Addressing the Economic Society of Australia on Thursday, RBA governor Philip Lowe said the recovery of the Australian labour market so far in 2021 had been “remarkable”, with employment levels now sitting 1 per cent above their pre-pandemic level.
“The unemployment rate has also fallen sharply, and is now around the same rate as it was just before the pandemic,” Dr Lowe said.
This sharp decline has come as a welcome surprise – Back in February, we expected the unemployment rate to now be around 6½ per cent and not reach the low 5s until the second half of 2023.”
Dr Lowe said the recent outbreaks in Sydney and other capital cities were “a source of uncertainty”, but the central bank had less concern after observing the sharp recovery that followed the previous 2020 national lockdown period.
“We are watching developments carefully, but it is important to remember that Australia’s experience has been that, once an outbreak is contained and restrictions are lifted, the economy and jobs bounce back quickly,” he said.
Dr Lowe said a more pressing long-term problem for Australia’s economy was persistently low wage growth, an issue that had still not been solved by the closure of borders and restriction of domestic employers to a smaller pool of labour.
With wage growth having underperformed the central bank’s forecasts every year since 2014, and 2021 looking like more of the same, Dr Lowe suggested businesses may have adapted to a cheaper cost of labour as a permanent feature of the economy.
“We have been seeking to understand this experience and its implications for our policy settings,” he said.
“One straightforward explanation is that the low wage growth encouraged firms to substitute labour for capital, with the result being that employment grew quickly.”
Dr Lowe said continuous increases in labour supply in the past few years had also contributed to the problem, with new labour market participants flooding in from both overseas and domestically, as conditions became easier for women to seek work, and older workers stayed in the labour force for longer.
Despite the closure of borders, many firms retained a focus on cost control and were willing to wait out the current conditions rather than increase wages or hire more workers, he said.
With many “moving parts” relating to the roll-out of vaccines and the return of full business confidence, Dr Lowe said this conundrum was unlikely to be solved in the near future, and that a further period of “strong employment growth” was needed to push wages up.
“It is likely that the unemployment rate will need to be sustained in the low 4s for the Australian economy to be considered to be operating at full employment,” he said.
