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Analysis: Where have all the workers gone: Australia?

• A question that comes up repeatedly in our discussions with businesses experiencing exceedingly tight labour markets and difficulty finding suitable labour is: where have all the workers gone?
• Much of the improvement in the labour market in the pandemic recovery is attributable to the strength of the demand backdrop and as such the newly reopened border and increased migration targets are unlikely to lead to a sharp reversal in labour market strength. Part of the story is simply that strong demand has absorbed spare capacity in the labour market and left firms with productive opportunities but little spare capacity sitting on the sidelines to pursue them. This is a sharp turnaround from the pre-pandemic period which was characterised by levels of spare capacity in the labour market that made it relatively easy for firms to attract applicants and fill vacancies where they existed.
• But that is far from the whole story. We explore in detail three additional features of the post-pandemic labour market that have added frictions and disrupted the supply of labour over and above the shifting macro environment:

1. 1. The closed border, and resultant slowdown in population growth caused by the interruption to the flow of spandemikilled migrants and the labour supply offered by temporary visa holders. Thankfully this situation is beginning to ease.
   2. Compositional shifts in activity and in employment associated with COVID help reconcile some of the most acute anecdotes of labour market shortages and absence of workers that have emerged over the past two and a half years with the strength in aggregate employment numbers. Employment growth has been slower in lower paying jobs and in face-to-face services and labourer roles.
   3. Reduced hours have also lowered labour supply per person. While the ‘great resignation’ or early retirement narrative isn’t particularly evident in the Australian data, there has been a marked drop in the hours available to be worked by those in the labour force due to higher sickness and leave usage.

• Each of these unusual features of the current labour market is adding to the experience of difficulty finding suitable labour for many businesses. They are likely contributing to the very elevated vacancy rate and level of job advertising even relative to the current low level of the unemployment rate. Together, they mean that even if the unemployment rate remains below pre-pandemic levels, the acute labour shortages and capacity constraints can still ease as some of these supply-side factors free up and as demand slows as a result of the RBA’s aggressive program of monetary policy tightening.

Chart 1: Employment growth has been slower in lower paid occupations

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