An unemployment rate of 2.9%? Some economists believe it is possible. But then what happens?


The Reserve Bank is expected to raise interest rates again this week, following this month’s increase.

It will also publish new forecasts for inflation, wages, unemployment and economic growth.

Analysts say its new forecast will likely show a slowing economy and rising inflation, but with unemployment still falling.

How could the unemployment rate drop further from here?

Vacancies reach record highs

At regular intervals, the economic teams of Australia’s major banks produce their own forecasts for the economy.

They use models similar to those of the Reserve Bank and the Treasury, so they know roughly how economic officials think.

Currently, the unemployment rate in Australia is 3.5%, and it hasn’t been this low since August 1974.

But bank economists say there is enough strength in the labor market to suggest the jobless rate could continue to fall from here, even with the RBA raising interest rates fairly quickly.

You can see what they’re talking about in the graphic below.

It shows how the number of job vacancies in the economy almost matches the number of officially unemployed. It’s almost one for one.

We haven’t seen anything like it in the neoliberal era.

With an unemployment rate of 3.5%, the employment-to-population ratio and the activity rate are both reaching new records.

Part-time jobs are converted to full-time jobs. The unemployment rate for young people (15 to 24 years old) fell to 7.9%, the lowest since 2008.

It’s still not ‘full employment’ – not in the sense that that term was originally used – but it’s by far the closest to full employment since we dropped it as a policy goal in the 1970s.

The Albanian government has a real opportunity to try to lock in these gains and rebuild the economy on a platform of much tighter labor markets.

This is a point that economist John Quiggin made last week.

“A renewed public commitment to full employment would be transformational, making it clear that changing governments changes the nation,” he said.

“If Labor misses this opportunity, it is unlikely to happen again.”

And last week economists at ANZ said the jobless rate could fall further from here – to 2.9% (or thereabouts) – before the RBA’s rate hikes begin. really to bite next year.

It would be remarkable.

They said “underemployment” could continue to fall this year and the participation rate could hit a new high early next year.

Why? Due to positive feedback: with such a strong labor market, it is theoretically easier for people to find jobs, so even more will join the labor force in the coming months.

The situation has been helped by more flexible and remote work arrangements, brought about by COVID, which has reduced barriers to employment.

And, they said, even if international borders have reopened, the pace of the increase in the additional supply of workers in Australia is expected to remain relatively slow for some time.

“Newly arrived skilled migrants, temporary visa holders, students and backpackers are adding to the supply of workers, but also to an already strong demand,” they said.

“So while the return of migration improves labor mobility and adequacy, it does not mean that the gap between demand and supply will close quickly.”

It will be fascinating to see, in a few months, what will become of this vacancies graph above.

The next data will be published at the end of September.

More RBA rate hikes to come

However, the RBA appears determined to raise interest rates quickly over the next few months to bring rates back to more normal levels and try to squeeze some inflation out of the system.

The cash rate target was 0.1% in April, and it has already been raised to 1.35%.

Economists say the RBA will likely raise rates by 0.5 percentage points on Tuesday, which would take the target to 1.85%.

After that, there are estimates that the bank will want to end the year with a cash rate around 3% (or higher).

ANZ economists say the accumulation of rate hikes will contribute to a slowing labor market next year, before slowing more sharply in 2024, with the unemployment rate hitting 4% by the end of 2024.

See their chart below.

However, different economic teams have different forecasts on this point.

Westpac economists are more pessimistic.

They believe the RBA’s rate hikes will push the unemployment rate to 4.2% by the end of next year and 5% by the end of 2024.

They also revised down their forecast for GDP growth (throughout the year) from 2% to 1% in 2023 and from 2.5% to 2% in 2024.

Westpac chief economist Bill Evans said slowing economic growth and rising unemployment would help inflation come down, but the degree of slowdown would force the RBA to cut rates in 2024 to boost again the growth.

“We now see an extended period of rates holding well within the contraction zone,” he wrote last week.

A few weeks ago, RBA Governor Philip Lowe said he wanted to bring inflation back to the target range of 2-3% while keeping economic growth and unemployment low.

“It is certainly possible to do it, but the road ahead is narrow and it is clouded by uncertainty,” he said.

But you can see where things could go.

Once this inflation is forced out of the system, do you think policymakers will do what they can to bring the unemployment rate down to this level?

Or will they settle for the false full employment that characterized the pre-pandemic era, with its higher unemployment rate?

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