Australia | Feb 14 2008
By Greg Peel
“Full employment” is a utopian goal of politicians who, for obvious reasons, believe a country in which everyone has a job is a successful one. Clearly any country’s employment can never really be “full”, as this would imply every single man and woman who wants a job, or must otherwise look for a job to qualify for welfare, has one. In other words unemployment would be 0%. Apart from being an unrealistic concept, it is not really a great help either. Imagine a sports team with no substitutes on the bench. What happens if someone is injured?
So a loose definition of “full” employment that has prevailed for some time is actually 5% unemployment. This is seen as relatively ideal, as it allows for employers looking for new staff to still find candidates while disaffected employees can still make choices. If unemployment is 0% there’s no room for growth and no one would dare leave their job.
The unemployment rate in Australia, however, long ago fell below 5% and in January hit a 34-year low at 4.1%. This has prompted some economists to suggest that maybe “full” employment should be reclassified as 3% unemployment, given Australia’s economy is powering along quite nicely and not suffering too many ramifications of being “over-employed”.
The number of Australians employed increased by 26,800 in January, compared to consensus estimations of a 15,000 increase. The participation rate remained at a historically high 65.2% of population, and unemployment fell to 4.1% from 4.3% in December. January represented the fifteenth consecutive month of job increases.
If just about everyone has a job it should be good for an economy, as there’s money in the pocket to spend. It also goes some way to explaining why, in Australia’s case, consumer spending has failed to be curtailed by higher energy and food prices. It is also beneficial in the face of higher interest rates, which have risen due to aforementioned inflation, in that home owners with jobs are better prepared to weather mortgage payment increases. Compare Australia’s situation to that in the US, where despite significant interest rate cuts unemployment has begun to rise, mortgage defaults are widespread, energy and food costs are soaring there too, and the economy is possibly already in recession.
But if there are benefits of a 4% unemployment rate, there is also a dark side. There might still be a reserves bench to make sure things don’t come to a grinding halt, but there is little to stop those who are in a job recognising their greater value in a market where good substitutes are thin on the ground. If energy, food and interest payment costs are rising for the average household, there’s little to stop the average worker leveraging more pay out of an employer. And now that the Rudd government is about to begin dismantling the previous government’s work agreement system, unions in particular will be pushing for wage increases.
Australia’s employment growth is even more significant when you consider that (a) immigration has stepped up to strong levels and (b) the Howard government took steps to ensure many more Australians – the aged, disabled and others on welfare – either remained in or returned to the workforce. Apart from some increase in productivity, this goes some way to explaining why the wage increases the RBA has been expecting for at least a year had not yet eventuated. But the RBA has never diminished its expectations that wage inflation must soon become an issue, and its monetary policy tightening has borne that in mind. If price inflation is rising, and then wage inflation rises, the two can end up fuelling each other in an upward spiral.
Thus the January jobs figure only goes to strengthen economist expectation that for the first time in ages the RBA may make consecutive monthly rate hikes, and perhaps another in May following the first quarter CPI result. Until the RBA can apply some form of brake to this runaway economy the labour market will remain uncomfortably tight.
Stand by for at least a 7.25% cash rate soon, if not 7.50%.