Cracking through the jobs market plateau
Australia's consistently low unemployment rate can be attributed to a combination of solid economic management and a resilient China. The next test will be whether a rate below 5 per cent can be sustained.
The solid performance of the jobs market in 2012 occurred despite the economy clearly losing momentum through the course of the year and the forward labour market indicators, such as the ANZ job advertisement series, falling away sharply.
The next big health check for the Australian economy comes with the December labour force data this Thursday. The average of the market economists is for a small rise in employment of around 3,500 and for the unemployment rate to move to 5.4 per cent, locking in three full years where the unemployment rate has not been above 5.5 per cent or below 4.9 per cent. As always, it will be interesting to see whether these forecasts are close to the mark or if there is some sort of shock that influences interpretations of the performance of the economy in the lead into the first meeting of the Reserve Bank board in three week’s time.
Whatever the vagaries of the monthly labour force data, there are some quite remarkable and very comforting facts about the Australian workforce. For instance, the last time the unemployment rate was above 6 per cent was way back in July 2003. This is a performance that most countries in the eurozone, the US, Canada, New Zealand and many others must look at with envy.
Similarly, when the GFC was destroying millions of jobs around the world and forcing unemployment rates to levels rarely seen in more than a generation, a range of policy stimulus measures and some good fortune from ongoing robust growth in China saw the unemployment rate in Australia peak at 5.9 per cent in June 2009. In Australia, the unemployment rate spent just eight months above 5.5 per cent despite the fact that the world economy was going through its weakest performance since the 1930s Great Depression. In every month since December 2009, the unemployment rate has been 5.5 per cent or lower.
Much has been written about the strength of the Australian labour market and why the unemployment rate is wonderfully low. Policy stimulus from the interest rate cuts from the Reserve Bank in late 2008 and a massive "temporary, targeted and timely” fiscal boost, as former treasury secretary Dr Ken Henry called it, were vital job protecting and creating factors.
It is also apparent that Australia has a good deal of labour market flexibility, with hours worked per employee being cut during the GFC-inspired slowdown rather than jobs being shed. It is also noteworthy that during the depth of the crisis, wages growth slowed to levels probably not seen since the early 1970s, signalling the fact that workers were willing to embrace wage restraint rather than risk losing their jobs or those of their work mates.
In other words, if the labour market was too rigid, firms would have implemented cost reductions by sacking people and workers would not have adapted to low wage growth. A rigid labour market, quite demonstrably, has not been seen in Australia since the 1980s.
Nor is it the case now with employment holding solid but hours worked falling to take account of the softer economy.
There is one concern in the upcoming jobs numbers – not just this week but into the early months of 2013. That is the fact that the labour market is a lagging indicator. With inflation, it is one of the last things to adjust to either accelerating or faltering rates of economic growth.
In a period of slower growth, like now, firms hold onto labour and only if the economy truly weakens are there widespread job losses. But with there being signs of a pick up in the economy in housing, some commodity prices and a turn in the global economy, the unemployment rate is unlikely to get much above 5.5 per cent in the current cycle.
The consistently low unemployment rate is something that should be celebrated. After all, most of the objectives of economic policy have job creation and low unemployment as an end objective.
One question that does not get a lot of attention is whether Australia can sustain an unemployment rate below 5 per cent or less and whether we should be content to see unemployment at 5-point-something. A 4-point-something unemployment rate has only been seriously tested once in the last four decades and when it got there in a sustained fashion in 2006, it unfortunately failed. Inflation and interest rates rose suggesting that some structural issues were inhibiting the unemployment rate from staying well below 5 per cent.
Perhaps the recent reforms on education, skilling and paid parental leave will allow the unemployment rate to get below 5 per cent without inflation and interest rate pressures. That is more an issue for the next few years rather than this week, where any job creation above the 3,500 forecast by the market should be seen as good news.