Conditions in the Australian labour market strengthened after coming through a disrupted start to 2022 from the Omicron wave over the summer holiday period. A stronger-than-expected employment outcome saw the unemployment rate falling to 4%, while a rebound in hours worked helped reduce overall spare capacity. Forward-looking indicators point to the momentum continuing, bringing the RBA closer to its full employment goal.
Labour Force Survey — February | By the numbers
- Employment posted a net gain of 77.4k in February, well above the consensus estimate of 37k. January's increase was revised up, from 12.9k to 28.3k.
- National unemployment fell from 4.2% to 4.0% (vs 4.1% expected), its lowest since August 2008.
- Labour force participation advanced to a record high of 66.4% from 66.2%.
- Hours worked surged by 8.9% in February, rebounding from January's 8.6% fall (revised from -8.8%).
Labour Force Survey — February | The details
The tightening in the Australian labour market resumed in February after the surge of the Omicron wave and the peak summer holiday period paused progress towards full employment early in 2022. At 4%, the national unemployment rate has fallen to the lows seen prior to the financial crisis in 2008. A decline in underemployment, from 6.7% to 6.6%, leaves overall underutilisation in the labour market at 10.6%, down from 10.9% in January and at its lowest in more than 13 years.
With the labour market tightening, the RBA is closely watching for the build-up of wages pressure as a guidepost for its medium-term forecasts of inflation. Wages pressures are rising and the minutes from the February meeting noted this week that the risks were now "skewed to the upside". However, unlike in many other economies, Australia's labour market has been tightening alongside rising participation, hitting a new record high in February at 66.4%.
Strong employment is more than offsetting the increase in participation, making inroads into spare capacity. Employment increased by 77.4k in February, well above expectations, and was driven by a surge in full-time work (121.9k) as the part-time segment declined (-44.5k). Overall, employment is 2.9% above its pre-Covid level.
Indications are that employment will continue to rise. Monthly job vacancies lifted to 1.9% of the labour force in February and survey data continues to report many businesses are faced with staff shortages, particularly in medium and large businesses.
All this suggests the labour market will continue to tighten in the months ahead and should contribute to generating upward pressure on wages. But, overall, the supply/demand dynamics in Australia are in a much better balance than in the US and UK, with the implication being that wages growth domestically is likely to rise at a much more moderate pace than offshore.
In January, a higher than usual number of Australians were on annual leave, while the surge of the Omicron wave saw many people falling ill or having to isolate due to being a close contact, with the combined effects crunching hours worked by 8.6% in the month. There was a reversal in February as hours worked rebounded by 8.9%, to be 2.7% above their pre-pandemic level.
This was driven mainly by people returning to work from holidays, though the number of Australians working fewer hours than usual due to illness or sick leave was also well down from January's high.
Labour Force Survey — February | Insights
The resumption of the tightening in the labour market after a temporary pause in January brings the RBA's progress towards full employment closer, with the prospect of more to come as forward-looking indicators of employment remain strong. The accumulation of data around the build-up of wages pressure is key to the timing of when the RBA raises rates. When the does occur, I see the hiking cycle as being more gradual and less agressive than the likes of the Fed, BoE and RBNZ, which are all faced with much higher inflation than the RBA is in Australia.