In January, Australia’s unemployment lifted to 523,200 people an increase of 21,900 over December. This has moved the unemployment rate up slightly to 3.7%. While an economy in an inflationary cycle must be careful about unemployment rates, there was little concern at rising rates.
There is always some level of employment readjustment in January. Contracts come to an end, businesses go dormant, start up (or not), school leavers look for work and churn the market and so on. A minor rise in the unemployment rate – shown in the chart below – is little cause for current concern. By any measure, any unemployment rate with a 3 at the front is a good number.
A lack of direct concern doesn’t mean the econometric nerds ignored the data. The change in direction is now noticeable after the unemployment rate bottomed at 3.4% in October. Economists wary of the dual impact of inflation and unemployment lowered their eyes, looked over the top of the pince nez and ultimately declared themselves watchful, not wary.
Why is that so?
At a macro level, increasing interest rates is aimed at pulling money out of the economy, thereby reducing demand. Whether inflation has peaked is yet to be seen but changes in Employment – as well as Retail Sales – are useful indicators of the expected impact of those interest rate rises.
That is, the more money comes from the economy, the less things and services people buy and the less need there is for workers.
If there is a trick in managing inflation using interest rates, it is walking a tightrope of withdrawing the right amount of money from the economy now, knowing the impact will be felt later.
There is observable national commentary about whether in its rounds of interest rate rises to date and those yet to come, the RBA has already overcooked the responses to inflation. It may be a little hyperbolic and emotional, but it is understandable concern, nonetheless.
Little wonder then that the econocrats are examining the unemployment rate so closely right now. It is in employment after all, that the economy routinely feels some of the worst impacts of inflation and also, of interest rate rises.
There are at least three factors that appear to give comfort to the current cycle of interest rate increases, and one that weighs against them.
First, we can look to the chart below showing the level of employment and the participation rate (those in or actively seeking work). More than 13.7 million people were in work in January and the participation rate was a solid 66.5%. Down a little but both are above pre-pandemic levels.
Second, the data also shows a decline in the hours worked in January. The nation punched the clock for 1.8362 billion hours for the month, down 2.1% on December. This is a mixed message but really no different to every January, when many people take leave.
As the chart here shows, those taking leave were at a six year high in January.
It is important to keep in mind that for some time now (about two years) Australians have been working extra hours each month. The long-term average is 85.73 hours per person. That fell to 85.69 hours in January and is likely to rebound to the recent 87 to 89 hours per week in February.
Third, as John Kehoe from the Australian Financial Review picked up in the ABS survey data, there were quite a large number of unemployed people – 72,400 to be specific – waiting to start a job within the next four months. It’s a bit peculiar, but we are coming out of a pandemic and the employment reset is still underway.
If there is a real downside on the employment data from January, it might be that the latest Wage Price Index shows that over 2022, wages increased just 3.3% on average, against inflation of 7.8% over the same period. That means real wages – spending power – fell by 4.5%. In turn, that means inflation is having a self-correcting impact.
That is, higher prices and reduced spending power reduce demand and help bring prices down. In that context, unemployment rising quickly could see demand ripped from the economy at an even faster rate, let alone the impact on the households of the unemployed.
Slightly mixed economic data right now perhaps, but the employment data remains solid with a stable outlook. That will be some comfort to a mild-mannered central bank governor, but it won’t stop the economic chattering classes from poring over future employment data.