Aussie Labour Market

Resilient or too resilient?

The RBA has been clear that a key reason that it has increased its policy interest rate by less than many other central banks is to try and hang on to as much as possible of the improvement in labour market conditions in recent years.

The Bank forecasts the unemployment rate rising to just 4.3% - from 4% currently - and flatlining there.

That is the RBA’s current central estimate of the NAIRU, though there are wide error bands around that estimate and the interaction between inflation and unemployment in recent years argues that the NAIRU could be higher.

Only time will tell whether this envisaged ‘fortuitous’ landing is achievable alongside a return of inflation back to 2.5%. We are sceptical.

But, from a labour market perspective at least, so far so good.

The share of the working age population in employment is not far off an all-time high, and while the unemployment rate has risen 0.5ppts, that was from a near-50-year low.

Australia’s labour market conditions have also been some of the most resilient among advanced economies. The employment-to-population ratio has moved sideways at an historically high level compared with declines elsewhere (the US is a notable exception).

From a different perspective, the rise in Australia’s unemployment rate has been relatively modest compared with the increases in other economies with high household debt.

In part that could reflect that those other economies have typically had pronounced weakness in residential construction activity.