ECONOMIC VIEW:

Full Employment

(31 December 2004)

By Mike Ng

In modern macroeconomics, “full employment” means that there is no unemployment above the level of the “natural rate of unemployment (UN)”, i.e., there is no cyclical or deficient-demand unemployment. The UN is defined as the long-run equilibrium level of unemployment once all labour market imperfections have been allowed for. Because the natural rate includes unemployment (such as frictional and structural) due to labour market imperfections, it is not the optimal level of unemployment.

From the above definitions, we can see that full employment does not mean zero unemployment, and which will never be achieved in any economy. Even in good times, the lowest unemployment rate for Hong Kong was still recorded at 1.1% (1989) since records began in 1976. Therefore, the total labour force always remains higher than the employed labour force. In other words, there is always some unemployment in any economy.

Moreover, the UN does not stay the same over time, and can change due to economic policy. The government might cut the UN by any supply-side labour market policy that can increase the number of people willing and able to find employment in the labour market. These policies include measures designed to improve incentives to find and accept work and policies to boost the human capital of the workforce to improve the employability of the unemployed.

Furthermore, there is a trade-off between inflation and unemployment in the short run. When unemployment rises above the UN, inflation tends to fall below rates experienced in the recent past. When unemployment falls below the UN, inflation tends to rise.

So for Hong Kong, what exactly does unemployment rate that full employment correspond to? According to the Research Memoranda of the Hong Kong Monetary Authority in November 2001, it has estimated that the UN of Hong Kong is 3-4%. This means that full employment in Hong Kong will be achieved if the unemployment rate reaches 3-4%. As we all know, the current unemployment rate is 6.7%. One question is when Hong Kong will achieve full employment: I made a prediction last year that Hong Kong will reach full employment (i.e., 3-4% unemployment rate) between the second half of 2007 and the first half of 2008.

Although estimates of the UN are notoriously imprecise, policy-makers everywhere explicitly employ such concept in their implementation and evaluation of public policies. Australia was the first country in the world in which full employment in a free society was made official policy by its government. On 30 May 1945, the Australian Labour Party Prime Minister John Curtin and his Employment Minister John Dedman proposed a white paper in the Australian House of Representatives titled “Full Employment in Australia”. The Australian government committed itself to providing work for any person who was willing and able to work. Conditions of full employment lasted in Australia from 1941 to 1975. Another example is the recent UK experience. When the New Labour Party (the Tony Blair Administration) came into power in 1997, its macroeconomic objectives for the first term were economic growth and full employment. In fact, the UK government has managed to lower the unemployment rate to almost 30 years low for several years, and the economy has reached full employment, with strong economic growth and low inflation (see “The Times - How the UK Compare”: http://images.thetimes.co.uk/TGD/picture/0,,153835,00.jpg). One of the reasons why the UK economy has performed so well is that the government has increased spending on job creations.

As an international city, does Hong Kong have anything to learn from other economies? Up to the end of November 2004, the total assets of the Exchange Fund of Hong Kong were at HK$1,073.8 billion (including HK$272.3 billion Fiscal Reserves). Apart from Japan, none of the Group of Seven (G7) economies can beat Hong Kong in this area. During the Asian Financial Crisis 1997-98, the Hong Kong government spent over HK$100 billion to intervene the financial markets. With such large amount of reserves, can the government do the same to the labour market? Do you not think that it is a waste of resources if the government only uses the reserves to fight with the international speculators? I myself tend to believe in Keynesian economics and think that active macroeconomic policies (fiscal and monetary) are necessary for the current Hong Kong situation, which has had more than halfway to full employment.