The Australian job market continues to boom, with the most recent unemployment figure of 4.2 per cent maintaining historically low levels.
And according to the Reserve Bank (RBA) this phenomenon is set to continue, with Australia's central bank suggesting the unemployment rate could fall to 3.75 per cent by 2023 in its latest guidance statement.
Given that a sub 4 per cent unemployment rate has not been seen in Australia since the 1970’s, is this a realistic projection? And if so, what's driving it?
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A changing labour market?
New data from job market analytics firm Web Rover, which analysed the impact of the COVID pandemic on the recruitment industry over the last 2 years, provides some fascinating insights.
According to their data, job vacancies are projected to be higher in 2022 than the pre-pandemic era, with figures from January 2022 already up 44 per cent on January 2020.
Is this likely to be a temporary phenomenon, or something more significant? Yahoo Finance spoke to Web Rover’s Founder Saxon Huggins for his opinion:
“Although we expect the market to normalise to some extent post-COVID, the data suggests the job market has undergone a fundamental shift,” commented Huggins.
The shift Huggins alluded to is that, prior to COVID, the unemployment rate in Australia had consistently been between 5 and 6 per cent over the previous decade.
“For the last decade or so the job market in Australia has been relatively consistent. The pandemic has changed all that,” Huggins said.
The significance of this statement has a direct relevance to the Reserve Bank’s projection of a sub 4 per cent unemployment rate. If a fundamental shift in Australian labour market conditions really has occurred, a prolonged period of historically low unemployment is possible.
The immigration factor
It’s clear from the data that demand for labour in Australia is currently at historically high levels, but what about factors affecting its supply?
One such factor that has been limiting the number of job seekers in the market over the last 2 years has been the lack of immigration due to Australian’s strict border controls.
With borders due to open across Australia in the coming days, some are suggesting that an influx of backpackers and skilled labour visa holders may significantly impact the labour market.
It’s something that Huggins acknowledged, commenting that “it will be interesting to see how the opening of international borders affects the unemployment rate.”
However, this is not something the Reserve Bank seems overly worried about.
In a speech to a parliamentary committee on economics in Sydney in early February, RBA Governor Philip Lowe played down the effect that open borders may have on unemployment, commenting that “the sooner the borders can be reopened, the better for us all.”
During his speech, Lowe referenced the scenario in Europe, where borders have been open for a significant period already, and unemployment continues to be low.
One additional reason for the Reserve Bank to welcome open borders, in addition to the obvious trade benefits, may also be to ease potential wage inflation, which has traditionally been a consequence of tight labour market conditions.
Low unemployment here to stay
Given all these factors, can we have confidence that Australia’s unemployment rate will continue to fall?
Although nothing is certain in today’s financial world, the initial indications would suggest that a fundamental shift in labour market conditions has indeed occurred, and low unemployment will be a feature of the Australian economic landscape for the foreseeable future.
Historically high demand for labour is likely to outweigh any increase in temporary and permanent migration as border restrictions are eased.
As a result, it’s not unreasonable to believe that the Reserve Bank’s projection of a 3.75 per cent unemployment rate will prove correct, despite its historical context.
What may become more of an issue for Australia’s policy makers in the coming months is how such a tight labour market may affect wage inflation going forward.