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OPINION: As the jobless rate dives, interest rates must rise

·4-min read
People walking across a busy street in Melbourne.
Back to work we go: The unemployment rate has dropped to pre-GFC levels. (Source: Getty)

It’s official. The boom in the jobs market continued through to the end of 2021.

In December, employment rose by 64,800 people, the unemployment rate fell to a stunning 4.2 per cent while the workforce participation rate was 66.1 per cent.

Underemployment, which measures people with a job but who want to work more hours, fell to 6.6 per cent.

These great numbers for the workforce fit with the news on job vacancies and job advertisements, which showed record demand for labour as the economy surged at the end of last year.

In simple terms, the jobs market is booming, fuelled by record-low interest rates, a surge in the terms of trade and low immigration. This all means firms must hire local Australians rather than relying on cheap and temporary immigrant workers to fill vacancies.

This good news must be assessed with what has happened to the jobs market since the middle of December – the problems that have resulted from the spread of the Omicron variant of the coronavirus.

According to Treasury, around 10 per cent of those counted as employed are not working. They are either sick, linked to businesses that cannot open due to the troubling supply chain shortages or are locked down because family members or others in their house have COVID.

It is a significant number of people. It means the labour market data will be choppy for several months, but when the Omicron issue passes - which it will - many of the people currently employed but not working will return to paid work. This will boost the measures of employment and hours worked by the middle of 2022.

This has been the experience over the past two years whenever lockdowns have ended. There has been a rebound in employment and spending when the health issues pass.

While there may be lingering negative effects on the economy from the current economic dislocations, there are grounds for optimism that the good news on the labour market will be sustained over the medium term.

The December labour force data confirm the unemployment rate is still on track to head towards 4 per cent, perhaps lower, by late 2022 or early 2023.

The December unemployment rate was remarkably close to that level. It is possible, if not likely, that the unemployment rate could dive towards 3.5 per cent in the year ahead, such is the demand for labour right now.

This will certainly feed into wages. The recent payrolls data confirmed a lift in wages growth, which was the result of the tightening labour market and skills shortages.

This is one of the clear benefits of low immigration.

It is now clear that the RBA will need to increase interest rates and start the process of getting the cash rate towards 2.5 to 3 per cent from the current 0.1 per cent.

It still reckons that wages and inflation will not be sustainably higher until 2023 or 2024, a time when it expects to start the rate-hiking cycle.

Reserve Bank of Australia governor Philip Lowe delivers an address at the National Press Club.
The pressure is on the RBA and governor Philip Lowe. (Source: Getty)

This view looked wrong late last year and is more wrong given the economic news of recent months.

And it is not just in Australia where there is pressure to hike interest rates.

Inflation in the likes of Canada, the US, the UK and elsewhere is running at 20-, 30- or even 40-year highs. The central banks in these countries are being pragmatic and signalling the need for interest rate hikes sooner rather than later.

The RBA needs to follow that lead and it now has the cover of strong data to follow up on that task.

It would be wise to start the process of getting monetary policy, not only to neutral, but towards being restrictive by hiking interest rates, perhaps as soon as February.

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