The Labour Market in Macroeconomic Models of the Australian Economy

This paper examines the treatment of the labour market in three macroeconometric models of the Australian economy: the Australian Treasury Macroeconomic (TRYM) model, the Access Economics Macro (AEM) model, and the Murphy model. In each of these models, employment and unemployment are basically determined at the aggregate level (though in the Murphy model, labour demand is determined at the industry level). The unemployment rate converges in the long run to an equilibrium level at which the average rate of real-wage inflation across the economy is equal to the rate of productivity growth in the economy. This rate, the non-accelerating inflation rate of unemployment or NAIRU, is given by an expectations-augmented Phillips curve. In each of the models, the NAIRU is treated as exogenous and its value is estimated as a parameter of the model. In the short run, expected wage inflation depends on deviations of the unemployment rate from the NAIRU and on a number of other variables including, in all the models, the change in the unemployment rate (a "speed-limit" effect). This makes it possible to define a "short-run" or "flexible" NAIRU as the unemployment at which expected real-wage inflation equals the rate of productivity growth, and this short-run NAIRU depends on lagged unemployment.