Low unemployment is a good thing

It’s a weird thing to have to say, but unemployment closer to 4% is better than unemployment closer to 5%. And yet the way the labour force figures get reported you would think we should all be sad to hear that today the ABS says unemployment is at 4.1%.

For eg the AFR ran with “‘Cold comfort’: Strong jobs numbers escalate pressure on RBA”. Well let me tell you they should put zero pressure on the RBA. The RBA’s job is to keep inflation steady, and it attempts to do this by setting a target of between 32% and 3%.

Low unemployment CAN be a of inflation because it can mean too few unemployed per vacancy (ie due to low unemployment). This CAN mean employers raises wages to attract staff (and to stop current staff from going to a better offer).

IF that is happening, the RBA will raise rates to reduce consumer spending and thus cause businesses to cut back on shift/hours because customers aren’t spending as much as they were. This in turn means they also don’t feel the need to offer such better wage increases to keep/attract staff.

But, that is NOT happening right now. Yes unemployment is low - it’s at a level it has only been for 44 months of the 600 (ie 50 years)

But wages are NOT spiking. How do we know?

WE JUST HAD THE LATEST FIGURES YESTERDAY!!!!!

Here’s the past 4 quarters of annual private-sector wage growth: 3.3%, 3.4%, 3.3%, 3.34%.

Wow check out that big wages breakout!

So no, a low unemployment rate does not put pressure on the RBA to lift rates, because wages are not growing unsustainably. In fact they are growing at a level consistent with inflation under 3%.

The problem is that inflation is actually rising faster than wages, but that actually means that wages can;t be the reason for higher inflation (as I wrote here).

Anyway, here’s my post at The Point where I have a look at today’s unemployment figures.

(Also make sure to bookmark The Point, it is a fantastic site The Australia Institute has set up and you will be much entertained and come away much smarter after reading it - we have not only got our great researchers writing, but experts in things we are not and people with experiences we also don’t have.)