An Estimate of the Range of Equilibrium Rates of Unemployment for Australia

Abstract

This paper estimates the range of equilibrium rates of unemployment for Australia. The estimation technique nests a unique equilibrium rate of unemployment as a special case. It is found for the period 1965^97 that a range of equilibria of at least 6.6 percentage points of unemployment exists in Australia. The lower limit of this range, which is the minimum rate of unemployment consistent with non-increasing in£ation, was 2^3 per cent in the 1960s, jumped in the early 1970s and was about 5.6 per cent during the 1990s. I IntroductionA number of papers have argued that a range of equilibrium rates of unemployment is more realistic than a unique equilibrium (or natural) rate of unemployment. For example, McDonald (1995) reviews evidence covering a number of countries and time periods, including, most dramatically, the interwar years. More recently Crosby and Olekalns (1998, p. 124) conclude that their estimates of the in£ation process in Australia are consistent with the idea of a range of equilibria.With a range of equilibrium rates of unemployment, a region of low rates of unemployment in which in£ation tends to be increasing is separated from a region of high rates of unemployment in which in£ation tends to be decreasing by a region of intermediate rates of unemployment in which in£ation tends to stay constant. 1 In this paper, the region of low rates of unemployment below the range is called the peak, referring to the peak of the business cycle, and the region above the range is called the trough. However, even although empirical evidence for the existence of the range has been put forward, no formal estimation of the size of the range has yet appeared in the literature. This paper attempts to provide such an estimate for Australia. The estimation technique nests the unique equilibrium as a special case. It is found that, for Australia for the period 1965^97, a range of at least 6.6 percentage points of unemployment exists. The lower limit of this range, which is the minimum rate of unemployment consistent with nonincreasing in£ation, was 2^3 per cent in the 1960s, jumped in the early 1970s and was about 5.6 per cent during the last three years of the period of estimation, i.e. during 1995^97. During the entire estimation period, 1965^97, the actual rate of unemployment was never above the range, i.e. the Australian economy was never in the trough. Wells and two referees for comments on earlier drafts. 1 The constancy of the rate of in£ation in the range is at a given rate of unemployment. Other in£uences, such as changes in the rate of unemployment, can have one-o¡ e¡ects on the rate of in£ation.

Equilibrium unemployment: Theory and measurement in Australia using the Phillips curve

“…25 More recently, in Lye et al (2001; Table 2), the estimation of a Phillips curve in which unemployment benefits are allowed to influence a unique equilibrium rate of unemployment finds the impact of unemployment benefits to be positive and significant.…”

Implications of Insights from Behavioral Economics for Macroeconomic Models

“…a large negative shock has pushed the economy to the lower end of the range, an expansionary monetary policy moving the economy to the upper end of the range will in fact involve a permanent increase in aggregate output. Lye, McDonald and Sibly (2001) find empirical support for the existence of a range of equilibrium unemployment rates in Australia.…”

Labour Market Dynamics in Australia: What Drives Unemployment?

“…The NAIRU is estimated by (i) applying the Kalman filter technique (Debelle and Vickery, 1998), (ii) using VAR (Crosby and Olekalns, 1998) and SVAR models (Groenewold and Hagger, 2000), and (iii) by embedding the Phillips curve into a big macroeconomic model such as the Treasury macroeconomic (TRYM) model (Song and Freebairn, 2005). Finally, Lye et al (2001), and Lye and McDonald (2006) use the range model (which allows for a piece-wise linear short-run Phillips curve), to evaluate the minimum equilibrium rate of unemployment, and contrast their model to NRU specifications.…”

“…It may also be due to the peculiarly narrow-based investment booms in Australia and the wage spillovers that they caused elsewhere in the economy." [p. [43][44] In contrast to the above work, this paper follows the chain reaction theory (CRT) of unem-ployment, presented in Section 3, and shows that capital stock affects positively employment in the long-run, while capital accumulation is inversely related with the ups and downs of the unemployment rate. The contribution of capital stock to the evolution of unemployment is among the several important considerations which distinguish the CRT from the NAIRU framework of analysis.…”