Saturday, 5 November 2011

Australia's Labour Force - Soft in patches

One reason behind the RBA decision to cut interest rates last week was clear evidence of a softening in labour market conditions. Sure, the unemployment rate remains stunning low at around 5.25% and in September, around 20,000 jobs were created. But rather than focussing on those snapshots of the labour market for one month, a broader look reveals the following trends:

  • In the 6 months since March, employment has fallen by a total of 5,000 with full-time employment down nearly 59,000 only partly offset by a 54,000 rise in part-time employment (note the working age population grows by around 15,000 a month).
  • The participation rate reached a record high of 66.0% in October 2010 - it has been easing back since then and in September, was 65.6%. In other words, 0.4% of the working age population has drifted away from employment or has stopped bothering to look for employment.
  • The unemployment rate zig-zagged from 4.9% to 5.0% in the first 6 months of 2011. In the last two months, it has been 5.3% and 5.2%. This is still low on any comparison, but as the saying goes, a march of 1,000 miles begins with a single step.
And then there are wages - the bogeyman that so many people trot out as a reason why inflation is always about to "breakout" or that undermines Australia's competitiveness or some such scary stuff. The Labour Price Index (the best gauge of broad wages issues) rose 3.8% in the past year which is actually lower than the average wages growth since the start of 2005. Wages growth is moderate and this has helped under-score the deceleration in inflation over the last couple of years.

These facts show that there are not any broadly wages pressures. Indeed, with the slightly softer labour market conditions coming through over recent months, it is obvious that the risks to wages growth in 2012 will be to the downside.

All of this information confirms that the prolonged period of sub-trend economic growth is showing up in the labour force data. There are likely to be more indications of moderate growth in employment in the months ahead with a further uptick in the unemployment rate on the cards. Thankfully, the RBA knows this and its monetary policy actions will likely prevent a sharp rice in the unemployment rate. It knows it has to keep cutting - and it will. The labour force data over the next few months will help determine exactly when and by how much interest rates will be cut.


  1. I know that talk of the Phillips Curve and NAIRU are very untrendy, but what concerns me is that there appears to be a very strong correlation between core inflation above 3% and an unemployment rate below 5% A YEAR EARLIER. In other words the price impact of the sub-5% unemployment rate in the first half of 2011 may not show up in core inflation until the middle of 2012; at exactly the time you say the RBA will be cutting rates to 3.5%.
    What happens to your rate calls if unemployment starts to reverse again on Thursday?...after all it's only gone up in two months since Oct 2010.

  2. I'm not good at forecasting monthly jobs data. The question is more where will the unemployment rate be in the early part of 2012 and then in mid-2012? If back below 5%, the RBA will have to reverse the cut.... above 5.5% and we'll have a much lower cash rate.