Sky-high vacancies suggest the jobless rate will decline further to 3-point-something per cent ...

Kieran Davies

Coolabah Capital

Recent data on both job vacancies and worker mobility show that Australia's labour market is continuing to tighten, pointing to ongoing reductions in the unemployment rate  and higher wages growth. In fact, current vacancy rates are consistent with a much lower unemployment rate, raising the prospect of a very rare 3-handle being recorded soon. This will only increase pressure on the Reserve Bank of Australia to soon start raising the cash rate, unwinding the emergency rate cuts of 2020.

Soaring job vacancies

Job vacancies continue to surge, up 7% in the first quarter of 2022. Vacancies are now 3% of the labour force, which is the highest share since just before the economy entered recession in late 1974. Vacancies are extremely high as a share of the labour force in every state and territory, but among the states WA has almost reached 4½%. 

Some vacancies will be filled when non-resident workers return to Australia, but based on the pre-pandemic relationship between vacancies and the unemployment rate, Coolabah Capital Investments estimates that the current level of vacancies is consistent with an unemployment rate of around 2% (see the first two charts below). 

Assuming that the unemployment rate soon falls into the 3s for the first time since 1974, this will place pressure on wages growth given the Reserve Bank thinks the NAIRU ranges between the high 3s and low 4s, while the bank's inflation model suggests the NAIRU is higher at 5¼%.  

Labour mobility points to greater wage pressures

With the unemployment rate likely to fall further, recent data also show clear signs of increased job mobility in Australia - albeit still nothing like the great resignation phenomenon in the US - which is also consistent with a pick-up in wages growth. 

About 5½% of workers have recently started a new job, which is the highest share in about a decade, mostly reflecting part-time workers changing jobs. More notable is the increase in the share of workers who plan to either change jobs or seek other employment over the next twelve months, which at about 5¼% is at the highest point since the global financial crisis. 

This has been driven by full-time workers, where about 4¾% of full-time staff plan to quit over the next twelve months, which is the highest share since data first became available in 2001. 

Importantly for the RBA, increased job switching places upward pressure on labour costs and hence inflation, but not the wage price index, which is a pure measure of wages growth that is not affected by changes in the occupational/industry mix of the workforce. 

The Reserve Bank has recently emphasised that it evaluates a broad range of labour cost benchmarks when assessing inflation pressures, including both the unit labour costs series reported in the national accounts as well as the wage price index. The former is more likely to signal sooner that the economy is generating wages growth that is consistent with sustainable core inflation within the Reserve Bank's 2-3% target band, which the bank has set as a pre-condition for its first hikes. 

We continue to expect 2-3 rate hikes from the Reserve Bank this year, which will eventually apply downward pressure on national house prices.

US unemployment rate is now well below the US NAIRU

In the US, the unemployment rate is practically back at pre-pandemic levels and well below estimates of the NAIRU.  That is, the unemployment rate fell to 3.6% in March, almost matching the pre-pandemic low of 3.5% that itself was the lowest unemployment rate since 1969 and one of the lowest rates in modern history.  

This indicates that there is excess demand in the US labour market as the unemployment rate is now well below the FOMC's median estimate of the NAIRU of 4% and outside the range of individual FOMC-member estimates of 3.8-4.2% (it is also below the median market estimate of the NAIRU of 3.8% in Q3 last year). 

Wages growth has reacted to the tighter labour market, where there has also been a supply response to the pandemic itself, with the strongest growth in wages in people-facing industries, such as hospitality, retail, health and education, presumably reflecting concern about catching COVID.  

The tightness of the labour market combined with the risk that high actual inflation will feed into high inflation expectations helps explain the Fed's pressing need to quickly return monetary policy to a more neutral setting and potentially adopt tight policy.  

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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 is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...

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