Discussion of Prospects for Output and Employment Growth with Steady Inflation, The Macroeconomics of Australian Unemployment

The Dungey and Pitchford (DP) paper and the Debelle and Vickery (DV) paper are important contributions to the macroeconomic analysis of unemployment in Australia. Both papers focus on the question of what macroeconomic factors would reduce unemployment in Australia. Both papers use a rigorous theoretical framework as a basis for developing empirical relationships between unemployment, economic growth and real wages in Australia. The two papers have a similar theoretical basis and although different in implementation, reach the same policy conclusion: that unemployment can likely be significantly reduced by either or both, a reduction in real wages and an increase in economic growth. How this might be achieved either economically or politically is not addressed but the key result is that unemployment can be reduced by macroeconomic means. Rather than agree in detail with the approaches taken in both papers, in these comments I will draw on my own general equilibrium modelling to illustrate two key issues that both papers treat insufficiently and which require further research. The first is to directly address the question: if macroeconomic shocks are responsible for increasing unemployment in Australia, is the reduction in unemployment also possible through macroeconomic policy or is it really in the microeconomic details of labour markets where answers lie? The second issue is the key difference between an open economy and a closed economy in how the labour market should be modelled.