After decades of teaching and media commentary on economics, I can’t believe I’m saying that when unemployment went up in March, it was a relief! You see, if you want to know why economics has been tagged the “dismal science”, understand that the history of the subject has shown that for inflation and interest rates to fall, unemployment must rise.

Some economists call it a ‘zero sum’ game, meaning for someone to win, someone has to lose. But I think that’s too simple and ignores what good economic policies and outcomes can achieve. The better the Reserve Bank’s monetary policy and the Treasurer’s budgetary policy, as well as the Industrial Relations Minister’s wages policy, on top of the Government’s overall industry policies, the better the economic outcomes.

The best of policy mix creates better productivity, lower costs of production, less inflation, higher real incomes, and more job opportunities. What I’m saying is that better policies can result in a lot less losers compared to winners and therefore there’s a lot more win-win results.

But right now, given where this economy is, we need unemployment to rise noticeably to get inflation down well and truly in the 2%-3% band, where the RBA wants it. I said earlier this week that Morgan’s economist Michael Knox (in an interview for our subscriber newsletter The Switzer Report) explained how here and in the US, history shows unemployment has to rise to get inflation down.

If inflation persists, it kills consumers’ purchasing power and the economy slows and can end up in a recession, where unemployment can go really high.

In the 1990 recession, the jobless rate was around 10.4%. Today it’s 3.8%. The RBA expects it will get around 4.5%, and that should coincide with inflation in the 2%-3% band.

So, what did yesterday’s ABS report on jobs and other recent economic readings tell us about the economy and, potentially, when interest rates might fall? Here goes:

1. Employment fell by 6,600 in March following a big lift of 117,600 in February.
2. The unemployment rate increased from 3.7% to 3.8%.
3. The participation rate edged lower by 0.1% to 66.6%. When it falls, it suggests workers are finding it hard to find a job.
4. The job market is loosening but the overall unemployment rate is still near a 40-year low.
5. In trend terms, unemployment has remained at 3.9% since November last year.
6. The CBA economics team reported: “Investors certainly believe that nothing in the data stands in the way of rate cuts in the second half of the year…” and stock prices rose after the number.
7. If unemployment had fallen, the fear of a long delay for a rate cut or even a rate rise would have hurt stocks yesterday.

The SMH’s Rachel Clun and Shayne Wright talked to

EY senior economist Paula Gadsby, who said “… the unemployment rate was moving in line with the central bank’s expectations, and it will rise to 4.2 per cent by June, but a tight labour market risked inflation staying higher for longer by placing ongoing upward pressure on wages.”

So, watching the economic readings for wages growth and the Consumer Price Index in coming months will be crucial to the timing of when the RBA cuts rates.

But importantly, unemployment has to keep on increasing and statistics such as retail sales (which increased by 0.3% month-over-month in February 2024, while slowing sharply from a 1.1% growth in the prior month) have to keep looking weak.

We know consumer and business confidence are both weak and building activity is slowing.

What the RBA wants to see is an economic picture of a slowing economy. If that slowing becomes faster than expected, then it will cut rates sooner than the September cut, which most economists are tipping to be the date for the first rate reduction.

Sure, I know I’m painting a dismal picture of people losing jobs so interest rate worriers can get some rate relief. But if these people are hit with high rates for too long, we might end up in a recession, with a whole lot more people on the dole queue.