Lots going on right now: the RBA cut rates this week, the Government’s economic reform roundtable started yesterday, and did someone say Labubu?

Let’s rip in.

Last week, the Australian Council of Trade Unions (ACTU), the peak national body for unions, announced it will propose a 4-day work week at the Government’s Economic Reform Roundtable. What is their pitch, why are they pitching it, is it a good idea, and does it mean I can get a standing Friday lunch reservation at Tottis for me and the boys?

First, some context. Yesterday, the Government’s economic reform roundtable kicked off in Canberra. The goal is to come up with policy ideas to improve productivity (what’s productivity? See Newsletter #4 for a refresher).

The ACTU is pitching the 4-day work week as a way to improve productivity. In sectors where 4-day weeks are not possible, it’s pitching more rostered days off and increasing annual leave. The ACTU points to two studies - one recently published by researchers from Ireland and the U.S, and a 2023 study by Swinburne University - which both suggest 4-day work weeks improve productivity and job performance.

So, are we heading for a 4-day work week? Probably not — at least not on the grounds that it will improve productivity.

UNSW economics Professor Richard Holden wrote an opinion piece for the AFR explaining why these studies could be unreliable. These papers don’t actually measure the type of productivity we are interested in. They measure employees’ self-reported feeling of productivity when you give them an extra day off, rather than what the Government cares about, which is how efficiently labour and capital can be combined to create output. (What do you mean capital and labour? See Newsletter #4 for a refresher).

Without good evidence to support its proposal, the ACTU’s pitch probably won’t get much of a look in. I’ll keep you posted about any other awesome policy ideas that arise this week, however.

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The RBA cut the cash rate by 25 basis points to 3.6% last week (pro tip: 1 basis point = 0.01 percentage points, so 25 basis points = 0.25 percentage points).

In their media release, the RBA board mentioned that “labour market conditions remain a little tight” and that “maintaining… full employment is the priority.” Why does the central bank care about unemployment? Shouldn’t it focus on inflation?

No-one is out there applying for jobs. In this situation, you ask your boss for a raise.

She says: “Oh my god, please don’t leave. Replacing you is going to be very difficult because no one is responding to my job ads. How much do you want to stay?” You get the raise you asked for.

Imagine everyone does this, and lots of people get raises. What happens?

Employers' costs go up, because they need to pay their employees more. So, they increase the price of their goods and services to offset these higher wages. When prices go up, inflation accelerates.

The opposite is also true, with high unemployment leading to decelerating inflation.

Here’s a chart from an RBA research paper which shows the relationship between inflation and unemployment. It’s based on Australian inflation and unemployment data over time. Focus on the blue line. When unemployment is low, price inflation is high, and vice versa.

The point is this: the RBA cares about unemployment because it’s evidence of where inflation might be heading. If the board sees unemployment is low, that means inflation may accelerate, and maybe they should increase rates, and vice versa. 

It gets less media attention, but in addition to controlling inflation the RBA has a second main goal: maintaining full employment. To the RBA board, these two goals - employment and inflation - are equally important. They need to balance achieving low and stable inflation with achieving full employment.

Imagine if inflation was high and the RBA only cared about prices. They could jack up interest rates quickly, crushing inflation but also sending unemployment soaring as businesses shed jobs (as we move along the blue line to the right in the above chart). That’s why the RBA has to balance both goals, keeping prices stable and protecting jobs, so the economy keeps ticking over nicely without needlessly putting people out of work.

You’re right. We’ve talked about:

The unemployment rate is a powerful indicator about the health of the economy and where inflation may be headed. 

But it’s not the only thing we look at when we talk about jobs. Mobility and other labour market indicators can tell us things the unemployment rate can’t. 

There’s a theory in economics called “the lipstick index”, or “the lipstick effect”. Coined by makeup heir Leonard Lauder (as in Estée), it’s the idea that when consumers perceive that a recession is looming, sales of “affordable luxuries” like lipstick increase. 

So what is the lipstick index telling us right now? Well, perfume and makeup sales at cosmetics conglomerate LVMH held steady in the first three months of 2025. Some experts have warned that consumers are choosing other little luxuries, however, pointing to the booming Labubu industry as a harbinger of trouble for the economy. 

If we have a Labubu-induced recession, I’m going to resusu from my juju and becucu a fullututu mememumu creatutu.