January Labour Force: a solid start with seasonal shifts
Employment: +44k (from +60k). Unemployment Rate: 4.1% (from 4.0%). Participation Rate: 67.3% (from 67.2%).
The January Labour Force Survey (LFS) provided an interesting batch of results, including strong employment growth, fresh record highs in labour force participation and the employment-to-population ratio, and an up-tick in the unemployment rate. We caution that January is the most seasonal time of year for the labour market and shifts in seasonality have had an impact on measured unemployment in recent years, so there is a risk that we could see somewhat of an unwind in February.
In January, employment once again surprised materially to the upside, beating all expectations with an increase of +44k (+0.3%), with December’s result also revised up slightly to +60k. On a three-month average basis, annual employment growth returned to a robust pace of 3.0%yr, the same pace that was recorded over a year ago in December 2023. Employment continues to outpace estimates of population growth, seeing the employment-to-population ratio rise to a fresh record high of 64.6%.
Over the last couple of years, we have seen potential signs of shifting seasonal patterns in the labour market around the turn-of-the-year, particularly as it relates to job attachment. In effect, since 2022, we have seen a higher-than-usual number of people that already have a job lined up after the holidays (i.e. for February) but were not currently working in January. While we cannot definitively say this marks an underlying shift in seasonal behaviour (i.e. unrelated to the current cyclical tightness in the labour market), we do know that it is having some impact on seasonally adjusted measures of employment and unemployment.
If it were not for this seasonal shift, the increase in employment in January could have been even larger. That aside, the current pace of employment growth is still certainly robust, suggesting that employers still have strong demand for new workers, as was clearly the case over the second half of last year. It is also worth highlighting that January’s employment bounce was virtually all centred on females.
With more people waiting to start or return to work, the number of unemployed persons rose by +23k in January, seeing the unemployment rate tick up from 4.0% to 4.1%. If this is all due to a higher than usual seasonal dynamic then, all else equal, we should see the unemployment rate return back to 4.0% as it unwinds in February.
It is worth emphasising that the combination of higher employment and unemployment implies another large increase in the size of Australia’s labour force, up +67k in January. This saw the participation rate – the proportion of Australia’s population actively engaged in the labour market – rise to a fresh record high of 67.3%.
Other measures of labour market slack were little changed. The underemployment rate, which measures the proportion of part-time workers that are willing and able to work more hours, remained unchanged at 6.0%. The underutilisation rate, which combines unemployment and underemployment, rose 0.1ppt to 10.1%, reflecting the tick up in unemployment. All of these measures are currently at or below the rates seen a year ago. In essence, strong labour demand continues to be met with strong labour supply, allowing employment growth to remain robust without driving a significant change in measures of labour market slack.
Yesterday, we also learned that wages growth came in softer than the RBA’s expectations for Q4 2024 (see here for more detail). Over the past six months, we have seen wages growth decelerate faster than expected from its peak. At the same time, the degree of tightness in the labour market has barely shifted – if anything, it has increased marginally. Falling wages growth by no means implies that the labour market is currently disinflationary (i.e. unemployment rate above NAIRU), but it does raise questions over how inflationary the labour market might currently be, given there are lags involved with the responsiveness of wage outcomes to shifts in labour market conditions.
The RBA expects the labour market will remain tight for some time, with the unemployment rate at 4.2% until June 2027, below the Bank’s current estimate (an average of various models) of the NAIRU which is around or slightly below 4.5%. The gap is reflected in the RBA’s forecasts for wages growth to hold between 3-3.5% – a rate they view as inconsistent with inflation reaching the mid-point of the target given a pessimistic view on labour productivity. Modelling the NAIRU is an inherently difficult task, and any estimate is associated with a great deal of uncertainty. Within that realm of possibility is a NAIRU in the low 4s, where the perceived upside risks to inflation may not be as grave as anticipated. While we cannot be absolutely certain, the recent flow of outcomes across the labour market, wages and inflation, in our view, suggests this might be a more likely scenario than the RBA is considering.
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