The labour market is tightening

6 Dec 2021 1 month(s) ago

Covid has tightened the work force, but will it lead to higher wages and inflation?

One of the important pointers for where interest rates are headed is what is happening in the labour market. With far fewer foreign workers in the country, the labour market has tightened. Will that add to wage pressure and then inflation.

Jardens has provided its interpretation of what the RBA will do:

“The RBA has made clear that while achieving ~2.5% underlying inflation is a necessary condition for hikes, it is not sufficient, and they also require wages growth around 3%.

“While the labour market is undoubtedly hot, with job vacancies at record levels thanks to a combination of rebounding demand and an exodus of foreign workers, we think it will still take some time for aggregate wages to clear the RBA's 3% hurdle. Indeed, despite frequent media reports of labour shortages and wage rises, we don't expect wages growth to approach 3% until late 2022 (with the data confirming this not due until Feb-23).

“As such, we still expect the RBA will disappoint market pricing and consensus expectations, and likely won't begin raising the cash rate until mid-23. While we don't doubt the labour shortages and wage pressures impacting many sectors, we think that the relatively rigid wage setting mechanisms in Australia, with 60% of employees covered by Awards or EBAs, will mean higher wages will be slower to propagate through the economy than expected - however, the risk is once they do, we expect they would stick around.”

Job ads are soaring:

Jarden says many employees who are counted as 'not employed' are still attached to their employers and will likely resume working as restrictions are lifted. There has been a rise in job vacancies since lockdowns were eased. Demand for labour is strong Jarden expects the labour market to recover quickly.

“We expect unemployment to fall to ~4% by end-22. At face value, Australia has not faced the same contraction in labour supply as some other countries like the US and UK, with participation and labour force rebounding to above pre-Covid levels (prior to lockdowns).

“However, this excludes the exodus of 390k temporary non-resident workers since Mar-20. Accounting for this impact, the labour force was still down 2% as at Jun-21. This suggests that despite elevated participation, Australia has seen a meaningful contraction in labour supply. While the recently announced reopening of borders for visa holders will be a positive, we expect it will take time for migration to rebound, and there is a risk that given strong labour markets/wages globally, Australians may leave for overseas opportunities.”

The question is, what will happen to wages in a tighter labour market? Jarden does not expect sudden changes;

“Wage pressures are clearly rising with record vacancies, a contraction in labour supply, more businesses citing labour shortages and household expectations for wages growth lifting.

“However, with ~20% of wages determined by the minimum wage ('Award' wages) and another 40% covered by Enterprise Bargaining Agreements (EBAs, Figure 23) with an average duration of ~3 years, we think these wage pressures will take time to emerge. Indeed, despite widespread reports of staff shortages in hospitality and retail (sectors which rely heavily on awards/EBAs, Figrure 24), our channel checks suggest most employers are not yet offering above award wages to attract staff. This means, despite some sectors seeing material wage rises (i.e., professional services and construction), we expect these to largely impact 'individual arrangements' in the near term. Looking forward, we expect wages will only approach the RBA's 3% growth target by late-22.”



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