Very tight labour market expected to stoke wages

The Australian Bureau of Statistics reported that 17,600 full-time jobs were added to the national economy in the last month of 2022, offset by the loss of 32,200 part-time positions. Overall, the proportion of Australians in paid employment eased slightly to 64.3 per cent, but remains near levels higher than at any point in records going back to 1972.

The ACT continued to be the nation's tightest labour market with an unemployment rate in December of just 2.8 per cent while the underemployment - which measures those with a job who would like to work more hours - was just 4.5 per cent, well below any other state or territory.

Canberra Business Chamber chief executive officer Graham Catt said employers across all sectors of the ACT economy were finding it extraordinarily difficult to recruit staff.

Mr Catt said competition for workers was fierce, particularly in hospitality, IT and professional services, and employers were having to offer or match major pay increases - in some instances of between 20 and 25 per cent - to attract or retain staff.

He said the very tight conditions were having an increasingly significant impact on businesses. Many small business owners were having to fill multiple staffing gaps, taking a heavy physical and emotional toll and impeding their ability to develop and execute expansion plans.

Some businesses had given up on filling vacancies altogether and were looking at alternatives, such as restaurants asking customers to use QR codes to place orders rather than have waiting staff, Mr Catt said.

Treasurer Jim Chalmers said the sustained low unemployment rate was "very welcome news".

"One of our best defences against the uncertainty and the volatility in the global economy is low unemployment," Dr Chalmers said, though he warned the jobless rate would lift as employment growth eased in the period ahead.

Nationally, there is evidence that the very strong demand for workers is helping lift wages, which grew at an annual pace of 3.1 per cent in the September quarter - the fastest pace in more than nine years - but still well short of inflation.

KPMG chief economist Brendan Rynne said the Reserve Bank of Australia would be watching closely for signs of an unsustainable acceleration in wages.

"The RBA will be closely watching how this flows through to labour costs, with any acceleration in wage growth putting pressure on the RBA to continue lifting rates," Dr Rynne said.

The consumer price index rebounded in November to 7.3 per cent, well above the central bank's 2 to 3 per cent target band, and mixed signals about the strength of consumer spending in the lead-up to Christmas has policymakers on edge.

But mounting evidence that global price pressures are easing has fueled hope that domestic inflation may be close to peaking, potentially reducing the pressure on the Reserve Bank to raise interest rates much further.

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Dr Rynne expects the cash rate to increase 0.25 of a percentage point to 3.35 per cent next month, but HSBC chief economist Paul Bloxham thinks the weakening housing market, easing global inflation, current moderate wage growth and early signs that demand for workers is slowing, could convince the central bank to hold rates steady.

Markets have lowered their rate expectations and currently anticipate the official cash rate to reach 3.7 per cent, implying a further 0.6 of a percentage points of rate hikes.

RBA Governor Philip Lowe has indicated that wages growth below 4 per cent would be considered sustainable, but has warned anything above that could raise the risk of a wage-price spiral which would require more aggressive action by the central bank.

Regarding wage growth, Dr Lowe told an America Chamber of Commerce in Australia function last year that: "It's good to start with a three".

"We can have increases in some parts of the labour market bigger than that for a short period of time. But if wage increases become common in the 4 and 5 per cent range ... then it's going to be harder to return inflation to 2.5 per cent," the governor said.

"There, we're in a world where the economy will have to slow more, and perhaps the unemployment rate would need to rise."

In its Budget the federal government forecast the unemployment rate will increase to 4.5 per cent as higher interest rates slow economic activity.

Coalition Treasury spokesman Angus Taylor warned that there was "some sign" that demand for workers was easing, which could portend difficult times ahead for some.

"We certainly hope this is not the beginning of a serious softening in the labour market for Australian workers," Mr Taylor said. "We want to make sure that there is a strong market and that there are great opportunities for Australians at a time which...will be challenging."

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