The unemployment rate fell to4 per cent in February, and it could keep declining(ABC News: Ron Ekkel)
The unemployment rate keeps falling and someeconomists think it's heading back to early-1970s' levels.
It deserves a lot of attention, because the reasonswhyhave important lessons.
And our major political parties have a questionto answer, too.
What is fallingunemployment rate telling us?
In the past 18 months, I've spent a lot of timeexplaining why the unemployment rate can be very misleading.
It's rarely telling you what you think it is, because it's such a technical number.
However, at this exactmoment,the unemployment rate is a decent-enoughproxy for the health of the labour market.
Why?Because arecord number of people are currently employed, and the number of officially unemployed people has fallen to a 13-year low.
The participation rate is at a record high, and the employment-to-population ratio isat a record high.
Underemployment has fallen significantly too.
We don't have time today to talk about thequalityof some of those jobs(I'll get to that in a future article).
However, for now,it's safe to say the declining unemployment rate is telling us thatthe labour market is tightening in ways that benefit workers.
And, last month, it fell to 4 per cent.
It hasn't been this lowsince 2008.
How low can it go?
However, a senior economist at ANZ, Catherine Birch, thinks the unemployment rate has much further to fall.
Ms Birch is forecasting it to hit 3.3 per cent by the end of the year.
See her graph below.
The unemployment rate hasn't been that low since the early 1970s.
How is it falling so quickly?
It's because we'vebeen living in a huge social experiment.
When we closed our international borders at the beginning of the pandemic in 2020, we cut off a major source of labour supply.
It saw thousands of migrants having to leave Australia, which contributed to job vacanciesjumping to record highs.
At the same time, we pumped our economy with an enormous amount of stimulus and the Reserve Bank cut interest rates to record lows.
The unprecedented stimulus drove a rapid recoveryin economic activity when lockdowns ended, andworkers have been in high demand from employers during the recovery.
However, with closed borders, employershad little choice but to source their new workers from the local pool of unemployedpeople.
That point iscrucial.
Why?
Because that's the reason why the decline in the unemploymentrate has not only occurred,it has alsobeenturbocharged.
I explainedwhy inthis piece.
And here's thekey point:In the closed borders era, the working-age population has barely been able to grow, while employment has grownreasonably well.
It's meant employment has been growing faster than the working-age population.
The only reason that's been possible is because employers have sourcedthe majority of their new workersfromthe pool of unemployed peoplein Australia.
And that dynamic has helped to drive the unemployment rate down exceptionally quickly.
We saw it again last month.
In February, the working-age population grew by 25,568 people. (Remember,this group only grows by natural increase and immigration.)
But thenumberofemployed people grew by 77,400.
How did employment grow by so much more?
See the graphic below.
It shows you where the extra workers came from.
As you can see, theworking-age population increased by25,568 peopleand theyall found employment.
But another18,500 workers came from thepool of officially unemployed people.
And another 33,332 workers came from thenot in the labour force group.
Add them up, and you get the 77,400 increase in employment.
According to the labour force framework, a way to drive the unemployment rate down rapidly — in a healthy way —is to boost employment by drawing down heavily on the local pool of people whodon't have jobs.
And, in the closed borders era, that's the only option employers had.
What happens when immigration picks back up?
Now, that phenomenon has been a short-term one.
When international migration flows pickup again, those dynamics will change.
Which brings us back to ANZ.
Last week, Ms Birch saidthe unemployment rate could fall to 3.3 per cent by the end of thisyear.
She said the labour market was still tightening, labour demand and job vacancies were still high and rising, and the lack of international migration hadaccelerated the tightening.
But her next point was very interesting.
She shifted her attention to what will happen to the labour market with bordersreopening.
She said the reopening of international borders will improve the matching of workers to jobs: a relief for employers.
And she doesn't think it will prevent further tightening in the labour market.
Why?Because new arrivals will not only add to the supply of workers, they'll also add to the already very strong demand side, she said.
And it will also take time for the working-age population to start growing at pre-pandemic rates.
This will be worth watching.
It's absolutely right that the unemployment rate could keep declining when immigration resumes properly.
Butthe pace of the decline could slow.
It's also possible the unemployment rate could start to increase again, over the medium term.
It depends on a lotof things.
And now for something completely different
But let's wrap things up.
We're getting close to the federal election, and there's something we haven't heard from our federal politicians.
Will the next federal government commit tokeepingthe unemployment rate down near 3 or 4 per cent (or even lower)?
We'reflirting with getting into genuine full employment.
We have a chance to reset the foundations of Australia's labour market.
It wasn't that long ago thatTreasurer Josh Frydenberg — and his department —was producing budgets with no ambition to pushthe unemployment rate below 5 per cent.
Remember this, from the 2019-20 budget?
Remember how little wages growth there was?
At the time, MrFrydenberg's budget priority was getting to surplus.
He was trying to takemore money out of the economy, via taxation,than he was spending into it, to manufacture that accounting surplus.
That budget opened with this memorable line:The 2019-20 Budget delivers a surplus for the first time in over a decade.
Itwas onlyprojectedto deliver a surplus.
Prime Minister Scott Morrison later clarified it this way: Isaid webrought thebudgetback tosurplus next year.
Let's not return to those games.
Wouldn't it be better if politicians competed over getting the labour market historically tightand keeping it there,like they used to?
https://www.abc.net.au/news/2022-03-20/will-politicians-commit-to-keeping-the-labour-market-tight/100921872
