Daily Commentary BY THE CURVE TEAM –

Employment Data Highlights RBA Conundrum

14th of May, 2019

The latest employment figures once again highlighted the conundrum the RBA faces in trying to meet its mandate of full employment and getting inflation back into the target band.

Structural changes in the labour market continue to plague the RBA’s attempt to meet its mandate. The latest data saw yet another robust month of jobs growth, with the economy adding a further 42,300 jobs in May, albeit mostly part time. Last months already solid increase was revised up from 28,400 to 43,100 new jobs, all of which were full time.

Despite the solid rate of jobs growth, which sits at an annual rate north of 3%, there remains considerable slack in the labour force. The unemployment rate remained at 5.2% in spite of the pick up in new jobs thanks to the continued uptrend in the participation rate.

The jobs market has continued to be far more flexible that the RBA had anticipated as highlighted by the Governor last week. While there is no clear reason behind the increase in the participation rate, it could be down to the fact that households have needed to offset persistently weak wage growth with a second family entering, or re-entering the labour force.

Also undermining the RBA is the fact that while more people are working, they are working less hours. Total hours worked actually fell 0.3% last month, despite the solid rise in new jobs numbers. The average hours worked per person has been in steady decline for years. This is somewhat reflected in the underemployment rate, which is now trending higher again after showing signs of improvement earlier in the year.

Wage growth has a strong relationship with the underemployment rate which is as good a guide as any to the slack that remains in the labour force. It also means until we see the participation rate ease or jobs growth accelerate even further, the slack in the labour force is likely to remain present for some time yet.

David Flanagan

Director - Interest Rate Markets