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Jobs boom, but Aussie economy is lagging

While the March unemployment figures are solid, they confirm the early stages of a slowing in the pace of job creation.

Composite image of a chef smiling and a male and female worker in a factory to represent jobs and employment.
The jobless rate remained steady in March. (Source: Getty)

Employment growth remains solid, broadly in line with the growth in the working-age population, which means the jobless rate is no longer falling.

In March, employment rose by 53,000, the unemployment rate was steady at 3.5 per cent and the underemployment rate edged up to 6.2 per cent.

Also by the Kouk:

While the monthly lift in employment looks strong, it needs to be seen in the context of the past few months. Over the past four months, employment has increased by a total of 93,000, an average of 23,250 a month. This is materially lower than the average monthly gains in employment earlier in 2022 and matches the slowing in annual GDP growth from around 5 per cent at the start of 2022 to just 2.7 per cent in the year to the December quarter 2022.

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It was a solid result but, from a macroeconomic view, it confirmed the early stages of a slowing in the pace of job creation. Recall also, that in broad terms over the medium term, for the unemployment rate to remain steady the economy needs to generate around 30,000 additional jobs every month, such is the size of the economy in 2023.

Employment lags GDP growth

History shows that it takes around six months before a material weakening in the economy spills over to a material weakening in employment and a rise in the unemployment rate.

The reason is that employers are usually unsure whether slower business activity is temporary, which it often can be, or it is a more enduring event. Only when the business managers realise that a slowdown is being sustained or worse, is severe, will demand for labour dry up. In the worst case, it can lead to workforce retrenchments and a loss of employment and a sharp rise in the unemployment rate.

We are in the early stages of that trend.

While they are still at high levels, there has been a clear turning in the various indicators of labour demand. Job advertisements and vacancies turned lower late last year and, if this trend continues - and it almost certainly will - the rate of employment growth will continue to slow and, with that, the unemployment rate will edge higher.

The labour market is one of the key issues for the Reserve Bank (RBA) and its monetary policy deliberations. While it hasn’t exactly said it, the RBA needs to see the unemployment rate tracking towards 4 per cent or even a little higher before it can be confident that wages growth and, with that, inflation will sit comfortably within its target band.

With the economy slowing and demand for labour easing, a 4 per cent unemployment rate is likely to be seen by late 2023 or early 2024.

If it rises to 4.5 per cent, or more, this is when the RBA will be moved to cut interest rates because then it will be confident that inflation will be on track to be within the target as the labour market weakens.

As noted earlier this week, this is what investors are starting to price in to financial markets – interest rate cuts in late 2023 or early 2024.

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