Rather than relying on big jumps in joblessness, the central bank argues that even a small loosening in an ultra-tight labour market can sharply reduce wage and price pressure.
The debate is shifting over how much economic pain is genuinely needed to get inflation down.
Behind the rethink is a lecture delivered in Melbourne to the Economics Society, where the Reserve Bank’s deputy governor revisited classic research from a New Zealand economist published in 1958. That original paper charted the relationship between unemployment and wages and laid the groundwork for what became known as the Phillips curve.
The Reserve Bank now stresses that this relationship is not a straight line but a curve, which matters a lot for policy choices. Under that curved shape, the impact of unemployment on wages changes dramatically depending on how tight the jobs market already is.
In the central bank’s reading, when unemployment is already very low, a further small fall in the jobless rate can trigger a disproportionately large jump in wage growth and inflation. Conditions are so tight that employers bid aggressively for scarce workers, pushing pay packets and prices higher in a feedback loop.
Once unemployment rises from those very low levels, even by a modest amount, that intense bidding pressure eases and wage growth cools quickly. At more normal or higher unemployment rates, by contrast, additional increases in joblessness have a much softer impact on wages so the curve flattens out.
The curved relationship gives the Reserve Bank more confidence that a gentle loosening in the labour market can bring inflation back under control without a deep recession. Policymakers are signalling that the economy does not need a large spike in unemployment to restore price stability, just some relief from historically tight conditions.
Rate decisions will now focus heavily on how close Australia is to that very low unemployment zone where wage and price pressures accelerate. The unresolved question for markets is exactly where that danger point now sits in an economy still adjusting after the pandemic.
