For the first time since the recession in 1992, Australia has seen employment fall in a calendar year. The fall in employment (100 people) in 2011 was confirmed with the uncomfortably large 29,300 drop in jobs in December which followed the 7,600 fall in November. There was a favourable skewing towards full-time employment in December (up 24,500) while part-time employment fell 53,700, but this is not enough to change the view that the labour market is unambiguously softening.
The spanner in the works for job creation is the participation rate, which slumped 0.3% to 65.2% - the last time the part rate was lower was in April 2007. As a result, there seems to be a lot of people who could re-enter the workforce if economic growth were strong enough. While a little bit dodgy, some people might suggest that if the participation rate had remained at the peak level of 66.0%, the unemployment rate would currently be around 6.25% (assuming all those dropping out of the labour force were counted as unemployed – as mentioned, a bit of a dodgy assumption but interesting nonetheless).
Either way, there is spare capacity building in the labour market at a rapid rate. That spare capacity means that wages momentum will likely be skewed a little lower, further reinforcing the risks that the RBA will miss its inflation target during 2012 – on the downside.
All up, a disconcerting jobs report.
That said, the labour market mushiness can be reversed. The onus is squarely on the shoulders of the RBA to move monetary policy to a stimulatory setting which means lower rates at the 7 February meeting is essential. As has been discussed here for some time, there is a good case for a 50 basis point cut which will be confirmed or otherwise with the CPI data next week and the run of monthly partials between now and the RBA meeting. Maybe the RBA should have cut harder late last year when it was obvious growth was cooling and inflation falling. Whatever. But as mentioned, it can catch up now with some aggressive cuts.