The impact of Omicron in late December and early January presented a bit of pothole for the labour market but its long-run trend improvement is still on track.
In January, employment rose a moderate 12,800. The underemployment rate rose 0.1 points to 6.7 per cent while the unemployment rate moved sideways at a 13-year low of 4.2 per cent.
The telling bit of information in the data was a sharp 8.8 per cent fall in the total number of hours worked in the economy as people stayed home due to Omicron illness or because the businesses they worked in had to close because of a shortage of workers.
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Indeed, with people sick and self-isolating due to the Omicron outbreak, it was always likely the January data would be fickle.
And while the statistical swings and roundabouts will continue with the monthly labour force reports, the labour market remains fundamentally strong.
This is good news.
There seems little doubt the unemployment rate will be below 4 per cent before year’s end and with that, wages growth in the private sector is poised to surge.
Demand for workers
What remains as a critical issue for the economy and policy makers is the rampant strength in demand for workers, as shown in the job vacancies and job advertisement data and, importantly, the anecdotes from anyone who has any liaison with the business sector.
It would be no surprise to see this extreme and historical tightness in the labour market spark a 5 or even 6 per cent lift in labour costs in the year ahead.
A snapshot of those pressures on wages will come next week with the Wage Price Index and Average Weekly Earnings data.
For businesses paying higher wage costs, margins can be held constant if they hike their selling prices to cover those extra costs. This is the very definition of inflation and once unleashed, it is hard to bring back under control.
Pressure on RBA to act
Which brings us to the RBA and its dismissal of the inflation risks. Governor Philip Lowe has mentioned, regularly, that underlying inflation has only just returned to the mid-point of the 2 to 3 per cent target range.
This is true but it ignores the momentum in inflation, with the past two quarters showing increases of 0.7 and 1.0 per cent. These are baked into the annual run rate for the next six months, and when we see repeat quarterly increases of 1 per cent or more in the March and June quarters, Lowe will be explaining his surprise that underlying inflation is 3.5 to 4 per cent and perhaps it would have been wise to start the monetary policy tightening cycle earlier.
That is for the future, of course.
But for the here and now, the labour market remains in rare health.
With international borders closed, local businesses are having to hire Australians who were either unemployed or underemployed. They are having to ‘pay up’ – which means a decent lift in wages growth for the first time in more than a decade.
It is good news but there are policy consequences.
The pressure on the RBA is growing to breaking point.
The earlier it starts on the rate-hiking cycle, the less it will eventually have to do to contain the unfolding inflation pressures.
Conversely, the longer it waits before imparting its economic medicine, the greater the inflation blowout and the more interest rate hikes it will have to deliver to contain what look like being runaway price increases.