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Is a February RBA rate cut at risk?
Another blockbuster labour market release for September has left economists dialing back the urgency of any rate cuts from the Reserve Bank of Australia (RBA). Financial markets have pushed out the expected timing of the first RBA rate cut from February to April next year. Indeed, with over 150,000 jobs created over the September quarter alone, and an unemployment rate sitting at just 4.1%, it would be valid to ask if there is any need for rate cuts at all?
Australia has created as many jobs over the first nine months of 2024 as it did for the whole of 2023. But employment is typically seen as a lagging indicator, meaning it lags the performance of the economy. And we know that the economy barely registered a pulse, growing by just 1%, in the year to June. If the economy is cyclically weak, are there structural reasons for the strength in employment?
We can get a hint on the answer to this question by examining where the jobs are coming from. Industry data to August suggest that over two-thirds of the jobs are being created in government-related sectors, including health and education, public administration & safety. Private sector job creation has been quite modest by comparison, with net job losses over the last year in mining, manufacturing, financial services, and wholesale and retail trade. There has been modest job growth in tourism-related services, mostly part-time, with the brightest employment prospects in real estate services given ongoing strength in property prices. The very modest expansion in private sector employment is consistent with the weakness in the economy, and is being reflected in slowing private sector wage gains.
A large part of the current strength in government-related employment does seem to be more structural in nature, reflecting an adjustment in the care sector that has been underway since the Labor government came to power and subsidised large wage gains to aged care workers. The realignment of aged care pay began in 2023, while the slated increases to childcare wages will take effect from the end of this year; both will continue into 2025. Increased wages in the care sector are encouraging (predominantly female) workers into the sector from other parts of the economy and from outside of the labour force.
Should we be worried about this strength of government employment, and is it really a factor preventing the RBA from easing monetary policy? We don’t think so, for several reasons.
First, the structural realignment of the labour market associated with expanding the care economy is not just increasing labour demand (employment), it is also boosting labour supply by inducing more women into the workforce. This can be seen in the upward march in the female participation rate to a new high of 63.2% in September. This increase in labour supply mitigates some of the inflationary impact of the expansionary policy. Second, many of the additional workers required to satisfy demand for care workers are likely to be drawn from sectors that are currently cyclically weak, such as retail trade and hospitality. In this sense, the structural adjustment has arrived at an opportune time to assist the RBA in achieving its full employment goal at a time of cyclical weakness.
Finally, much of the funding of the care economy wage adjustment is borne by the government rather than by the private sector, and the government is less likely to pass on the increased wage cost as higher prices. More likely, the funding will be in the form of higher taxes paid by households and businesses, which negates some of the stimulatory effect.
What could be of concern to the RBA is the weakness in measured productivity implied by the nexus of strong employment and weak activity. Productivity in the care economy is inherently difficult to measure. Effectively, the structural adjustment that is underway requires more employees to service the same number of aged care patients. Presumably quality of care is improved, but this is not easily or well measured, and will show up as a fall in measured productivity for the aggregate economy. Productivity growth, in aggregate, has been abysmal, and the structural adjustment in the care economy will continue to weigh on productivity into 2025.
If other sectors of the economy are unable to deliver increased productivity growth, the RBA is likely to insist that uncertainty over the inflation outlook remains high. This will keep them mired in a world of driving the car whilst looking in the rear-view mirror, hence elevating the importance of past inflation outcomes in determining monetary policy outcomes. The September quarter CPI, due at the end of October, will be a more important gauge of the direction and timing of the next RBA move than this week’s employment report.