Three years ago, the jobs market was roaring, and the only thing the Reserve Bank’s economists really lost sleep over was inflation, the surge in prices leaving Australians angry and their wallets drained.
Unemployment, which was hovering around a record low of 3.5 per cent at the time, was far from the bank’s (and most people’s) worries.
The latest unemployment figure of 4.5 per cent shocked most people who were paying attention.Credit: Dionne Gain
By cranking up interest rates – and leaving them there for a while – the Reserve Bank was able to shrink the country’s inflation problem. Sure, home loan borrowers felt the pinch (which probably started to feel more like a full-body press when interest rates peaked at 4.35 and stayed there for a year), but at least it put a lid on inflation by forcing people to tighten their spending habits.
But now, with inflation comfortably between the bank’s target of 2 and 3 per cent, the Australian economy crawling along at a dismal pace of 1.8 per cent in the year to June and unemployment creeping back up, the picture looks different.
Reserve Bank governor Michele Bullock. The bank’s messaging is expected to pivot back in a much less dovish direction, compared with its stance in August.Credit: Dominic Lorrimer
The Reserve Bank has taken notice and is sailing in the right direction – although, like the effects of its interest rates which take about 12 to 18 months to fully flow through the economy, it has been slow. It’s also possible that, like most people (including me), the bank has its biases.
To be fair to RBA governor Michele Bullock, her predecessor Phil Lowe’s downfall was arguably that he jumped the gun. He said interest rates wouldn’t rise until 2024 (with caveats, of course, but the media isn’t known for its nuance) but was then forced to hike them to slow inflation.
That’s a pitfall Bullock has been very careful to avoid, always telling eager journalists at the bank’s press conferences – often with a knowing smile – that she will “not be providing forward guidance”.
But being too slow comes at a cost, too. As Melbourne University labour economist professor Jeff Borland points out, the position we’re in now is “sufficiently worrying” and it’s time to pick up the pace.
The latest unemployment rate shocked most people who were paying attention. Data released last week by the Australian Bureau of Statistics showed unemployment jumped from 4.3 per cent in August to 4.5 per cent in September – the highest rate in four years.
Of course, the Reserve Bank can’t react immediately. Its next meeting is scheduled towards the start of November.
But even up to its most recent interest rate decision, the bank has still seemed to be preoccupied with one thing: inflation, jumping at any signs of it but maintaining that the labour market is “broadly steady” and even a little tight (meaning they think unemployment is still a little too low to be safe).
But what’s actually wrong with having low unemployment? Isn’t it a good thing to have more people in jobs?
Well, the only real risk from an unemployment rate that is too low is inflation (which, as we know, is now well within its target range).
And as Borland points out, wage growth – a good warning sign for inflation caused by a tight labour market – has generally been coming down or has stayed relatively steady since June last year. If wage growth sped up, it would tell you there’s a shortage of workers, meaning businesses might have to pay more to find and keep them, therefore increasing the cost of goods and services.
A slowdown in wage growth, which is broadly what we’ve been seeing, is a sign that inflation is still on its way down and that the economy and the labour market are weakening.
The data, for some time now, suggests the economy is in a slowing phase.
Melbourne University labour economist professor Jeff Borland
But we know the Reserve Bank has been quite stubborn in its view of the right level of unemployment to keep inflation in check. Even with many economists (both inside and outside the bank) saying the bank’s view was wrong, and after annual inflation dropped below 3 per cent (with unemployment close to 4 per cent), Bullock has continued to back the bank’s estimate that unemployment couldn’t be lower than about 4.5 per cent without stoking inflation.
There is, of course, a huge range of economic indicators that economists can use and draw different conclusions from. But it seems the Reserve Bank still leans (more so than necessary) towards avoiding inflation at the cost of jobs and the economy’s ability to grow.
While it’s possible the full effect of the past few interest rate cuts hasn’t yet flowed through the economy, Borland says he thinks the bank should hasten its rate-cutting because it is such a slow tool.
“The data, for some time now, suggests the economy is in a slowing phase,” he says. “It’s really important to be operating quickly to prevent that.”
Unemployment is still at a (historically speaking) low level. But erasing opportunities for further employment will hold the country back. This is especially the case for groups who have generally found it more difficult to find a job in the past including young people, First Nations people and women, who, as more job opportunities came up, were able to get into work.
The main reason why the unemployment rate is rising is that employment growth is slowing. That is, there’s not as many new jobs being created.
According to Borland’s number crunching, last year, about 33,900 were looking for a job on average every month, with about 32,600 becoming employed each month. Basically: if you were looking for a job, there was a good chance you’d find one.
Unemployment is still at a (historically speaking) low level. But erasing opportunities for further employment will hold the country back.Credit: Michelle Smith
So far this year, only about one third of that number – an average of 12,900 people a month – managed to land. Seeing that it’s harder to get a job, fewer people than last year (about 22,100 a month) have been looking for one.
Since unemployment is the share of people who don’t have a job and are looking for one, if more people are looking, and fewer are successful in getting a job, then the unemployment rate rises.
Borland’s research also shows monthly hours worked have been growing much more slowly this year and the share of people who are underemployed (working but not as much as they’d like to) has climbed compared with last year.
But why is the jobs market weakening?
You might think it has something to do with a pullback in government spending, but that’s not really the case.
From the middle of 2021, the federal government’s push to improve the quality of government services and expand the National Disability Insurance Scheme (NDIS) turbocharged the number of jobs being created in sectors such as healthcare and education. As government spending dried up, many people expected growth and jobs in these sectors would fade away.
But the growth in total hours worked in these sectors has continued at pretty much the same pace as in previous years, according to Borland.
Instead, it’s private businesses which are pushing pause on their expansion plans. It’s not necessarily that they’re slashing jobs (although there have been a fair share of high-profile redundancies). It’s that they’re not keen to add new jobs because they’re not very optimistic about the economy.
Borland’s view is that the Reserve Bank is not yet focused enough on helping the economy to grow and keeping unemployment down. “We should really have a bias towards trying to prevent severe economic downturns,” he says.
Inflation might be the issue everyone feels and remembers most vividly right now, but if the bank stays too stubborn, it will end up with a bigger problem on its hands and a smaller economy to fight back with.
Ross Gittins unpacks the economy in an exclusive subscriber-only newsletter. Sign up to receive it every Tuesday evening.
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