.

That was an idea accepted by both Labor and Coalition governments right through to the 1970s, where unemployment remained as low as 2%. It was also one Coombs himself adopted as the first head of the Reserve Bank of Australia from 1960.

But the employment target Coombs helped write in to the Reserve Bank Act was fuzzy: it simply committed the bank to “the maintenance of full employment in Australia”.

Finally setting a jobs target

Fast forward to March 2023, when the treasurer was handed the review of the Reserve Bank, An RBA fit for the future.

That final report pointed out the bank’s target for inflation is specific – defined in a written agreement with the treasurer as “2-3% on average, over time”.

In contrast, the bank’s target for employment has no numbers attached – resulting in inflation getting prioritised.

While it is true that putting a number on a target doesn’t guarantee an outcome, the number put on the inflation target does seem to have helped bring it down.

The RBA review recommended the treasurer’s agreement with the bank be updated, requiring it to adopt an explicit target for “full employment”. That would most likely be expressed via a range of indicators, including the unemployment rate, the underemployment rate, and the tenure of employment.

Chalmers says he will update the agreement and issue the direction by the end of the year. Before then, next month he will make public his own target for full employment via his employment white paper, now being prepared by the treasury.

Moving unofficial targets of the past

The numbers that the treasurer and the Reserve Bank adopt will matter enormously. And it’s worth clarifying that the target can’t be an unemployment rate of zero.

There will always be some temporary unemployment as people move between jobs. That’s also the case when people leave industries that are no longer needed – such as thermal coal mining in the years ahead, as our energy mix changes – and go on to retrain for jobs in emerging industries.

For a while in the 1990s, the Reserve Bank acted as if full employment meant an unemployment rate of 7%. That was its estimate of the “non-accelerating inflation rate of unemployment” (also known as NAIRU), the rate needed to stop shortages of useful workers pushing up inflation.

In 2017, the bank cut that estimate to 5% and then 4.5% in 2019. Then, about a year after COVID hit, it appeared to cut it further when Governor Philip Lowe said in 2021 there was a chance Australia could achieve and sustain an unemployment rate in the “low fours”, although only time would tell.

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The lower our target, the more secure we will be

The unemployment rate is now 3.5% – a near five-decade low.

If the government and the bank choose to adopt 3.5% as a target, it would put 150,000 more Australians into work than would a higher unambitious target of 4.5% – in perpetuity.

A lower target of 3% (not too far above the 2% Australia achieved from 1940 to 1974) would do much more than put people into jobs and better use our resources.

It would also help us adapt to change in the way we are going to need to.

Creating confidence to face change

The 1945 white paper was on to this, at another time of massive transition when the wartime industries were dying and the peacetime industries emerging.

It said an assurance of full employment would

assure workers that the community has need of their services somewhere, and will restore the basic sense of security without which new risks will not readily be undertaken.

It’s a point echoed by Prime Minister Bob Hawke’s former economic advisor, Ross Garnaut, in an address to the Australian Conference of Economists last month.

He said unless there was confidence in high employment, every time an industry or employer was threatened with closure, there would be a cry of “jobs, jobs, jobs” as workers fought to protect what they had.

Garnaut told me it was a lesson he learned from Hawke when he signed on with the prime minister in 1983. Hawke agreed with him that the economy would have to change and some industries would have to die. But Hawke told him he wasn’t going to bring on those changes until unemployment was clearly coming down.

When people knew they could get another job, they would accept change.

Now, as in the 1940s and 1980s, we need that confidence. If Chalmers and the Reserve Bank adopt an ambitious target, they’ll create it and set us up for the challenges ahead.

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