Goalposts for full employment likely shifting: RBA

Poppy Johnston |

Australia can sustain a lower jobless rate than it has over the past few decades without pushing up inflation, the Reserve Bank of Australia estimates. 

Acting RBA assistant governor (economic) Marion Kohler said full employment – the level of employment where labour shortages do not drive up prices – is likely to be below historical averages observed over the past couple of decades.

Full employment can be expressed as a number known as the non-accelerating inflation rate of unemployment, or NAIRU. 

Before the pandemic, a jobless rate below five per cent was thought to be likely to push up inflation.

Yet for several months running, the unemployment rate has been hovering in the mid to high threes, coming in at 3.6 per cent in September.

While the top RBA official says the labour market will continue to ease as economic activity wanes, it’s likely in balance at a lower rate of unemployment than it was 20 years ago.

“In this case, the unemployment rate when the economy is at full employment is likely to be below the middle of the historical range of observations from the past two decades,” Dr Kohler said at the UBS Australasia Conference in Sydney.

She said full employment changes over time as the structure of the economy evolves. 

Her comments come ahead of the release of the October labour force data. 

In a speech from earlier in the year, governor Michele Bullock – then speaking as deputy – said 4.5 per cent was roughly around estimates for a sustainable level of full employment.

An updated set of forecasts released by the central bank on Friday revised down expectations for the unemployment rate. It’s now expected to drift over the next few years to 4.3 per cent by mid 2025, below the 4.5 per cent predicted earlier.

Dr Kohler said the broader economy was evolving “more or less as we expected a year ago”.

Economic growth was slowing, the labour market was easing, and headline inflation was coming down, led by moderating goods prices as supply chain issues resolved. 

“However, inflation is still too high and underlying inflation is higher than expected a year ago.”

She said strong domestic cost pressures and still robust levels of aggregate demand were keeping pressure on inflation.