Like most people, the RBA has a bias. But it’s costing us jobs

The latest unemployment rate shocked most people interested in the subject. Data released by the Australian Bureau of Statistics last week showed unemployment rose to 4.5 per cent in September from 4.3 per cent in August; This rate was the highest rate in the last four years.

Of course, the Central Bank cannot react immediately. Its next meeting is scheduled for early November.

But even until the latest interest rate decision, the bank still seemed preoccupied with one thing: Inflation, jumping at any sign but maintaining that the labor market is “generally stable” and even somewhat tight (so they think unemployment is still too low to be safe).

So what’s actually wrong with low unemployment? Isn’t it a good thing that more people have jobs?

The only real risk from a very low unemployment rate is inflation (which, as we know, is currently well within the target range).

As Borland points out, wage growth has generally been falling or remaining relatively flat since June of last year, which is a good warning sign for inflation caused by a tight labor market. If wage growth accelerates, that tells you there is a shortage of workers; This means businesses may have to pay more to find and retain them, thus increasing the cost of goods and services.

The slowdown in wage growth, which we see across the board, is a sign that inflation is still on track to decline and the economy and labor market are weakening.

Data has been showing that the economy has been in a slowdown phase for some time.

University of Melbourne labor economist professor Jeff Borland

But we know that the Central Bank is quite stubborn in its view on the right level of unemployment to keep inflation under control. Although many economists (both inside and outside the bank) said the bank’s view was wrong and that after annual inflation fell below 3 percent (unemployment was near 4 percent), Bullock continued to support the bank’s forecast that unemployment could not be lower than about 4.5 percent without increasing inflation.

Of course, there are a wide variety of economic indicators that economists can use and draw different conclusions from. But it appears that the Federal Reserve is still bent (overly) on avoiding inflation at the expense of employment and the economy’s ability to grow.

While it is possible that the full impact of the last few rate cuts has not yet been reflected in the economy, Borland says the bank should accelerate the rate cut because it is a very slow tool.

“Data has been showing for some time that the economy has been in a slowdown phase,” he says. “It’s really important to act quickly to prevent this.”

Unemployment is still (historically speaking) at a low level. However, the disappearance of more employment opportunities will hold the country back. This is especially true for groups who have generally found it more difficult to find work in the past, including youth, First Nations workers, and women who have been able to gain employment as more job opportunities become available.

The main reason for the increase in the unemployment rate is the slowdown in employment growth. So not many new jobs are being created.

Accordingly Borland’s numbers are crackingLast year, an average of 33,900 people were looking for work each month, and approximately 32,600 people were finding work each month. Basically: If you were looking for a job, your chances of finding it were pretty good.

So far this year, only a third of that number has managed to land (an average of 12,900 people per month). Given that it is harder to find a job, fewer people are looking for work than last year (about 22,100 people per month).

Since unemployment is the ratio of people who do not have a job and are looking for a job, the unemployment rate increases if more people are looking for work and fewer are successful in finding a job.

Borland’s research also shows that monthly working hours have increased much more slowly this year, and the proportion of people who are underemployed (working but not as much as they would like) has increased compared to last year.

So why is the job market weakening?

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You might think this has something to do with the pullback in government spending, but that’s not actually the case.

From mid-2021, the federal government’s efforts to improve the quality of government services and expand the National Disability Insurance Scheme (NDIS) have increased the number of jobs created in sectors such as health and education. As government spending decreased, many expected growth and employment in these sectors to decline.

However, according to Borland, the increase in total working hours in these sectors continued at almost the same pace as in previous years.

Instead, it is private companies that are forcing them to pause their expansion plans. That doesn’t necessarily mean they’re cutting jobs (although there have been their fair share of high-profile layoffs). Since they are not very optimistic about the economy, they are not keen on creating new employment.

Borland’s view is that the Federal Reserve is not yet focused enough on helping the economy grow and keep unemployment low. “We should have a bias towards preventing really serious economic downturns,” he says.

Inflation may be the issue everyone feels and remembers most vividly right now, but if the bank remains too stubborn, it will face a bigger problem on its hands and a smaller economy to contend with.

Ross Gittins explains economics in a subscriber-only newsletter. Sign up to receive it every Tuesday evening.