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Labour Markets – Progress on rebalancing labour markets in the US and Australia

• Central banks have noted that ‘some softening in labour market conditions’ will be needed to see inflation sustainably back to target. Some sign of that softening has emerged in the US and in this week’s Weekly we take stock of labour market tightness in Australia and the US.
• US data is consistent with a slowdown in the pace of jobs gains. Most encouragingly, indicators of unusual and unsustainably buoyant conditions for employees including elevated job openings and quit rates have normalised quickly. Job openings relative to unemployed people now stands at 1.5, well off the high of 2.0 and about 2/3rds of the way back to its pre-pandemic ratio of 1.2.
• Importantly, this softening has come without a lift in layoffs or a sizable rise in unemployment. The layoff rate is below pre-pandemic levels, while the slowdown in job gains has come from normalisation in the pace of hiring.
• This same phenomenon has been seen in Australia. The retrenchment rate and flows from employment into unemployment are well below historical levels, but flows into employment have returned to more usual ranges. That could be consistent with labour hoarding as forms seek to hold on to staff, but also reflects robust demand.
• The implication of this is that the US experience suggests hope that unusual tightness in the labour market could ease without a sharp rise in the unemployment rate could be being borne out. Wages growth has decelerated in the US, and while the Fed still expects further easing in the labour market will be necessary to achieve their inflation target sustainably, more progress has been made than headline indicators suggest.
• On many indicators, the US labour market does not look significantly different to it did in 2019. The question looking forward becomes whether the rebalancing seen so far is sufficient, or whether a more meaningful rise in unemployment is needed. Locally, a lot is analogous, and the US data is giving some hope that labour markets can normalise without seeing a significant rise in unemployment.

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