The double edge sword of ultra low unemployment
Written and accurate as at: Aug 03, 2023 Current Stats & Facts
For the first time since 1974, Australia's unemployment rate has dropped to around 3.5%, a remarkable milestone for the Australian labour market. This statistical data signifies that Australians are securing jobs more readily and accumulating more work hours. Record-low underemployment levels further illustrate an optimistic employment situation - a welcome development after decades of striving to reach full employment.
Concurrently, the labour force and youth participation rates have reached an all-time high, with record numbers of Australians actively participating in the workforce. A drastic reduction in youth unemployment and unprecedented female participation levels signifies a highly active labour market. Despite the prevalence of inflation, these factors have driven benign wage growth in alignment with inflation targets, given an expected increase in productivity.
The robust labour market is attributed to the substantial fiscal and monetary policy stimulus implemented amidst the pandemic to guard against devastating economic fallout. The implemented stimulus has not only fulfilled its primary goal but also bolstered demand and instigated a robust recovery, resulting in a surge in job creation and a consequential reduction in unemployment.
Countries including Australia, New Zealand, and the United States are all experiencing unemployment rates plummeting to near-historic lows of around 3.5% to 3.6%. The United Kingdom trails closely with an unemployment rate of 4.0%. On the surface, these figures herald a global economic boom. However, further investigation into these positive figures uncovers an intricate mesh of factors.
Governments in these countries have fostered labour market-friendly policies, including business tax incentives and investments in education and training. Simultaneously, attempts to streamline the process for job seekers collectively create an environment that nurtures job creation, reducing unemployment.
Albeit, a strikingly low unemployment rate of 3.5% dips below the Reserve Bank of Australia's "full employment" benchmark of 4.5%, which doesn't come without consequences. Even with increasing interest rates, the number of unemployed people is still lower than the rate that prevents inflation from accelerating. This has the potential to reduce the effectiveness of monetary policy and risk an inflationary spiral that central banks strive to evade.
Specific sectors like healthcare, technology, and food services feel the strain as job vacancies outnumber available candidates. This scarcity of suitable workers may hinder productivity and restrict growth, ultimately impacting the broader economy.
Intense competition for skilled workers has the potential to cause wage inflation. While higher wages are generally a positive outcome for employees, they can provoke inflationary pressures if wage growth outstrips productivity. The challenge businesses face with increased wage costs could be passed onto consumers through elevated prices to protect their margins, creating a potential 'embedded inflation' scenario. This situation echoes the economic instability of the 1970s, posing a substantial challenge for central banks.
Persistent inflation can depreciate consumers' purchasing power and proves challenging to rectify.
The labour shortage could also exacerbate the socioeconomic divide. Industries experiencing high demand can afford to raise wages, favouring their employees. Conversely, industries with less demand may grapple with declining real income due to inflation. This discrepancy underscores the imperative for an educated, resilient workforce and innovative policies that boost efficiency and productivity.
However, this unusual labour market situation could spur positive change. It emphasises the critical need for education and professional development investments, cultivating a resilient future workforce. Innovative policies enhancing business efficiency and productivity also become an urgent necessity.
Australia's record-low unemployment rate indicates both stimulus-driven successes in safeguarding jobs during the pandemic and potential risks of over-employment, inflation, and a widening socioeconomic divide if unchecked. The subtleties highlight the need for strategic policy and workforce development to navigate the complex post-pandemic recovery. Understanding these nuances empowers Australians to make informed financial decisions in an environment of economic uncertainty.