Noticing the dog that didn't bark

The Reserve Bank’s decision to cut rates marks a historic moment. Never before have we managed to reduce inflation without a sustained experience of joblessness. In the past, curtailing inflation meant thousands of people thrown out of work – suffering the loss of income and dignity that comes with being unable to find a job. Now, for the very first time, we’ve managed to get price growth down without the human toll of mass unemployment.

To see how remarkable this experience has been, it’s worth going back through how past episodes of inflation have been handled.

In 1973, an oil embargo in response to the Yom Kippur War caused world oil prices to more than double. The global oil price shock pushed annual inflation in Australia to a peak of 18 percent. Unemployment went up from 4 percent to 6 percent, leaving many Australians claiming unemployment benefits for the first time. The combination of double-digit inflation and higher unemployment led to the term ‘stagflation’. Australia entered recession.

Inflation was briefly brought back down in 1977 before a second oil shock hit. The 1979 Iranian revolution caused a drop in global oil production. Again, oil prices doubled. Again, Australian inflation took off, with annual inflation exceeding 10 percent. Again, unemployment rose – this time from 6 percent to 10 percent. In the early-1980s, Australia – like many other countries around the world – went into recession.

Inflation was brought under control, but only briefly. By the mid-1980s, inflation began to increase again, averaging around 8 percent for the second half of the decade. Unemployment, which had fallen to 6 percent by the late-1980s, spiked upwards. The early-1990s recession, caused largely by Australia’s efforts to curb demand and reduce inflation, saw unemployment peak at 11 percent. Factory workers in their fifties were laid off. Some would never work again. Among young people, one in five were unable to find work.

Fast forward to the post-pandemic inflation spike, which has hit countries around the world. In 2023, the UK economy entered recession. In 2024, New Zealand entered recession, and finished the year with unemployment having risen to 5 percent. Canada has also seen a significant rise in joblessness, with the unemployment rate rising through 2024, and now standing at nearly 7 percent.

Comparisons with history and with other countries are always imperfect. Inflation isn’t the only challenge facing policymakers, and the world is a complex place. Yet as a nation, Australia should take a measure of collective pride in what we’ve done over the past three years. In mid-2022, inflation was over 6 percent. Now, inflation stands at 2.4 percent – comfortably back in the Reserve Bank’s target band of 2 to 3 percent. Throughout the past three years, the unemployment rate has averaged around 4 percent, a level that macroeconomists call ‘full employment’. The average unemployment rate under the Albanese Government is lower than under any government in the past fifty years.

We often don’t notice the dog that didn’t bark. But in this case, it’s a ferocious dog with a cruel bark. Unemployment can break up families, and cause people to lose their homes. A prolonged bout of joblessness can have a scarring effect on a person’s career, leaving them earning less even a decade or two later. School-leavers are particularly badly hit, with those who graduate high school in a slump unable to find work. When unemployment spikes, those who find it hardest to get a job are often people who were already doing it tough: people with fewer skills, older workers, and First Nations people. Unemployment is one of the strongest predictors of whether a family will be in poverty, and growing up in a jobless household can have an adverse impact on children. Unemployment affects everyone. Wages grow more slowly when more people are looking for work. A higher rate of joblessness increases the welfare bill for all taxpayers.

In the 1970s, 1980s and 1990s, unemployment was the penalty Australia suffered for getting inflation under control. In recent years, other advanced countries have paid this same price. This time was different. As economist Saul Eslake puts it, we’ve done ‘something that has never been accomplished before in Australia, and which (arguably) hasn't been accomplished in any of Australia's peer group of “advanced” economies in the past few years’.

Since May 2022, the Australian economy has generated 1.1 million jobs, two-thirds of them full-time. 64.6 percent of the working age population are in jobs, a record high. Real wages are growing again, increasing in each of the past five consecutive quarters.

That’s not to say the fight against inflation is done. Many Australians are still hurting, which is why the Australian Government is delivering cost of living relief like cheaper medicines, direct energy bill relief and making it cheaper to see a doctor.

Australia has done something unique: we brought inflation under control without mass joblessness, without a recession and while delivering back-to-back budget surpluses. As a nation, we should be collectively proud.

Andrew Leigh is the Assistant Minister for Treasury and his website is andrewleigh.com.