Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.
AMW: Closed borders & labour market recovery
The labour market recovery has been much faster than expected.
- Employment is now 0.5% above pre-pandemic levels and the unemployment rate is widely expected to fall below its pre-pandemic rate of 5.1%. JobSeeker data also point to continued decline in the unemployment rate with the Treasurer noting JobSeeker numbers have fallen by 120,000 since the end of March. Not all those on JobSeeker are classified as unemployed, but a similar fall in unemployment could drop the unemployment rate below 5.0%. It is clear the ‘snap-back’ phase to pre-pandemic is now largely complete.
- In this weekly we look beyond the ‘snap back’ phase and delve into where we can expect the labour market to go from here. We look at this from both the demand side where many indicators are at record levels, and also at the supply side where the closed international border is impacting on labour supply. The mismatch between demand and supply has the potential to see pockets of labour market tightness.
- On the labour demand side, the indicators are very strong. Seek Job Ads reached their highest level on record in April (see NAB/SEEK Employment Report for details) with job ads now 38.8% above pre-pandemic levels. Job Vacancies for Q1 are also at record highs, while the most recent NAB Business Survey saw the Employment Index and Capacity Utilisation at record highs. All these indicators point to very strong labour demand.
- On the labour supply side, there are very few forward-looking indicators. The closed international border is leading to disruptions for both low wage labour in agriculture and hospitality, as well as high wage labour in the professional services. This is neatly summarised in the chart below with the increase in job vacancies more pronounced in industries with a higher share of temporary visa holders. Importantly, border restrictions are expected to last until mid-2022, meaning dislocations could persist for at least a year.
- The outlook overall for the labour market remains overwhelmingly positive. NAB expects the unemployment rate to fall to 4.3% by the end of 2023. The key uncertainty remains about how tight the labour market needs to get to see wages growth lift to the 3% rate that is more consistent with inflation being sustainably at 2-3%. NAB sees wages growth gradually lifting to 2.8% by the end of 2023. With labour supply dislocations, there is the potential that a faster pick-up in particularly industry pockets could occur.
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