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Analysis: Closed borders suggest Australia’s labour market will remain (temporarily) very tight for a further 9-12 months (at least). This provides a golden opportunity to reduce unemployment in Australia.

• There are now less than two unemployed people for every job vacancy in Australia, a record low for this ratio, after job vacancies surged 23% in the three months to May to be 57% higher than pre-pandemic levels.
• The closed border is likely playing an important role in both reducing labour supply in Australia (there are currently around 285,000 fewer foreign short-term workers than before the pandemic) and boosting vacancies, job ads and labour force utilisation.
• While these effects should prove transitory and unwind when international borders reopen, the latter seems unlikely for another 9-12 months. In the interim, with demand in the economy having recovered strongly, this labour demand/supply imbalance could be expected to intensify.  Though downward pressure on the unemployment may remain for a while, declines in unemployment will not be as fast as over the past year.
• A positive interpretation is that there exists a significant opportunity to further lower Australian unemployment while the borders are closed. Any pick up in wages growth driven by the closed border is likely to be temporary, and fall back. The RBA should look through the transitory effects of a temporary acceleration in wages growth, though markets will likely remain skittish if wages accelerate and the unemployment rate continues to fall as seems likely in these circumstances.
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Chart 1: Record low unemployed per vacancy

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