Market Watch: The jobs bonanza

The RBA is making a big deal about the improvement in the employment market. It is forecasting unemployment to hold at 5 per cent into December, which would be its lowest level in six years. It could even break into the 4 per cent handle in 2019, which would be a new eight-year low. The excitement is due to the fact that employment slack is finally leaving the market, and also because wage growth is coming.

Let’s go through the reasons for this:

• Employment growth has boomed over the past year, as Australia has added 291,000 jobs (or 2.4 per cent) in this timeframe. If we look back at the past two years, that number increases to over 500,000. 186,000 full-time jobs have been created over the year to October, with over 310,000 in the two years to October. Employment growth is clearly booming, and the expectation for Thursday’s announcement is that 20,000 jobs will have been created in October, according to the latest Reuters poll. The boom continues.

• However, there were flow-on effects of the increased number of jobs created. As more people found work, those who had fallen out of work and left the employment market altogether started coming back and ‘participating’ in the employment market once again. This increased participation meant that although jobs were being created, new participants were entering the market to replace those who were previously unemployed. This partly explains the ‘slack’ in the employment market, and why the unemployment rate hasn’t fallen as quickly as one may have expected. The participation rate has now started to stabilise, suggesting the slack has begun to fall away, which should lead to positive outcomes for unemployment and wage growth. (Female participation must be noted: it is currently at a record-high, which is a huge positive.)

• The unemployment rate has been falling since its peak in October, 2014. However, that fall has started to steepen as the slack has tightened. The 0.3 per cent move in 2018 has been strong and sustained. Thursday’s unemployment rate announcement is predicted to be 5.1 per cent on a trend basis, down from 5.2 per cent, according to the latest Reuters poll. This result would confirm the RBA’s theory.

• The final piece of the employment puzzle is hours worked, which has been rising solidly. An increase in hours worked is a sign that employees are working and looking to work more. It is strongly correlated to wages. The increase in hours worked should lead to an increase in wages, something for which the RBA is hoping.

If, as expected, unemployment moves to a new six-year low, coupled with another large increase in employment, the RBA’s forecasts will have to be taken at face value. The market is not currently doing this – it believes the RBA is too optimistic, and that unemployment will actually begin to rise. Time will tell as to which is right.