More people are changing jobs/planning to start new work as the labour market tightens, which will add to inflation...

Kieran Davies

Coolabah Capital

The demand for labour is strong, as reflected in job vacancies reaching their highest share of the workforce in half a century. The supply of labour has picked up, although a record high participation rate partly reflects migration all but stopping during the pandemic. As the labour market has tightened, more people have either recently switched jobs or expect to start new work over the next twelve months. Although this is nothing like the “great resignation” phenomenon in the US, such stirrings should add to labour costs and inflation, unless, of course, recovery is derailed by COVID.

Job vacancies are at their highest level in 50 years, with strong demand for labour across the country.

The demand for labour has been extremely strong during the pandemic, with non-farm job vacancies increasing rapidly to about 3% of the work force at the end of 2021. Vacancies did fall during the brief recession in 2020 and might dip during the latest COVID outbreak, but this is well above the pre-pandemic rate of 1.7% and the highest share since 1971. 

Some of this increase reflects employers being forced to replace non-resident workers who left the country early in the pandemic, although quantifying this effect is difficult given the uncertainty in measuring non-resident employees (the ABS recently revised down its estimate of the number of non-resident employees who left the country in 2020 from about 0.3mn to 0.1mn). 

The strength in the demand for labour has been broadly based when gauged using regional data, with vacancies at multi-decade highs as a share of the labour force in every state and territory and at extremes in Western Australia and the territories. 

On an industry basis, the demand has been more concentrated, with the greatest increases relative to pre-pandemic levels in health, hospitality, manufacturing, professional services, construction, and retail trade.

The supply of labour has recovered strongly, although the record participation rate has been inflated by the slowest growth in the adult population in over a century and the earlier exodus of non-resident workers.

The participation rate – which is the workforce as a share of the working-age population – has been volatile during the pandemic, falling sharply during the initial COVID wave, again during the delta outbreak and most likely dipping in the current omicron wave. However, these sharp declines have been short-lived, with the participation rate reaching just over 66% last year, which is marginally above pre-pandemic levels and the highest rate on record. 

The high participation rate has reflected a strong recovery in employment, where some domestic workers have filled gaps left by the exodus of non-resident workers (*), and has been artificially boosted by the closure of the international border, with the working-age population almost stalling as migration has all but stopped. 

The effect on the participation rate from the closure of the border has been significant as we estimate the participation rate would have only recovered to just over 65% last year – which would still be below the pre-pandemic peak – if the adult population had continued to grow at its pre-COVID pace. 

The situation should change as the border is re-opened as the return of non-resident workers and the resumption of migration should both place downward pressure on the participation rate. However, inbound migration may take time to recover and will be partly offset by Australians leaving to work and study overseas.

There are signs that workers are responding to the tighter labour market, which points to a recovery in labour costs .

There are signs that the combination of high vacancies and low unemployment are encouraging workers to change jobs, which points to upward pressure on labour costs given survey data show that switching jobs normally delivers an average 5% boost in hourly wages. 

More people have already started to switch jobs, with the number of workers starting a new job over the past three months currently about 5½% of total employment, which is the highest share since 2017.  Moreover, more workers – particularly full-time workers – expect to quit over the next twelve months to start a new job, with the expected quit rate increasing to just over 5% of total employment at the end of last year. 

Although this pales in comparison with the “great resignation” phenomenon in the US, this is the highest expected quit rate since 2008. While the boost to labour costs from workers changing jobs does not affect the wage price index given it is a pure measure of wages for individual occupations, this suggests that the labour market is starting to stir, which should boost inflation unless economic recovery is derailed by COVID.

Note: * the official measure of employment covers civilian residents and excludes non-resident workers. 

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Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...

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