The low unemployment rate is good news and the participation rate is even more so. But the situation is fragile and almost certainly temporary. There are two reasons for that.
1). Labour has become cheaper in real terms so more of it is being demanded. Businesses can usuallky increase their prices without much ado so can often increase their revenue that way. But wages are much slower and harder to move. They are sticky upwards. So will not immediately move. So wages relative to increased business income are proportionately smaller. They are cheaper. And when a thing is cheaper, more of it will be demanded. Hence the low unemployment rate.
But that tends to be temporary. Court cases and industrial action (strikes etc.) will tend to rebalance wages relative to prices. So labour will become more expensive and less will therefore be demanded of it. Unemployment will rise.
And that rebalancing will be disruptive, with an increased incidence of strikes etc. So a lot of productivity and income losses will flow from that.
2). Governments worldwide have pumped up the money supply rather recklessly in order to fund their high rate of pandemic spending. But that is a "sugar-hit" to the economy.
The extra money will be spent, leading to an increase in demand. And businesses will expand in order to provide the extra goods and services which satisfy that demand. So they will put on more staff.
But the available supply of labour is not very elastic so the extra services they can provide will be limited. There will be a shortage of goods and services relative to demand. And the result of shortages is that prices will rise. People will be prepared to pay higher prices to be the ones who get the goods and services that are available. You have inflation.
But with government spending returning to roughly normal levels, everything else will return to normal levels too. Shortages of of goods and services and shortages of labour will evaporate and extra staff will be laid off.
Australians will go to the polls on May 21 with the economy in astonishingly good shape. Despite what may feel to voters like a long period of crisis and challenge, the past couple of years have left minimal economic scarring.
Growth is nearly double what it was in the three years before the pandemic, at 4.2 per cent across 2021. When pens last struck federal ballot papers in May 2019 economic growth was at 1.7 per cent. This time, the economy is roaring with a jobs-led recovery pushing unemployment to a 14-year low.
In fact, leading indicators suggest we’re about to see the lowest unemployment rate since the early 1970s, which means the healthiest job market ever for the 8.8 million voters under the age of 50.
Importantly, it is a more inclusive labour market – female unemployment is at record lows and participation rate at record highs. Youth unemployment is at the lowest level since March 2008.
Job insecurity is also down 26 per cent since COVID hit, and elevated job-switching is hopefully delivering pay bumps and more fulfilling jobs. Wage growth is finally starting to stir after many years in the doldrums, although it is taking time to feed into awards, enterprise bargaining agreements and the public sector.
And household balance sheets are very healthy, partly as a result of generous government support in the pandemic. There’s a mountain of cash saved in bank accounts, house prices have risen by 28 per cent (remembering that two in three Australians own their home outright or with a mortgage) and net household wealth is up 32 per cent since the pandemic began.
And yet, despite the good news backdrop, consumers are feeling nervous. People either don’t see themselves reflected in the positive statistics, or don’t believe the good conditions will last.
Cost of living concerns, which are largely driven by petrol and food prices, have shot to No. 1 on the worry list. It tells us that, notwithstanding some of the best economic statistics in a long time, the reality is that real wages are still falling, at least for the next quarter or two, meaning the standard of living is declining. At the same time, households are being told interest rates are about to rise and house prices could fall.
How the Coalition sells the story of Australia’s economic recovery to voters will be important. This week’s employment data may help, especially if the March unemployment rate falls below 4 per cent.
But will it be enough to counteract the feeling that a strong economy is not delivering for the individual? Inflation data that will be released in the middle of the election campaign is likely to confirm rapidly rising prices in the March quarter, so expect to hear a lot about cost of living over the next six weeks.
While there’s no doubt this is an important issue for households and will influence consumer confidence and potentially the election outcome, I hope it doesn’t dominate the conversation at the expense of other challenges we should, as a nation, be asking of both major parties.
There has been a lot of talk of using the pandemic crisis to rebuild better, and yet both the budget and the opposition’s budget reply lacked bold reform agendas or a robust conversation on fiscal repair.
This matters because whichever side wins next month, the long-term challenge remains, of making sure the current growth peak transforms into a sustained upward trajectory.
Unfortunately, Australia’s well researched laundry list of productivity-enhancing reforms (industrial relations, red tape, regulation, skills, infrastructure, competition policy and tax), don’t hold a lot of interest around the dining table for most voters.
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