Australia should shoot for full employment after the COVID crisis, according to a new Grattan Institute report.

No one left behind: Why Australia should lock in full employment shows that all workers suffer when unemployment is high, but the most vulnerable workers suffer the most. And the costs of failing to reach full employment increase over time.

Australians who lose their job suffer large falls in their income that persist well after they find another job.

Workers who otherwise have good work histories will still have an 11 per cent lower labour income five years after the typical three-month spell of unemployment. The cumulative effect over five years is equivalent to nearly a year of lost pay.

Unemployment also causes worse mental health and is associated with higher rates of suicide.

Low-wealth and low-wage workers are more than twice as likely to lose their jobs when unemployment rises. Younger, less-educated workers and those in routine manual jobs are also hit harder.

Sustained low unemployment and under-employment are among the best ways to improve the lives of Australia’s most vulnerable workers.

But high unemployment also hurts those who keep their jobs. A larger pool of unemployed workers reduces the bargaining power of all workers. High unemployment in the years leading into the COVID crisis accounts for at least one-third of the slowdown in wage growth in Australia since 2013.

Weak labour markets also cast long shadows. Even temporary bouts of unemployment can cause permanent damage if workers’ skills erode. Spells of long-term unemployment can cause workers to give up and walk away from the job market. And weak demand for labour weighs on economic growth because firms have little incentive to expand and make new investments.

Australia’s economy was sluggish in the years immediately before the COVID recession: inflation had been below its target for more than half a decade, unemployment was persistently higher than it could have been, and many Australians had not had a decent pay rise in years.

But Australia has recovered much faster than after previous recessions. The unemployment rate is now at a near 50-year low of just 4 per cent, and the labour market is the strongest it has been for decades. We should learn the policy lessons.

‘Australia’s rapid economic recovery from the COVID recession did not occur by accident,’ says Grattan Institute Economic Policy Program Director Brendan Coates.

‘It is a macroeconomic success story, the result of unprecedented monetary policy – record low interest rates – and unprecedented fiscal policy – hundreds of billions of dollars of government spending to keep households and businesses afloat and stimulate economic activity.

‘The rising inflation and interest rates we see today are a challenge – but they are also a testament to that success.’

In the short term, the Reserve Bank needs to try to tame inflation, and the Federal Government should avoid adding further fiscal fuel to the fire while inflation is high. But we should not lose sight of the prize of full employment.

‘Whoever wins the 2022 federal election should make sustaining full employment a baked-in national priority,’ Mr Coates says.

‘Our report shows why Australians should not settle for anything less than full employment – where everyone who wants a job can find a job.’

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