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Unemployment hits 5.0%, so where is the inflation?

Adam Zuchetti
Adam Zuchetti
21 March 2019 3 minute readShare
Sydney street

Australia’s unemployment rate remains low by historic standards, latest ABS figures show, leading to questions of why a traditional correlation with high inflation has been broken.

The Bureau of Statistics on Thursday released unemployment figures for February 2019, which puts the nation’s trend unemployment rate at 5.0 per cent.

That was steady compared with January, which was revised down from 5.1 per cent. Seasonally adjusted, the rate for February was rounded to 4.9 per cent.

Employment increased in the shortest month of the year by 20,600 — around two-thirds of which were full-time jobs (12,300). The remainder (8,200) were part-time jobs.

“The trend unemployment rate declined [by] 0.5 [of a percentage point] over the year, from 5.5 per cent to 5.0 per cent. The pace of decline slowed in recent months, which was consistent with the slowdown seen in recent job vacancies and GDP numbers,” ABS chief economist Bruce Hockman said.

According to the ABS, the rate of underemployment has also eased, with the number edging down “by less than 0.1 [of a percentage point]” for the month to 8.1 per cent. That figure is 0.4 of a  percentage point lower than a year ago.

Last month, the bureau revealed a surprising number of Australians who typically only work a single hour each week.

There are now 12,762,800 people in paid work in Australia, 8,743,400 of whom are in full-time employment.

Virtually all states and territories saw their respective unemployment rates remain steady over the month. The only exception was Tasmania, where unemployment rose. This was offset by a fall in Queensland.

However, the ABS noted that the major flooding to hit Townsville and other parts of far North Queensland “resulted in a major disruption to the operation of the Labour Force Survey”, as very few households made their usual response.

“Given the severity of these disruptions, which affected almost the entire region, and to ensure that this loss of sample did not affect data for Australia and Queensland, the ABS imputed sample for Townsville for February 2019,” the ABS said.

“The imputation drew upon previous information that had recently been collected from people in Townsville. The imputation will be re-assessed once March data has been collected from Townsville, at which point the ABS may revise the data for February.”

So, why isn’t inflation soaring?

An unemployment rate of 5 per cent is often cited as the level deemed to constitute “full employment”, and a generally accepted view when it comes to the economy is that when unemployment is low, inflation (growth in prices) is high — and vice versa.

Yet this is far from the case at present. Inflation in Australia is currently sitting at just 1.8 per cent — below the Reserve Bank’s target of between 2 and 3 per cent.

The Bank of International Settlements (BIS), sometimes called the “central bank of central banks”, has noted that the situation is not isolated to Australia. It suggested that the current reason for low inflation, and also low rates of wage growth, could be an ageing population.

“Over the last 15 years, the proportion of people aged 55 to 64 who work has increased from 33 per cent to 55 per cent on average across the Organisation of Economic Co-operation and Development [OECD] countries,” it said in a recent working paper.

BIS explored data on wages, CPI inflation, productivity, unemployment and participation rates across 19 countries — including Australia — and found that an older workforce does create downward pressure on inflation.

“We find that, over the last 20 years, the ageing of the workforce has reduced wage inflation. This result holds true across all the economies we tested, from the G7 advanced economies to small European regions. But the effects are small,” it said.

“We also find that unemployment has a large impact on wage inflation. Reducing the unemployment rate by 1 per cent reduces wage inflation by 0.45 [of a percentage point] in G7 countries and 0.25 [of a percentage point] in euro area countries.

“In view of these estimates, the current situation of low wage inflation and low unemployment implies that the unemployment rate gives only a partial picture of the amount of slack in the labour market.”

According to BIS, a large part of this uncertainty falls to the participation rate: the proportion of working-age adults in paid employment.

Despite our population ageing, more people are delaying their retirement and working longer. Whatever the reasons for this — people living longer, needing to save more money for retirement, changing dynamics of what constitutes retirement — this trend is still in progress, BIS said, making it difficult to determine its full impact on inflation.

“It is not clear yet how high participation rates of older workers will go. We are probably undergoing a very long transition and we don’t know when it will end,” it said.

Unemployment hits 5.0%, so where is the inflation?
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Adam Zuchetti
Adam Zuchetti

Adam Zuchetti is the former editor of MyBusiness and a senior freelance media professional, specialising in the fields of business, personal finance and property. In 2020, he also embarked on his own business journey – inspired in part by the entrepreneurs and founders he had met through his journalistic work – with the launch of customised pet gifting and subscription service Paws N’ All.

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