Morrison’s greatest achievement: our rapid recovery from the COVID recession

Unemployment is at a near 50-year low of just 4 per cent. The share of underemployed Australians – those in work but who want more hours – is at its lowest level in more than a decade.

We’re on the cusp of full employment for the first time in decades.

Australia’s rapid recovery from the pandemic recession is the greatest achievement of the Morrison government. And our latest report shows that some of Australia’s most vulnerable stand to benefit the most.

Unemployment can leave deep scars. Australians who lose their job suffer large falls in their income that persist well after they find another job. Workers with otherwise good work histories will still earn 11 per cent less a full 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.

Australia’s rapid post-pandemic recovery will avoid so much of this pain.

Our research shows that low-wealth and low-wage workers are more than twice as likely to lose their jobs when unemployment rises. Younger, less-educated workers are also hit harder. But when the economy grows strongly, poorer Australians get the biggest lift in their hours worked, total employment, and labour income. Sustained low unemployment is among the best ways to improve the lives of our most vulnerable workers.

Even those who keep their jobs are hurt when unemployment rises. High unemployment in the years leading into the Covid-19 crisis accounts for at least one-third of the slowdown in wage growth in Australia since 2013.

Australia’s rapid economic recovery from the recession did not occur by accident.

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.

Australia chose to push unemployment back down quickly, and it worked. It is a lesson we should learn for future recessions.

The contrast with Australia’s economy in the years immediately before Covid-19 couldn’t be clearer. Inflation had been below its target for more than half a decade, unemployment was persistently above 5 per cent and underemployment trended upward for a decade. Many Australians didn’t see a decent pay rise in years.

But in the past two years Australia’s two main authors of macroeconomic policy – the Reserve Bank and the Treasury – radically rewrote the script.

After refusing to cut interest rates despite years of below-target inflation before the pandemic, the RBA cut the cash rate to 0.1 per cent, undertook quantitative easing, and committed to not raise rates until we saw actual inflation within the target range.

After the global financial crisis, successive federal governments of both political stripes sought to quickly return the budget to surplus. Now, prompted by the Covid-19 crisis, the government has a new fiscal strategy: it wants to push unemployment below pre-pandemic levels.

Now, as the crisis fades, inflation is on the march for the first time in decades. In the short term, the RBA will need to try to tame inflation, and the federal government should avoid adding further fiscal fuel to the fire while inflation is high.

But we shouldn’t lose sight of the prize of full employment.

Australia’s macroeconomic policy framework is about to be renewed.

Both the Coalition and Labor have committed to commissioning the first review of the RBA in more than 30 years.

At the same time, structural budget pressures remain: the latest federal budget projects that spending will stabilise at 26.3 per cent of GDP by the end of the decade, compared to an average of 25 per cent in the decade before the Covid-19 pandemic. Along with likely future interest rate rises, this means that over time, tax and spending reforms will be needed to maintain debt sustainability.

Whoever wins the election on Saturday week will therefore need to review Australia’s medium-term fiscal targets with an eye to managing the growing importance of fiscal policy in macro-stabilisation while also keeping debt sustainable.

Australia is finally experiencing full employment for the first time decades. But there is much more work to be done to lock it in.