The best story of the economy over the past 3 years has been the resilience of the labour market – and with it the total destruction of the view that unemployment below 4.5% is unstainable.

We really need to just stop and marvel at the current situation. For most people, an unemployment rate with a 3 in front during their working life was akin to a sighting of the Yeti. In the past 600 months since December 1974, Australia’s unemployment rate has been below 4% only 24 times – and every month has been in the past 3 years.

This was not expected.

Coming out to the pandemic and the enforced lockdowns both within Australia and of migration from overseas, a common belief was that Australia’s low unemployment was due to a lack of labour supply, and thus in effect the rate was artificially low. And yet despite strong migration growth over the past 18 months, unemployment has remained low – surely delivering a massive body blow to those who espouse the lump of labour fallacy that somehow a job gained by a migrant is one taken from a local worker.

But more surprising is that despite the Reserve Bank raising interest rates 13 times since May 2022, the unemployment rate in that time has risen only from 3.6% to the current rate in November of 3.9%.

The Reserve Bank has been trying to raise unemployment to a level of around 4.5% because it believes that is the level at which unemployment needs to be to keep wage growth steady and inflation below 3%.

And yet unemployment is at 3.9%, and inflation is increasing at 2.8% – down from 4.1% this time last year.

Rather than accelerate when unemployment has been below 4.5%, inflation has decelerated.

Many conservative commentators and economists were also arguing that the government’s changes to industrial relations which allowed for multiemployer bargaining and greater protections for workers would hurt employment and also unsustainably drive up wages.

But in another slap to the orthodox view that Australia cannot sustain unemployment below 4% without wages growing out of control, today the latest enterprise bargaining agreement figures revealed that in the September quarter, the average annual wage growth of agreements approved in the quarter was just 3.6% – down from 4.0% in the June quarter and is also the lowest growth since 2022.

This ongoing period of unemployment below 4% coupled with decelerating wages and inflation growth should provoke a very strong rethink of monetary policy from the RBA. No longer should it see full-employment through the lens of the “non-accelerating inflation rate of unemployment” – the so-called “NAIRU” – which is clearly not where the RBA thinks it is, or where it wants it to be.

Unemployment below 4% should not mean interest rates must stay high. All it means is that the RBA has misunderstood the causes of the recent bout of inflation and greatly miscalculated the level of sustainable unemployment.

All economic policy should be geared towards keeping the unemployment rate below 4%. The RBA and the government should seize this opportunity to lock in low unemployment with strong protections for workers and sustainable wage growth that improves living standards. And the RBA needs to stop trying to increase the number of people out of a job just because it wants its out-of-date theory of how the economy works to be true.