RBA Signals Unemployment May Have to Fall Below 5% to Spur Wages

(Bloomberg) -- Australia’s jobless rate might need to decline further than in the past in order to generate faster wage growth, the central bank’s No. 2 official Guy Debelle said.

The deputy governor said that the Reserve Bank believes the unemployment rate is still the best measure of labor market health, in a speech delivered in Sydney Wednesday. The current 5.3 percent level is 30 basis points above the estimated full employment rate. Debelle said the bank’s current assessment is that employment is likely to grow “a bit above” its long-term average in the next six months.

RBA Signals Unemployment May Have to Fall Below 5% to Spur Wages

“Recent international experience indicates that the unemployment rate could decline further than historical experience would suggest before we see a material increase in wages growth,” he said. “But against this, further increases in labor demand may be met more from the pool of unemployed rather than from people not currently in the labor force. That is, the unemployment rate may decline faster than we expect.”

The jobless rate has become the key metric for the central bank as it tries to drive faster inflation to set the stage for the first interest-rate increase since 2010. The RBA has kept the cash rate at a record low for the past two years to stoke growth and hiring and generate sufficient demand in the labor market to force employers to offer higher salaries to attract workers.

RBA Signals Unemployment May Have to Fall Below 5% to Spur Wages

Employment has grown by 2.5 percent over the past year, Debelle said, noting that was at “the high end of historical outcomes” and above the current 1.5 percent growth in the working-age population. One of the difficulties the RBA has grappled with is that the labor force has expanded as hiring increased, preventing a deeper drop in the jobless rate; Debelle was sanguine on this phenomenon.

“Both the rise in the participation rate and the lower unemployment rate increase labor utilization and reduce the amount of spare capacity in the labor market,” he said.

Debelle also noted in his speech:

  • The standard error on the change in employment each month is around plus or minus 30,000
  • Of the one-third of the workforce which works part-time, three-quarters of them do so because they want to
  • Industries that have contributed most to employment growth over the past two years are health care and social assistance, construction and -- perhaps more surprisingly -- manufacturing
  • Construction employment is close to 10 percent of total employment, around its highest share of employment since the 1920s
  • The “noteworthy increase” in manufacturing employment is largely due to export demand for high-quality food and beverage products
  • Employment growth has been reasonably evenly distributed across pay levels over the recent period
  • Estimates the labor under-utilization rate is around 8.5 percent

The RBA is focused on faster wage growth because the two key drivers of inflation in recent times -- higher tobacco and energy prices -- are starting to fade. That leaves higher pay as the best way to lift prices. In summing up, Debelle sees the labor market as follows:

“The labor market is in pretty good shape: employment growth is above average, the participation rate is at a high level, the vacancy rate is at an all-time high and the unemployment rate is falling,” he said. “However, the long-term unemployment rate has been little changed of late and wages growth remains low.”

Employment data for September due out tomorrow is predicted to show the unemployment rate unchanged at 5.3 percent.

©2018 Bloomberg L.P.