Why Australia isn't aiming for 'full employment' anymore?
Is there a reason politicians wouldn't want as many people as possible to be employed?
It's a genuine question.
In the 1930s and 1940s, there was a lively conversation among economists about the theoretical possibility of "full unemployment".
After seeing the wastefulness of mass unemployment in the Great Depression, and how unemployment was eradicated when governments put their countries on a war-footing, it made economists wonder if it was possible to create full employment in peace time?
The question inspired a wave of research.
Economists knew individual employers were incapable of delivering full employment on their own, so it had to be the government's responsibility.
They said the government could achieve it using fiscal policy — by using its spending power to cover shortfalls in economic activity left by the private sector, to lift investment and consumption to the point where a fully employed economy was maintained.
And eventually, a wave of full employment policy washed across the democratic world.
In Australia, it arrived with the Labor government's 1945 White Paper on Full Employment, which aimed to lay the groundwork for official full employment from 1946 to 1975.
But the idea and practice of "full employment" was never universally welcomed.
In 1943, brilliant Polish economist Michał Kalecki wrote an essay explaining why.
Titled The Political Aspects of Full Employment, it became famous, years later, when its predictions came to pass.
Kalecki posed the problem this way.
"In the Great Depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany," he wrote.
"This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler.
"The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?"
Why businesses didn't want full employment
Kalecki said the arguments business leaders used against full employment fell into three categories.
He said they disliked "government interference"; they disliked the idea of governments subsidising consumption and making public investments; and they were concerned about the social and political changes that would result from the maintenance of full employment.
That last point was the most interesting.
According to Kalecki, if democratic countries started adopting full employment, it would change society in ways that business leaders wouldn't like and they'd start pushing back.
Specifically, it would increase the bargaining power of workers.
"Under a regime of permanent full employment, the 'sack' would cease to play its role as a disciplinary measure," he reasoned.
"The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow.
"Strikes for wage increases and improvements in the conditions of work would create political tension.
"It is true that profits would be higher under a regime of full employment than they are on average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and this adversely affects only the rentier interests.
"But 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders."
Remember, this was published in 1943, so attitudes, rhetoric, and the economic environment were different.
But Kalecki believed much of the economic research on full employment in the 1930s and 1940s had ignored the political reality of the policy.
He thought if full employment was adopted, it would increase the power of workers, and workers would be more inclined to strike to improve their pay and conditions.
And in a fully employed economy prone to inflation, price increases in an upswing would become problematic, making employers "boom-tired", and there would eventually be a counter-movement from the business community.
In Australia, economics students in the 1960s and 1970s were well aware of Kalecki's essay.
The "Keynesian consensus" of the post-war years was beginning to fray in those years.
From 1946 to 1975, Australia's national unemployment rate averaged below 2 per cent as successive federal governments intentionally used deficit spending to maintain full employment.
The economy, like economies in other Western nations, had grown strongly for decades.
The number of industrial disputes had increased each decade too.
In the 1950s, the average number of strikes per year was roughly 1,300. In the 1960s, it was 1,340. In the 1970s, it was 2,370.
The share of national income going to workers in the form of wages and salaries had also risen, peaking in the 1970s, but then things came to a head.
Dropping the 'full employment' approach
Major advanced economies, including Australia's, were hit by "stagflation" in the 1970s — slowing growth, rising inflation, and rising unemployment.
The complications metastasised through the decade, and business leaders were desperate to find a solution.
Full employment was abandoned as an official policy in Australia.
A new policy was adopted: officials would pursue a level of 'natural' unemployment that kept a lid on inflation (i.e. on wages and prices).
That policy remains in place today.
Following the reform era of the 1980s and 1990s, which was a direct response to the economic problems of the 1970s, industrial action has fallen to its lowest level in the post-war era, and wages are growing at their slowest pace in the post-war era.
Now, the world has changed dramatically since Kalecki wrote his essay.
Global systems have been deregulated, fixed exchange rates have been floated, high barriers to global investment and trade have been removed, and union membership has plummeted as unions' bargaining power has been systematically dismantled.
Even if Australia adopted genuine full employment again, Kalecki's old analysis wouldn't be directly applicable, but the political aspects of labour market policy have never gone away.
As Kalecki pointed out, by the early 1940s business leaders accepted that some form of government intervention would be coming after the war to boost employment.
That's why they started arguing that government intervention should be used to stimulate private investment.
"This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidising private investment directly in this or another form," he said, mimicking their argument.
"That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted."
Why does that sound familiar?
The post about “Why Australia isn't aiming for 'full employment' anymore" first appeared on the ABC Net website.
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