BCEC Monthly Labour Market Update – March 2024

— Labour market remains strong, with few signs yet of the softening in labour demand anticipated as a result of higher interest rates. —
— Resilience underscored as headline unemployment rate remains below 4 per cent, along with growth in full-time work and marginal increases in average hours worked and job vacancies in March. —
— Growth in the working-age population, running at about 60,000 persons per month, exceeding projections as labour market absorbs influx of migrants. —

Labour market holds on to last month’s gains

In light of the surprise jump in employment recorded in February, the minimal change seen in the March figures for the Australian labour market should be seen as a very strong outcome. A small fall in job numbers of 6,600 was the result of a solid increase in the number of full-time positions (+27,900 workers) offset by a decline in part-time positions (-34,500 workers).

To round out the signals of underlying resilience in the labour market in March, the underemployment ratio fell, average monthly hours worked per worker rose, and 2024’s run of falling vacancies came to an end.

While all those changes were marginal, coming on top of the strong February figures they go against expectations of a softening labour market. Recall those expectations relate to the anticipated effect of higher interest rates: a higher unemployment rate reducing wage and demand pressures, in turn bringing inflation back below 3 per cent.

Instead, March figures add to signs that monetary policy is not impacting on the labour market as quickly as anticipated. The headline unemployment rate ticked up by 0.1ppt to 3.8 per cent. The number of unemployed jumped by 3.6 per cent, but remains around 30,000 below the recent peak in January 2024, when it edged over 600,000.

Quarterly data on the number of unemployed persons to vacancies does point to a gradual increase in the available workers relative to firm demands for new hires (See Figure 9). In historical terms, however, vacancy levels remain high and the ratio of unemployed persons to vacancies low. Underlining the labour market resilience, the working age population is estimated to be expanding by almost 60,000 persons per month.

The Reserve Bank’s latest Statement on Monetary policy forecast an unemployment rate of 4.2 per cent over the June quarter, 2024. For that to eventuate with the current rates of population growth and participation, we estimate employment growth would need to fall to 15,000 persons per month through the June quarter, which is around half the current trend rate.

Hence, the March figures suggest labour market demand remains stronger than in the RBA’s working scenario that would see interest rates begin to come down in calendar 2024. The March quarter inflation figure, to be released next Wednesday, is next critical indicator for the prospects of interest rate cuts. Two days before next month’s labour force figures are released, we’ll get a comprehensive update of Treasury expectations in the form of the 2024-25 Federal Budget, to be handed down on 14 May.

2023-24 Budget in Review

With the 2024-25 Federal Budget around the corner, it’s timely to look back at how the in 2023-24 Budget forecasts for the labour market are panning out. Those forecasts, made back in May 2023, put the participation rate and unemployment rate for the June quarter 2024 at 66.25 per cent and 4.25 per cent respectively. The projected participation rate is close to the current trend rate of 66.6 per cent for March. As noted, the unemployment rate is likely to come in below 4.25 per cent unless there is a substantial slow down in jobs growth in the coming months.

Where last year’s budget forecasts were well off the mark was with respect to employment growth, projected to be 1 per cent over the year to the June quarter 2024. Even if not a single additional job is created for the rest of 2023-24, employment growth will come in at double that. If the current trend increase in employment continues, growth through the year will be 2.5 per cent. The fact that the employment growth projection appears far too low, with the participation and unemployment rate projections not so far off the mark, indicates the level of migration and the ability of the labour market to absorb those extra workers, was substantially underestimated in the outlook.

Currently only December Quarter 2023 data are available for annual growth in inflation (4.1%) and the Wage Price Index (4.2%). These compare to projections to the June Quarter 2024 of 3.25 per cent and 4 per cent, respectively. Those projections are consistent with real wages growing by around 0.75 per cent for the year. That looks to be on the high side of what is likely, given real wage growth currently at 0.1 per cent per annum and the current inflationary outlook.