Justin Smirk, Research Analyst at Westpac, explains that Australia’s total employment rose 12.0k in May but even though this is below what is considered to be a trend gain in the labour force, the unemployment rate dipped to 5.4% from 5.6%, a significant two percentage point drop in one month (5.40% from 5.60% at two decimal places).
“This outsized fall in the unemployment rate is significant when you consider a recent speech by the RBA Governor, Phil Lowe (a June 13 speech to AI Group) in which he stressed that the RBA remained uncertain about how much of an impact a tight Australian labour market will have on wages.”
“Our research found wage inflation tends to accelerate/decelerating with a tightening/easing in the labour gap with a lag of around two quarters. The labour gap tightened around mid-2016, then again from March 2017 September 2017, as we observed an improvement in the unemployment rate. However, wages continued to languish around 2.0%yr and were it not for the out sized increase in minimum wages last year, the pace would be somewhat lower.”
“The gap started easing again from the September quarter 2017 through to the May survey when the surprising drop in unemployment suggested the market was tightening again. Should this trend continue then it would suggest an economic backdrop that is becoming more conducive to an acceleration in wages. If you assume this is the case, and then overlaying the outsized gain in the minimum wage, you could mount an argument for an acceleration in wages through this year.”
“However, we are not convinced by this argument. Part of the reason we aren’t is that the jobs being created are in sectors that don’t have tight labour markets (tend to be female dominated employment sectors) and that the decline in male unemployment is more about declining male participation than robust jobs growth in the male rich employment sectors.”
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