The deep recession of 2020 smashed the labour market.
In the space of three months from February to May 2020, employment fell 877,600 or 7 per cent of the workforce. Talk of economic depression hit the news and hopes for a strong and sustained recovery seemed remote.
At the same time, the unemployment and underemployment rates spiked, job advertisements crashed and wages growth dived to a record low.
But as the Australian domestic economy and markets have opened, jobs have come back.
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The most recent jobs data confirm that 89 per cent of the jobs lost have been regained; that is 784,500 of those lost at the low in May 2020.
The unemployment rate, which was hovering around 5 per cent prior to the recession, ended 2020 at 6.6 per cent, well below the levels forecast by Treasury, the RBA and most private sector forecasters which in the middle of last year were expecting it to approach or even exceed 10 per cent.
To that extent, the news on the labour market is encouraging – better than expected in just about every way.
The other encouraging news is the lift in the various measure of job advertisements and vacancies which suggests demand from firms for new workers is expanding… rapidly. If these vacancies are filled and more job are needed in the months ahead, the unemployment rate should fall.
Some challenges ahead
Despite the run of good news, the economy and the labour market are still some way from full recovery.
A full recovery will be evident only when the unemployment rate is near 4 per cent and when annual wages growth has lifted to around 3.5 per cent.
Such a mix of news on the labour market is unlikely to be seen in 2021, but if the domestic borders remains largely open and the population manages with the COVID-19 requirements, further strong jobs growth could see the unemployment rate ease towards 5 per cent by late 2021 which would help see wages growth lift from the current record lows.
This improvement in the labour market is also predicated on the policy settings staying in favour of further job creation.
As far as the RBA is concerned, we can rest easy that it will keep monetary policy super-easy until it is very close to full employment and when inflation is well entrenched in its 2 to 3 per cent target band.
RBA officials have said as much and it would be wise to take them at face value.
In terms of fiscal policy, as things stand, JobKeeper will be terminated at the end of March, meaning many firms and their staff will have a significant mode of support taken away from them.
Unless the private sector is growing rapidly, this ending of government support risks stalling the improvement in the labour market.
If the Federal Government was determined to get to full employment as quickly as possible, it would maintain some form of targeted JobKeeper payments, linked to sectors and areas of the economy still under pressure because of COVID related restrictions.
For now, the labour market news is welcome, even if there are still a few concerns about generating more jobs in 2021 for those still unemployed and underemployed.
Dealing with the COVID-19 health issues will be important in helping the labour market to fully recover, but so too will the need for the right policies to keep firms spending, investing and hiring.
It is to be hoped Treasurer Josh Frydenberg is taking the advice from Treasury about how well targeted policies can create yet more jobs and return the economy to full health.
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