28 May 2021
A remarkable 115,000 person rise in employment in May has driven Australia’s unemployment rate down to its pre-pandemic rate of 5.1 per cent. As such, the unemployment rate is likely to fall below 5 per cent sooner rather than later, which would put it within the Treasury’s estimated range for a non-accelerating inflation rate of unemployment (NAIRU or full employment) of 4.5-5 per cent.
ANZ Research’s latest forecasts have the Reserve Bank of Australia (RBA) lifting the cash rate twice in the second half of 2023 to 0.5 per cent by year-end. But if the labour market continues to tighten at this rate, triggering an earlier, stronger acceleration in wages growth and inflation than has been factored in, this timetable could be brought forward.
"Along with the drop in unemployment, underemployment has fallen 1 percentage point over the past three months to 7.4 per cent.”
ANZ Research thinks the recent labour market result will also cement the RBA’s upcoming decisions at its July meeting to not roll the yield target from the April 2024 bond and to shift to “flexible” quantitative easing from September.
Along with the drop in unemployment, underemployment has fallen 1 percentage point over the past three months to 7.4 per cent. The shrinking pool of underemployed workers is likely to be an important catalyst for businesses to lift wages as they have less “available” labour to draw on quickly.
Underemployment has been a much better predictor of wages growth over the past cycle. It is now at its lowest rate since Q1 2014, when wages growth was 2.7 per cent year-on-year.
Further reflecting the sharply tighter labour market, while there were 344,000 people working fewer than usual or no hours due to no work, not enough work or being stood down, this is fewer than the May average over the five years pre-pandemic.
Catherine Birch is Senior Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
28 May 2021
07 May 2021