BCEC Monthly Labour Market Update – February 2024

— Employment jumps by 116,500 workers in February, or 0.8 per cent in a single month. —
— Headline unemployment rate tumbles back to 3.7 per cent, down from 4.1 per cent in January. —
— Robust labour market erodes chances of a May interest rate cut. —

Interest rate cuts back on ice

At its March meeting, the Reserve Bank of Australia Board announced they were keeping official interest rates on hold at 4.35 per cent, with the Governor’s statement observing “…conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target.”

Later in the same week, the release of the labour force survey figures for February 2024 quashed hopes that an interest rate cut was just around the corner. The seasonally adjusted estimates show the number of people in jobs jumping by 116,500 in February, or 0.8 per cent. Most of that growth was in full-time workers, and the unemployment rate dropped 0.4 percentage points from 4.1 per cent to 3.7 per cent. Ignoring swings in the figures attributable to COVID-19, that’s the largest monthly increase in employment ever observed in the current series.

Employment grew in every state and territory bar Tasmania, and was particularly strong in WA (+1.7 per cent for the month), ACT (+1.3%), SA (+1.2%) and QLD (+1.0%). Nationally, jobs growth was robust for men and women, and for both full-time and part-time workers. While volatility in the NSW estimates has driven some of the larger movements in the national figures in recent months, employment growth over the 12 months to February was strongest for the two high growth states of WA (+4.9%) and QLD (+4.6%).

With the participation rate rising only marginally, the jump in job numbers translated into a big fall in the number of people unemployed by 52,000, or 8.7 per cent. Almost all of that fall was in the number of unemployed people looking for full-time work.

Advertised job vacancies moderated further in February but, overall, the labour market continues to defy expectations of a downturn. February’s unemployment rate (3.7%) and participation rate (66.7%) are both exactly where they were 6 months ago, in August of 2023. Since then the labour market has absorbed an additional 300,000 people into the working-age population, which continues to expand at a rate around double its historical average.

Perhaps we’ll just have to live with low unemployment…

The RBA Board next meets in early May. Key data to be released before then include the monthly CPI figure for February, the labour force figures for March, and the critical March quarter CPI. The next update on economic growth is not due until early June, after the Board meets. In light of this month’s labour force figures it’s hard to see the outlook changing enough to give the RBA room to reduce rates at the May meeting.

The key reason the RBA wants to see the labour market soften before it starts cutting interest rates is that high labour demand and a low unemployment rate put upward pressure on wages, adding to firms’ costs, which will be passed on to prices, thereby making it harder to bring inflation back into the 2 to 3 per cent target range.

However, the spike in annual inflation to 7.8 per cent in late 2022 had very little to do with wages and much more to do with other supply-side constraints, such as energy prices. Moreover, inflation has since significantly moderated to 4.1 per cent in the December quarter of 2023 with the unemployment rate still averaging below 4 per cent in that quarter.

As highlighted in this month’s MLMU, that fall in inflation has occurred as real wage growth returned to positive territory. Current real wage growth is largely a lagged response from indexation of wages to the 2022 spike in inflation. We see little evidence that current labour market conditions are sustaining real wage growth that is inconsistent with ‘inflation at target’. The rapid expansion of labour supply through immigration will be a contributing factor in limiting real wage growth.

Current Treasury forecasts are for the unemployment rate to increase to 4.5 per cent in the June Quarter of 2025 as inflation falls back to 2.75 per cent. Given the tenuous relationship between the unemployment rate and real wages in recent years, it may well be the case that inflation can be constrained with a lower unemployment rate. Other supply-side measures, such as the recent decision to scrap a wide range of import tariffs from 1 July 2024, may be preferable to sacrificing the benefits of low unemployment.