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Economic and Financial Market Update: The Labour Market - Are We There Yet?

26 March 2021

Summary:

The unemployment rate has fallen faster than even the most optimistic forecasters’ expectations;
A stronger economy has been one factor.
Very low population growth has been another;
A further significant improvement in the labour market is still required.

Recently we found out that the unemployment rate in February was 5.8%. The RBA (like most forecasters) didn’t expect the unemployment rate to reach that level until the first half of next year. One of the key reasons for the sharp decline in the unemployment rate has been that the economy is doing better than virtually anyone had forecasted. But another is that jobs growth has been strong at a time when growth in the labour force has been weak.

With JobKeeper coming to an end some turbulence is likely to hit the economy. But the economy did keep powering ahead when JobKeeper was turned down a notch at the end of last September. One reason for that confidence is that the leading indicators (such as job ads) are saying more jobs are on the way.

So the economy is doing much better than we had hoped if we use the unemployment rate as the benchmark. But being ahead of where we thought is not the as saying we have reached our destination.

The RBA has set an ambitious unemployment rate target. It believes that the unemployment rate might need to drop to at least 4.5% wages growth will go above 3% (its benchmark for a strongly performing economy). We have done well. But we are still some distance from that mark.

And it is not even clear that the unemployment rate is the best measure of how the labour market is travelling. Movements in the underutilisation rate appear to have a stronger influence on wages growth. And that measure is still above its long-term average. It is also worth keeping an eye on movements in the participation rate as another sign of how the jobs market is performing. That rate is back at its pre-pandemic highs.