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Australia’s Labor Participation Puzzle Holds the Key to Its Rate Outlook

Australia’s Labor Participation Puzzle Holds the Key to Its Rate Outlook

(Bloomberg) -- Australia’s central bank chief Philip Lowe and his U.S. counterpart Jerome Powell have both witnessed multi-year hiring surges. Yet Powell’s jobless rate has a 3 in front of it and Lowe’s a 5.

The difference is all about labor force participation, and it’s throwing up hurdles to the Reserve Bank of Australia’s efforts to put a floor under interest rates and to meet its broader mandate.

A swelling labor force -- hovering near a record -- has prevented Australia from reaching full employment and is keeping a lid on wages and inflation. Lowe told lawmakers earlier this month that he hadn’t seen this coming.

“The big shock, the big surprise, has been the rise in labor force participation,” Lowe said in parliamentary testimony Feb. 7. “There has been no shortage of jobs growth in Australia. In fact, it’s been very strong. But it’s been met with a lot of extra labor supply. That’s not the case, I think, in the United States.”

Australia’s Labor Participation Puzzle Holds the Key to Its Rate Outlook

The RBA is under increased pressure from lawmakers to meet its mandated full employment -- estimated at 4.5% -- and inflation target of 2%-3%. Yet Lowe has only two quarter-percentage-point rate cuts remaining before he would need to adopt unorthodox tools too. And as he told the parliamentary panel, returning inflation to the target midpoint would require 3-4 percentage points of rate cuts to get there quickly.

Ian Harper, who sits on the RBA’s nine-member board, says the sluggish wages and hiring strength are part of the same story. “Jobs are growing because wages are not -- or not much -- and so the cost of labor is relatively cheap,” he says.

Australia’s Labor Participation Puzzle Holds the Key to Its Rate Outlook

Australia’s wage price index remained at a lackluster annual rate of 2.2% in the final three months of 2019, matching expectations, data released Wednesday in Sydney showed. The RBA expects little change from that rate this year and next.

Employment data due Thursday are forecast to show 10,000 positions were added in January, with the estimate weighed down by wildfires that devastated the east coast and left major cities choking on smoke. The coronavirus is expected to further hit tourism and education employment in coming months.

The forecast small rise in jobs has economists penciling in unemployment rising to 5.2%. Yet people fleeing or trying to defend their homes were unlikely to be job hunting in the month, suggesting there might be some pullback in the relentless rise in participation.

Australia’s Labor Participation Puzzle Holds the Key to Its Rate Outlook

Lowe says the rise in the participation rate is “fantastic” because it means more people are working than ever before, and those with a job have income. Australia’s employment-to-population ratio is near a record high of 62.6%.

What Bloomberg’s Economists Say

“We estimate that the 1.7 percentage point lift in Australia’s participation rate to a peak of 66.2% in August 2019 added an additional 300k people to the labor force. In the absence of this additional supply of workers the strong run on jobs growth would have driven the unemployment rate down to 3.2%, which would have had significant implications for RBA policy.”

James McIntyre, economist

The RBA governor says higher participation, driven primarily by women and older workers, demonstrates increased opportunity for Australians through greater flexibility to work part time. But it also reflects the need for extra income to pay eye-watering levels of mortgage debt.

To contact the reporter on this story: Alexandra Veroude in Sydney at averoude4@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Michael Heath, Malcolm Scott

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