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Chart of the week: Australia's puzzling labour market appears set for a solution? 

17 May 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

 

Sources: Reserve Bank of Australia and Datastream.


A key strength of the Australian economy has been the labour market. In the past year to April 2019, there has been robust jobs growth exceeding three hundred thousand. Australia’s unemployment rate has edged down from 5.5% in April 2018 to now stand at 5.2%. The Reserve Bank of Australia (RBA) has noted that “labour market conditions remained strong”. This is one of the key factors suggesting that the RBA should keep interest rates steady at 1.5% (blue line).

However this stands in contrast to most economic indicators which suggest a soft Australian economy. Subdued business surveys, weak housing construction and falling car sales are warning signs of weakness. So there is a puzzle between these soft economic indicators compared to the current strength of Australia’s labour market.

Yet this puzzle seems set to be solved. Australia’s underemployment rate has remained stubbornly high and above 8% for the past four years, indicating that part-time workers are struggling to obtain sufficient hours (inverted red line). The underemployment rate now stands at 8.5%, suggesting that the labour market is actually soft rather than strong. So for the RBA, this disappointing underemployment performance could prove to be the catalyst for interest rate cuts in the coming months.


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