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Australia's wage growth should accelerate once the jobless rate falls below 4%, according to Reserve Bank research that reviewed the experience of local labor markets across the country over the past 20 years.
The RBA is trying to push the economy to full employment in order to spark pay gains and return inflation to its 2-3% target. One forecasting difficulty is that Australia hasn't experienced a sustained period of such low unemployment in recent decades and policy makers are unsure how it will unfold.
“Our baseline estimates suggest that if the unemployment rate is below 4%, a 1 percentage point reduction will lead to an increase in wages growth that is around three times larger than if the starting unemployment rate was above 5.5%,” James Bishop and Emma Greenland said in their paper released on Tuesday titled “Is the Phillips Curve Still a Curve? Evidence from the Regions.”
Australia's labor market had been tightening rapidly until an outbreak of the delta variant of coronavirus forced Sydney into lockdown -- now in its 10th week -- and spread along the highly populated east coast. The jobless rate dropped to 4.6% in July, the lowest level since 2008, though that was largely due to a fall in participation as Sydneysiders were unable to hunt for work.
Unemployment is expected to rise in coming months due to the restrictions imposed to combat Covid.
RBA's Harper Sees Delta Driving Unemployment Rate Back Above 5%
Bishop and Greenland examined the relationship between wages growth and unemployment in 291 local labor markets. This provided them with fresh insights as while national unemployment hasn't fallen below 4% in the past four decades, about one-fifth of the local areas studied had experienced rates below that level.
Separately, in the introduction to its annual corporate plan, the RBA signaled again that it expects a rapid recovery once the economy reopens. While delta is “introducing a high level of uncertainty about the near-term outlook,” the experience to date has been that once restrictions are eased, the economy bounces back quickly, the central bank said.
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