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December Labour Force: strong finish to the year

Employment: +56.3k (from +28.2k). Unemployment Rate: 4.0% (from 3.9%). Participation Rate: 67.1% (from 67.0%).

The December Labour Force Survey (LFS) provided further support to the narrative that the easing in labour market conditions, that has been in place since late-2022, looks to have paused over the second half of 2024. This is supported by evidence of robust employment growth, a relatively stable level of average hours, and the fact that the key measurements of labour underutilisation are the same or lower than they were a year ago. How this ties into the developments around wages growth will be key moving forward.

In December, employment surprised materially to the upside, beating all expectations with an increase of +56.3k (0.4%) in the month. We had anticipated that some of November’s gains represented a ‘pull-forward’ effect associated with changes in end-of-year recruitment activity and shifts in seasonality around Black Friday and Christmas, implying a smaller increase in employment in December. While that may have been the case, it’s impact was evidently minute relative to the immense hiring effort that took place during the month.

At a three-month average pace of 2.7%yr, employment growth is unchanged versus three months ago and is only slightly below the 3.0%yr pace recorded a year ago in December 2023. Perhaps most impressive is the fact that the employment-to-population ratio once again rose to a fresh record high in December, up to 64.5% – a sign that the labour market, while having eased somewhat over the past two-or-so years, remains in a solid state in aggregate.

Another important lever through which employers adjust their labour demand is altering the average number of hours being worked. This has been very important in the latest cycle, where historic tightness drove a large increase in average hours, before normalising over the course of 2023. Even in the context of a multi-decade downtrend since the 1970s, it is impressive that average hours managed to hold broadly steady over the course of 2024. This complements the data we have observed around employment growth, which suggests that overall, labour demand remains relatively robust. Indeed, total hours worked were up 0.6% (2.5%yr) in Q4, and while this was driven mostly by strength in the non-market sector, it is encouraging to see hours worked begin to turn around from earlier weakness in the market sector.

On labour supply, there was a stronger bounce-back from November’s somewhat dismal read, with the participation rate rising nearly 0.2ppts from 66.96% to 67.13%. The expansion in the size of Australia’s labour force slightly outstripped the gain in employment, enough to drive a marginal increase in the unemployment rate from 3.9% to 4.0% (or from 3.93% to 3.98% to two decimal places). 

It is worth emphasising that virtually all rates of labour underutilisation have moved lower over the second half of last year, suggesting that the easing in labour market conditions paused. In the case of the unemployment rate, it finished 2024 exactly where it finished 2023, at the 4.0% mark. Meanwhile, the underemployment and underutilisation rates finished the year around 0.5ppts lower, currently at 6.0% and 10.0% respectively. This aligns with the notion that there has been an “income effect” at play in the labour market: earlier pressures around real incomes drove an increase in labour supply, predominantly via a preference for extra hours of work, and now with cost-of-living pressures easing, this effect is starting to unwind (see here for more detail).

Looking forward, new data on wages growth (due February 19) will be an important piece of evidence to tie-in with what we are seeing in the labour market. While the lumpiness around wage agreements does present some uncertainty, evidence of a continued and broad-based downtrend in wages growth – especially given the current labour market backdrop – may suggest that the labour market might be closer to balance than what the RBA’s November forecasts have implied, which featured an underlying assumption of the NAIRU of 4.5%. If that is the case, the perceived upside risks the labour market poses to inflation (and hence the interest rate outlook) may not be as grave as anticipated. 

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