• Stephen Roberts
    • Oct 18

The Tightening Labour Market

The lockdowns in New South Wales and Victoria have played havoc with Australian monthly labour force data. In the past two reports for August and September a collapse in the number of people considered active in the labour force (defined as employed or unemployed) or the participation rate has meant that despite a fall in employment of more than 280,000 over the two months the national unemployment rate is hovering near a twelve-year low at 4.6% in September.

Policymakers are saying that the unemployment rate is an unreliable indicator of the tightness of the labour market in the short term. As New South Wales and Victoria exit their lockdowns and lead the nation towards a new normal way of life living with Covid the rebound in employment in those states will be met with a sharp increase in the labour force participation rate and conceivably a lift in the measured unemployment rate before it settles eventually and starts to become a reliable indicator of tightness in the labour market.

Even after the unemployment rate has settled and starts to fall again it will take many months, possibly a year or two, before pushing down consistently below 4%, territory where annual wages growth may push up above 3% y-o-y causing the RBA to start considering the need to hike official interest rates.

While it is possible that the labour market might tighten as slowly as policymakers are forecasting the various Covid lockdowns since March 2020 have thrown potential spoilers into the analysis that may cause the labour market to tighten more quickly than policymakers expect.

One big spoiler is that coming out of the lockdowns in New South Wales and Victoria there is ample evidence that demand for goods and services will bump up sharply causing many businesses that have been shut to scramble for staff to function and meet demand. Some businesses in areas such as hospitality are reporting extreme difficulty bringing back workers stood down in the shutdown or employing new workers to fill their positions.

Part of the labour scarcity in areas such as hospitality and including other industry sectors such as agriculture, health and age care and many others has been heavy reliance on employing temporary and permanent migrants to Australia. This key source of labour for many parts of the Australian economy has dried up since the start of the pandemic and may be slow to return even when entry requirements to Australia ease.

The most recent Australian population statistics for Q1 2021 show an annual lift of only 35,700 or 0.1% to 25,704,340. This slowest annual population growth rate in more than a century occurred despite still quite fast natural population increase (births minus deaths) of 131,000. The damage to the overall population growth rate came from net overseas migration, -95,300. This is a sharp change from net overseas migration that regularly ran at +150,000 a year and more before the pandemic and marks a big squeeze on labour supply in the first year of the pandemic.

Beyond the quite dated Q1 population data which relate to the period before the most recent lengthy lockdowns in New South Wales and Victoria, more recent monthly Australian overseas arrivals and departures data indicate that net overseas migration may have worsened squeezing labour supply even more. In July, August and September total departures from Australia (122,700) exceeded arrivals (155,960) by 33,260 and implying net migration is running worse than –100,000 annual pace.

The latest announcement at the weekend from the Federal Government about international border requirements is that more general international travel for Australian residents will resume from 1 November. Non-resident workers to Australia will wait longer. Travel into Australia for overseas migrants, students and other holiday and work visa holders will occur in yet to be determined stages beyond November 1.

In short, existing labour market shortages caused during the pandemic by the absence of overseas workers and worsening now with the relaxation of lockdown rules in New South Wales and Victoria will not begin to be relieved until some still unspecified future date. Even then, there will be further delays as the numbers of overseas workers pick up speed.

There is also a question around whether when overseas workers are able to return to Australia they will return in large numbers. Australia’s border closures internal and external and lengthy lockdowns may have damaged Australia’s appeal relative to other possible travel destinations. It is a reasonable assumption that the return of overseas workers to Australia will be slow affair in the early stages.

In the next six months at least, Australian employers trying to source labour to meet the jump in demand post New South Wales and Victorian lockdowns will have to trawl a market limited to those living here. Recruiting will be unusually difficult because some of the workers they used to employ have made choices during the lengthy lockdowns to work with businesses less affected by lockdown, start their own lockdown immune enterprises, or change lifestyle and not return to conventional working arrangements.

In effect, the labour market may already be drum tight. If it is, those who lost jobs or hours during the lockdowns will regain them fast, perhaps by the end of this year. The unemployment rate may not rise much more than the latest reading of 4.6% and could be tumbling again early in 2022. By then, the falling unemployment rate will be harder to dismiss as a statistical anomaly. The scene will be set for faster and bigger wage increases and the RBA may need to reconsider its timeframe for hiking the cash rate.