Bank Joins Debate On Jobless Rate

Sydney Morning Herald

Wednesday February 20, 2008

Jacob Saulwick

THE Reserve Bank says low unemployment can be sustained without inflation breaking out, adding its two cents' worth to a debate in Parliament about the job market's effect on inflation.

The Opposition has grilled the Treasurer, Wayne Swan, about at what point low unemployment starts to drive inflation up. But yesterday Coalition MPs found themselves in a knot on the issue.

Economists have long argued about how low the unemployment rate can go before workers, emboldened by a booming labour market, start to drive up inflation by demanding higher wages.

The Opposition's finance spokesman, Peter Dutton, yesterday nominated a 5.1 per cent unemployment rate. Soon after, the Opposition's spokesman on small business, Steven Ciobo, said 4 to 4.5 per cent. At present the unemployment rate sits at 4.1 per cent, a three-decade low.

Addressing a group of business leaders in Sydney yesterday, a Reserve Bank assistant governor, Malcolm Edey, said labour markets had become more flexible in the past 20 years, which should continue to sustain low unemployment without necessarily increasing inflation.

"We should expect to see that low levels of unemployment can still be sustained without generating significant lifts in wage inflation," Dr Edey said.

But he warned that, even so, there was some evidence that wages had picked up recently.

Dr Edey and other officials will focus today on the release of official labour costs figures for a sign the healthy jobs market is fuelling wages growth.

A survey released yesterday by the Melbourne Institute found wages had only risen 3 per cent in the year to February, tracking the general rate of inflation.

The parliamentary stoush came after the Opposition's Treasury spokesman, Malcolm Turnbull, repeatedly asked Mr Swan to nominate the non-accelerating inflation rate of unemployment.

Mr Swan yesterday quoted the former Reserve Bank governor Ian Macfarlane as saying the concept had never been used to make decisions on interest rates.