And yet these non-resident jobs, which were not part of the most frequently cited labor force survey, need to be filled. The employers therefore hired locals. We have actually had 333,900 new jobs that were not included in the Labor Force Survey are starting to move there (the jobs which are not placed are identified by the survey on vacant positions).

This helps explain the sharp reduction in the unemployment rate as residents accept this newly available job, and the soaring vacancy rate as employers advertise vacancies. It also explains why the unemployment rate in regional markets, where many non-residents worked, declined much faster to be below pre-pandemic levels unlike cities where the unemployment rate remains above this threshold.

The problem for RBA is that as most of the population is vaccinated over time, the borders will gradually reopen. Governments are already creating new avenues for the return of foreign students, and migrants will follow quickly thereafter. Over the next few years, much of the lost non-resident labor supply could return. Australia is, after all, one of the most attractive destinations for tourists, students and skilled migrants, given our economic and health performance since the crisis. A cheap Australian dollar only amplifies our relative appeal.

If we assume that the 333,900 non-resident jobs are all placed with locals who were looking for work (and not people who are sucked into the labor market), this has the effect of temporarily reduce our unemployment rate by 2.4 percentage points. In other words, if the borders open up and non-resident workers come back and take those jobs, the unemployment rate would drop from 5.1% to 7.5%. Although this is a very crude upper bound, it gives an idea of ​​the influence of the exodus of non-resident workers on the unemployment rate.

RBA Governor Philip Lowe on Thursday addressed these complexities in a thoughtful speech on how the central bank plans to get wages and inflation back on track.

The RBA knows it is in uncharted forecast territory, which will include navigating reopening borders and sharply expanding population growth and labor supply. This could mean that any future increase in wage growth is transient, as the negative shock to labor supply caused by COVID-19 reverses.

In Lowe’s speech, which was accompanied by a series of important new RBA research papers, he delivered several messages. Perhaps most importantly, although the recovery is “much stronger” than the RBA expected, “wage growth and inflation remain subdued.” In fact, we get the results on wages and inflation that the RBA predicted to occur assuming much lower growth and significantly higher unemployment.

“The wage price index has only increased 1.5% in the past year, with slow wage growth in the private and public sectors,” Lowe said. That’s less than half of the 3-4% pace the RBA needs to normalize inflation within its target range of 2-3%. “And it should be noted that even in the pockets where companies have the most difficulty in hiring workers, the pay increases are mostly modest,” he continued.

Business reluctance

Lowe argued that the weak wage growth in Australia partly reflected the reluctance of companies to increase their fixed costs after numerous macroeconomic headwinds, including the period from 2011 to 2013 when the Australian dollar soared above 100 US, making many exporters and competing import businesses uncompetitive, and more recent pandemic, which somehow existentially threatening most businesses.

RBA analysis reveals that many employers “rely on non-salary strategies to retain and attract staff.” “Some also take a ‘wait and ration’ approach: wait for labor market conditions to ease, perhaps when borders reopen, and until then, ration production,” Lowe said.

“For some, this is a better option than paying higher wages and increasing their own cost base. This is especially true if increases in the cost base are difficult to reverse afterwards, prices are reluctant to increase, and the company expects labor market conditions to ease before too long. . By waiting and rationing, companies can avoid setting up a higher cost structure in response to a problem that might be only temporary.

Our macro-strategist Kieran Davies says it reminds him of the dynamics of the global financial crisis, when Australian companies failed to lay off large numbers of their employees because the cost of rehiring them would have been too high.

It’s a rational approach if you think the borders will open up in the next couple of years. It also highlights the disconnect between wage data and inflation and the increasingly tight labor market in Australia, which will loosen as borders become more porous.

Latest RBA Tool

Finally, it reinforces the fact that the RBA’s forecasting models, which have consistently overestimated wages and inflation for years, are likely to perform poorly in this unprecedented environment. This is why Lowe and his deputy governor Guy Debelle stressed that Martin Place would base policy decisions on what they see as credible data on wages and inflation, rather than on volatile employment numbers. and / or rubbery predictions for the future. And these data will have to convince them that wages are increasing durably at 3 to 4 percent per year.

Despite this commitment to “nowcasting”, the stimulus of the RBA is slowly unwinding. On June 30, he will stop lending the banks ultra-cheap three-year money at a rate of 0.1%, which will push mortgage rates up as banks eventually replace that $ 200 billion in money. more expensive wholesale debt financing. And in July, the RBA will not extend its three-year yield curve target of 0.1% on the April 2024 bond under November 2024, signaling that the first rate hikes will materialize around that time. .

The only tool left for the RBA to provide further stimulus is its government bond purchase (or quantitative easing) program, which puts downward pressure on long-term interest rates. term which slowed down the rise in our exchange rate, despite extremely high commodity prices.

According to Bill Evans, the Australian dollar is expected to trade between US 85 and US 90 at this time based on Westpac’s exchange rate model. “The only thing we can identify that explains the gap between the fair value of the Australian dollar and its current level around $ 75 is the RBA’s quantitative easing program,” Evans said.

Bond Purchase Program

On Thursday, Lowe said that “the RBA’s bond buying program is one of the factors underlying the accommodative conditions necessary for our economic recovery,” reiterating that it would be “premature” to consider restrict such purchases when comparable central banks like the U.S. Federal Reserve and European Central Bank are expected to continue their own quantitative easing programs until 2022. On Tuesday, the RBA board noted that its commitments in this area QE to date have lagged relatively behind the rest of the world, implying a comparatively lower stimulus.

“The key consideration in our decision [regarding additional bond purchases] is the best way for the RBA to support the economy’s ongoing recovery, ”Lowe said. “The RBA wants to see the recent recovery turn into strong and sustainable economic growth, with low unemployment and faster wage growth than we have seen recently. Over time, this will help meet the inflation target.

Lowe gave extra weight to what has become the dominant consensus in the marketplace, driven by The Australian Financial Review‘s John Kehoe, for the RBA’s quantitative easing program to evolve in September into a $ 5 billion per week open-ended initiative, reviewed quarterly and calibrated against hard evidence on wages and salaries and labor. ‘inflation. This view is now supported by most banks, including Westpac, ANZ, Goldman Sachs, HSBC, RBC, Nomura, UBS and Deutsche Bank.

The RBA’s strong commitment to maintain its stimulus measures to help Australians secure full employment characterized by sustainable wage growth and inflation within the target range is one of the main reasons the Australian dollar has fallen. versus other currencies despite Thursday’s astonishing employment data.

And if there was any doubt as to what the RBA thought of the effectiveness of these policies, it released a rich array of new research papers who evaluated their performance.

On the QE question, RBA economists “estimate that the program reduced long-term Australian Government Security (AGS) yields by about 30 basis points and narrowed the spread in government and territory bond yields by compared to AGS returns 5 to 10 basis points, compared to where they would have been otherwise ”.

They further found that “the bond purchase program has not had a significant negative impact on the functioning of government bond markets”.

Indeed, most market experts believe that the RBA’s purchases of five- or ten-year government bonds have dramatically improved liquidity without any evidence that they are crowding out other participants.

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