A weak set of jobs figures puts the Reserve Bank of Australia in a tough spot.
The labour market argues for lower interest rates but the housing market says the opposite.
The job figures, released on Thursday, were indeed weak despite the tiny rise in the number of employed people and an unemployment rate of 5.7 per cent being close to economists’ expectations.
In terms of the Australian Bureau of Statistics’ trend measures, the unemployment rate is flatlining.
That could be seen as a vindication of the RBA’s current “on hold” interest rate policy as it waits for the dawdling economy to gather pace.
But it’s not quite as simple as that, because a flat trend in unemployment masks a stagnating labour market.
The bureau’s trend measure of employment peaked in May.
Its growth rate as of October was negative to the tune of 50,000 a year.
The ageing population and bleak prospects for jobseekers are combining to reduce the proportion of the working-age population active in the labour market.
That proportion, the participation rate, is currently 64.8 per cent but trending down by just under 0.1 percentage points a month or one percentage point a year.
That’s a relatively steep rate of decline in participation.
It is more than offsetting the rising trend in the population.
As a result, the labour force – the pool of available workers either employed or looking for work and ready to start – is actually shrinking.
That’s why the jobless rate is steady despite a falling trend in employment.
If not for those two influences – the ageing population and the disincentive a slack labour market provides – reducing participation over the past year, the unemployment rate would be 6.3 per cent rather than 5.7 per cent.
Those two effects have been about equally to blame for the fall in participation over the past year.
But the current, faster rate of decline in participation is primarily the result of factors other than the ageing population.
So, the RBA, which has a statutory responsibility for maximising employment, is faced with a, sadly, underperforming labour market.
Ordinarily, with only tentative and isolated signs of a pickup in an economy strangled by a high exchange rate, the RBA would be thinking seriously about cutting interest rates again.
But rates are already very low.
Whether even lower rates would help is not guaranteed.
And there are already signs of overheating in parts of the housing market, something the RBA desperately would love to avoid becoming more widespread.
Most likely, the RBA will continue its current policy of waiting, fingers crossed, for things to improve.
But another rate cut can’t be ruled out.
The central bank will be wary of stoking the housing market, but it would still be a mistake to assume the RBA will soon signal a move to a “neutral” outlook for monetary policy.
