BCEC Monthly Labour Market Update – January 2025

— Participation records keep tumbling as female participation rate jumps 0.5 percentage points to 63.5 per cent. —
— Jobs growth solid, unemployment rate up from 4.0 per cent to 4.1 per cent. —
— A further interest rate cut unlikely before voters head to the Federal polls. —

RBA decision heralds a new view on link between unemployment and inflation

Two days on after the Reserve Bank of Australia (RBA) announced a 25 basis point cut in interest rates, the January labour force figures felt like a bit of an anticlimax. The run of solid employment growth continued, with women capturing all of the net monthly increase in jobs. Looking past some mixed signals, including an uptick in job vacancies and falling aggregate hours worked, the data for January point to the labour market remaining tight.

Most significantly, the January estimates show the female participation rate jumping 0.5ppt to 63.5 per cent, a full 0.4ppt above the previous record high. This pushed the overall participation rate (67.3%) and employment-to-population ratio (64.6%) to new record highs (both by 0.1ppt). The unemployment rate edging up only to 4.1 per cent despite record participation is testament to the ongoing strength of labour demand.

Understandably the interest rate cut captured the week’s headlines, but the other telling cut was to the RBA’s projections for the unemployment rate. The Statement on Monetary Policy now projects an unemployment rate of 4.2 per cent from the June Quarter 2025 to the December Quarter 2026, revised down from 4.5 per cent in November’s statement of last year.

We’re seeing some challenge to the orthodox notion of a NAIRU – a non-accelerating inflation rate of unemployment – and particularly its implication that the current unemployment rate will have to rise before inflation is brought under control. The fact that the RBA cut interest rates suggests they believe inflation can fall sustainably into the 2-3 per cent target range with an unemployment rate of 4.2 per cent. To the extent the RBA does buy into a NAIRU, they now believe it to be in the vicinity of 4.2 per cent, instead of 4.5 per cent.

The Federal election must be held by 17 May, and the RBA board meet only once more before then, at the end of March. Unless the election is called earlier, a lot will hinge on the RBA’s next decision, with the government hoping for a second rate cut. With the next quarterly inflation figure not due out until the end of April and taking account of the cautionary notes struck in comments by RBA Governor Michelle Bullock, we think a further pre-election rate cut is unlikely unless other economic data soften appreciably.

Monetary policy was regularly slated as a ‘blunt instrument’ when interest rates were being increased to slow the economy. It’s equally blunt on the downside. Those with variable-rate mortgages will get relief, but others who derive income from interest-bearing accounts will lose disposable income and house prices may increase. It will take some time for the monetary policy easing to take effect, and the tone of the RBA Governor’s statement suggests they are prepared to wait to see how the dust settles.

The ABS estimates show the working-age population increased by 44,400 in January. Driven by immigration, those estimates stay the same for each month of the quarter, so we can anticipate the same expansion for February and March, which is up from 42,500 per month in the December quarter. If the employment-to-population ratio holds at its current level, that suggests around 30,000 additional jobs per month are baked into the estimates.

A forward indicator of wage movements

In this issue of the MLMU we introduce a new indicator of wage developments, the ‘average annualised wage increase’ (AAWI) series produced by the Fair Work Commission. Derived from wage clauses contained in enterprise agreements lodged with the Commission, it is based on wage increases that will be realised over the coming year and is therefore inherently forward looking. It is also produced and published on a much timelier basis, in contrast to the wage price index (WPI) and average weekly earnings (AWE) that report past changes with around a one-quarter lag.

Available from the middle of 2022, the other two series have so far tracked the AAWI reasonably closely. All three series show real wage growth for the December quarter, and agreements lodged in the first half of that period have the AAWI pointing to nominal wage increases jumping to 5.2 per cent per annum. This marks a divergence from the 3.2 per cent increase in the WPI, so it will be interesting to see if the March quarter WPI follows suit. While welcomed by workers, that pace of wage growth would not make the RBA’s job of keeping inflation below 3 per cent any easier. The NAIRU may yet come back to haunt them.