The collapse in foreign workers has boosted job vacancies and reduced unemployment

Kieran Davies

Coolabah Capital

The closure of Australia's international border has seen a collapse of non-resident employment as foreign workers returned home. This has contributed to the largest surge in job vacancies since the 1970s and placed downward pressure on the official unemployment rate. When foreign workers eventually return, the boost to job vacancies and the downward pressure on the unemployment rate should reverse. As the RBA has pointed out, some companies confronting labour shortages are holding off on increasing wages as they wait for foreign workers to return when the border reopens. The risk that Governor Lowe pointed out is that if the border remains closed for longer than anticipated, it will add to upward pressure on wage growth and inflation.   

The rebound in the labour market over recent months has been remarkable. After one of the biggest collapses on record, where 7% of workers lost their jobs in the space of three months last year, employment has rapidly rebounded to be 1% above its pre-pandemic level at the end of 2019. The unemployment rate spiked to 7.4% when employment slumped last year, which was the highest jobless rate since the economy was recovering from the drawn-out and deep recession of the early 1990s. From that peak, though, the unemployment rate has fallen to 5.1% in May, which means it is almost back at its pre-COVID starting point of 5.0%. This contrasts with the experience of most other advanced economies, where employment remains well below pre-pandemic levels and unemployment remains high.

However, these figures do not provide the full story as recently pointed out by CBA economist Gareth Aird. The ABS’s labour account – which provides a more comprehensive insight into the labour market – shows that total employment is yet to recover its pre-pandemic level. While the labour force survey – which provides the official measures of employment and unemployment – covers the civilian resident workforce, the labour accounts add in other workers such as non-resident workers and defence personnel. The broader labour account measure of employment is recovering from the pandemic, but as at Q1 2021 it was 2% below the end of 2019 level. 

The weaker rebound in the labour account measure of employment reflects a collapse in non-resident workers, which include foreign students, short-term migrants and backpackers. With defence force employment relatively steady at less than 0.1mn, we estimate that non-resident employment has fallen by more than 70%, dropping by about 0.3mn from under 0.5mn at the end of 2019 to just over 0.1mn in Q1 2021. 

The collapse in non-resident employment is mainly a supply shock to the labour market, as many of the foreign workers who lost their job at the height of the pandemic left Australia when the international border closed given they could not access unemployment benefits. These lost workers have contributed to the surge in job vacancies over recent months, while likely placing downward pressure on the official unemployment rate as Australians take up some of the jobs previously done by non-residents.  

Job vacancies have seen an exceptional rebound from the pandemic. Nationally, job vacancies have reached 2% of the local labour force, which is the highest share since the 1970s. In sectors where non-resident workers have been important, vacancies have spiked to their highest level in years. For example, household services vacancies have reached about 2% of that sector’s labour force, which is the highest share since at least the mid 1990s. Likewise, farm vacancies have reached about 1% of that industry’s labour force, which is the highest share since 2008.  

The impact on the official unemployment rate is hard to measure. However, an extreme scenario where all lost non-resident jobs were eventually filled by unemployed workers provides insight into the effect of this shock. In this clearly unrealistic scenario, if all 0.3mn jobs ended up filled by Australians it could reduce the unemployment rate by more than 2pp.  There are several problems with this scenario.  Some of the jobs may have been scrapped, while there could be skill/geographic mismatches between the available jobs and local workers. Also, some jobs may be filled by people joining or re-entering the workforce. Nonetheless it shows how the shock may have spilled over to the official measures of employment and unemployment.  

When the border re-opens and foreign workers return, the boost to job vacancies and the downward pressure on the unemployment rate should subside and eventually reverse assuming that foreign employment returns to its pre-pandemic trend.  

This impact of this supply shock appears to be influencing the RBA’s view on the labour market. As Governor Lowe suggested yesterday, foreign workers have historically acted as something of a safety valve for local firms when the labour market tightens. With non-residents currently out of the picture, Lowe pointed out that some companies facing labour shortages appear to be holding off increasing wages as they anticipate the return of foreign workers when the border is re-opened. This forward-looking behaviour is reminiscent of how companies acted during the global financial crisis, when they held on to workers rather than let them go and face a high cost of rehiring them when the crisis passed. Importantly, Lowe emphasised this patience would be tested if the border remained shut in a year’s time, increasing the risk of higher wage growth and inflation.   

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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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