The labour market is fundamental to the RBA's three key objectives: RBA Governor Philip Lowe

The labour market is fundamental to the RBA's three key objectives: RBA Governor Philip Lowe
The labour market is fundamental to the RBA's three key objectives: RBA Governor Philip Lowe

The RBA Governor Philip Lowe has said the labour market is key to the three key objectives that the RBA has held for the last six decades.

Speaking at the Committee for Economic Development of Australia (CEDA) event, Lowe cited the three broad monetary policy objectives when the Reserver Bank Act was passed 60 years ago.

They were the stability of the currency, the maintenance of full employment and the economic prosperity and welfare of the Australian people.

"These objectives have remained unchanged since 1959," Lowe said.

He said that where other nation's will have focused solely on inflation, Australia have had a three aim approach.

He added however that from operational perspective the flexible inflation target is the centre piece of the monetary policy framework.

"The target – which has been agreed to with successive governments – is to deliver an average rate of inflation over time of 2–3 per cent.

"Our focus is on the average and on the medium term."

Lowe said it was obvious to see the labour markets connection with the second objective, full employment, however it was important in the other two objectives.

"Trends in the labour market have a major bearing on inflation outcomes, so they are important for the first element of our mandate [the stability of our currency] as well.

"The labour market is, of course, also central to the third objective in our mandate – our collective welfare," Lowe said.

"It is stating the obvious to say that for many Australians, having a good job at a decent rate of pay is central to their economic prosperity. 

"The RBA is seeking to achieve the lowest rate of unemployment that can be sustained without inflation becoming an issue.

Lowe suggests there is still spare capacity in the labour market.

"Over recent times there has been a gradual accumulation of evidence which has led to lower estimates," Lowe said.

"While it is not possible to pin the number down exactly, the evidence is consistent with an estimate below five percent, perhaps around four and a half percent.

"Given that the current unemployment rate is 5.2 per cent, this suggests that there is still spare capacity in our labour market.

In the 1960s, less than one in ten workers worked part time (below). Today is it one in three.

Graph 1: Part-time Workers
Around three million people work part time because they want to, not because they can't find a full-time job, according to the ABS.
 
"Most people who are working part time do so because they are studying or have caring responsibilities, or for other personal reasons," Lowe noted.
 
"So we should not think of part-time jobs as being bad jobs, and full-time jobs as being good jobs."
 
On the cash rate cut, Lowe said the decision was not in response to a deterioration in the economic outlook since the previous update was published in early May.
 
"Rather, it reflected a judgement that we could do better than the path we looked to be on."
 
To read Philip Lowe's full speech at CEDA, click here.

Joel Robinson

Joel Robinson

Joel Robinson is a property journalist based in Sydney. Joel has been writing about the residential real estate market for the last five years, specializing in market trends and the economics and finance behind buying and selling real estate.

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