Analysis: Higher Labor Participation Likely to Seal RBA June Cut Decision

By Sophia Rodrigues

The Reserve Bank of Australia is very likely to lower the cash rate at its next meeting in June as its optimistic view of achieving a rate of unemployment that would be consistent with the inflation target has been dashed by recent labor market reports.

Earlier Thursday, the Australian Bureau of Statistics published labor force data for April which showed the unemployment rate rise to 5.2% even as the number of employed rose by 28,400. The number of unemployed also rose by 21,200 – the highest since December 2017, leading to increase in participation to 65.8%, matching the record high last seen in January 2018.

The rise in jobless rate defies RBA’s forecast for a steady unemployment rate, and the fact that a rise in participation rate partly caused this outcome cannot be taken as a consolation. On the contrary, it is the rise in participation rate that would seal the rate cut decision.

This is because increase in labor participation is likely to put downward pressure on wage growth, and acceleration in wage growth is important for inflation to be consistent with the RBA’s inflation target.

Interestingly, the Reserve Bank of New Zealand published a discussion paper earlier in May on the labor market developments in New Zealand. One of its concluding discussions was that “the secular increases in participation may help explain why recent wage pressures have remained relatively benign and resulted in only modest wage increases.”

Other labor market related data in the past week included National Australia Bank’s business survey which showed the employment index declining to below average at -1. The index suggests employment growth of just 14,000 per month which isn’t enough to push the jobless rate lower.

Wage price index for the second quarter published by the ABS on Wednesday showed growth of just 0.5% q/q and 2.3% y/y. The quarterly growth has slowed to 0.5% q/q for the last two quarters from 0.6% in each of the two quarters prior.  A key risk for this data is extended period of below-target headline inflation because this has a significant effect on wage setting behavior especially when there is slack in the labor market.