Economic stabilisation in Australia : inflation and unemployment / Malcolm Gray and Fred H. Gruen.

Abstract

This paper examines Australia's unemployment, output and inflation performance in the seventies. After Australia joined the OECD in June 1971, this organisation prepared its first economic survey - which congratulated Australia on its relatively good unemployment/inflation performance. These congratulations were based on some comparison for the period 1955 to 1968. After that period, OECD countries' macro-economic performance deteriorated generally - but Australia's deteriorated also relative to that of practically every other OECD country. The bulk of the paper is taken up with two dissections - one of changes in unemployment, the other of changes in output. Changes in unemployment are dissected into changes in population (aged 15 - 64), in the participation rate, in output and in labour productivity. It is shown that Australia's output decline during the mid-seventies recession was relatively mild - (compared to the OECD average) - yet Australia suffered a greater increase in unemployment. This was primarily because Australia's labour productivity growth rate did not decline as much as in most OECD countries. In other words Australian firms seem to have shed more labour, whilst the typical OECD country suffered a more drastic decline in labour productivity - since OECD firms hoarded more labour than they typically hoarded in Australia. The recession also lasted longer in Australia than in most OECD countries. After calendar 1975 OECD average output growth rates recovered to 84% of their pre-1974 levels - whilst in Australia output growth rates stayed low until the end of 1978. The period 1976 to 1978 was a period of substantial growth in "hidden" unemployment as participation rates declined and some of the unemployed left the labour force - on occasions to draw invalid or service pensions. Since the most important component of changes in the level of unemployment in Australia have been fluctuations in the growth rate of GDP, the second section of the paper concentrates on decomposing these changes in GDP. The vehicle used for this decomposition is a conventional Keynesian aggregate demand model. No claim is made that this decomposition necessarily represents any causal relationships. To move to such a level of analysis would require the construction and estimation of a structural model of the economy. Our aim is the simpler one of describing the changes in the components of output which make up the changes in the total. We concentrate on the non-farm sector which accounted for over 90% of GDP growth. (Also, in the short run, the dominant influences on the farm sector are outside the control of domestic agencies.) Non-farm GDP growth is subdivided into seventeen individual items which, in turn, are aggregated into six groups. Of these, the most important are the private sector, the Government sector, the external sector and a miscellaneous group. Over the period as a whole (1966 to 1978) the most important positive influences have been the government and external sectors with average annual contributions to GNFP growth of 2.9 and 2.2% respectively. The private sector was next in importance with an average negative contribution of 1.1%. None of these sectors have made an even contribution over the period. The government's contribution seems to have been counter-cyclical - with relatively larger contributions made in years of low output growth such as 1974, 1977 and 1978. However, the net stabilising function of the government sector is a subject requiring a good deal of further examination. The external sector's contributions to growth over the period has tended to decline - from an average of +3.2 percentage points in the eight years before 1973/74 to an average of - 0.50 percentage points during the three years ended June 1979. Both exports and the average propensity to import contributed to this decline. The private sector's negative overall contribution to growth has tended to be reversed over this period - with the 1.8 percentage point negative contribution over the earlier eight year period converting to an average positive 0.3 percentage points during the three years ended June 30th, 1979. Of the various components of the private sector, only the average propensity to invest by the corporate sector has followed the same longer term trend. The last sector worthy of specific mention here is the miscellaneous sector - where the statistical discrepancy dominates the year-to-year movements. The statistical discrepancy is defined as the difference between the income and expenditure estimates of GDP. By definition, we have no hard information as to what this variable represents. But it was the largest component depressing output growth in the most serious recession for thirty years - the period 1974-75. This is a rather discouraging profession of ignorance on the part of the National Accounts Estimates - which obviously requires more thorough examination. The section on money and inflation shows that monetary shocks have been a major feature of the economic environmentin the seventies, something not true of the sixties. It is argued that ill-timed or ill-conceived government policy must bear a large share of the blame for generating the shocks. Show more