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Near ‘full’ employment to force another RBA rate rise?

Economists believe that yesterday’s positive ABS labour force data has increased the possibility that the RBA will look to tighten monetary policy as near full employment triggers inflation pressures.

RBA ABS InflationYesterday’s announcement by the ABS that Australia’s unemployment rate was 5.1 percent for June and revised down to the same for May appear benign enough on the surface, look beneath the headline figure and you see a greater participation rate (meaning those who were not looking for work have returned to the workforce ) and a shift from part time to full time employment as businesses ramp up production to meet demand.

Both the return to work of formerly ‘disengaged workers’ and the shift from part to full time are indicative that the Australian labour market is approaching the full employment point, that is, the point where there is no cyclical unemployment (that being economic cycle related) with the remaining unemployed are either frictionally unemployed (people simply between jobs due to quitting one before starting another) and structurally unemployed (those who lack the skills for the available jobs but who could get work with the right training).

Once an economy approaches or indeed reaches the rate of full employment pressure on wages increases as the supply pool of available workers dries up and businesses start competing with each other to attract talented employees, which usually involves offering higher wages to lure someone out of an existing job. This salary bidding war then results in higher average wages in the economy, which in turn leads to higher inflation as businesses pass on these higher wage costs through higher pricing to customers, leading to higher inflation numbers and the RBA increasing interest rates to keep inflation under control.

JPMorgan economist Stephen Walters agrees that the economy is at or near the full employment point, which will lead to increasing inflation pressure and potential for the RBA to increase interest rates.

“An unemployment rate close to 5 per cent is basically full employment.” He told The Australian,  “we’re running out of people and that means wage pressures and pressure on the RBA for more tightening.”

The full employment inflationary cycle will take some time to filter through the economy, but expect the ABS Labour Force data released yesterday to have increased the chance of another interest rate increase before the end of the year.