Australia’s unemployment rate drifted higher in August.
The national unemployment rate rose to 4.6 per cent, up from 4.5 per cent in July, in seasonally adjusted and trend terms.
It is the highest unemployment rate in the post-COVID era.
On Tuesday, RBA governor Michele Bullock said she thought an unemployment rate of somewhere between 4.5 and 5 per cent would “take enough heat out of the labour market” to ease pressure on inflation.
In recent weeks, all four major banks and the bulk of money market traders have also announced that they expect the RBA to lift interest rates next week to try to clamp down on economic activity and squash inflation.
Oscar Guth, economist for Oxford Economics Australia, said the higher unemployment rate should ease “some of the tightness” in the labour market but he still thought the RBA would lift rates next week.
Participation rate back near record high
The ABS data show that Australia’s labour force increased by another 67,700 people in August, which pushed the participation rate up to 67.1 per cent, from 66.9 per cent in July.
That returns the participation rate to just below its record high of 67.2 per cent.
The labour force increased by 67,700 people last month because an extra 39,500 people found employment and an extra 28,200 people were recorded as being officially unemployed.
The RBA’s post-COVID rate hikes caused Australians to work more
The unemployment rate still increased, in that situation, because the growth in employment failed to keep pace with the influx of people into the labour force.
Earlier this year, a working paper published by the International Monetary Fund (IMF) found that the RBA’s rapid rate hikes in the post-COVID era had seen the supply of labour increase in Australia, because many Australians in highly indebted households entered the workforce, or took on second or third jobs, to pay for their rising interest payments.
“This August we recorded a higher proportion of people who were previously not in the labour force moving to being unemployed, compared to recent years,” Sean Crick, ABS head of labour statistics, said on Thursday.
CBA economist Ashwin Clarke said the increase in the participation rate last month was likely supported by the uptick in inflation and higher interest rates, “as households seek to recoup some of their lower real incomes by working more.”
What do economists say?
David Bassanese, BetaShares chief economist, says the overall strength in employment will likely be “the final nail in the coffin” for the Reserve Bank to lift rates next week.
“For the RBA, the lift in unemployment will likely be regarded as unfortunate, but the price that needs to be paid to create more slack in the economy and lower domestic demand-driven inflation pressure,” he said.
Interest rates back at ‘sensible level’
“My base case remains that the RBA will raise interest rates by 0.25 percentage points next week to 4.6 per cent, with an even-odds chance of a follow-up hike on Melbourne Cup Day in early November.”
EY senior economist Paula Gadsby said the data would do little to alter the interest rate outlook.
“The key challenge for the Reserve Bank is inflation, which has been outside the 2 to 3 per cent target band for some time,” she said.
“A labour market that continues to absorb workers and support household spending indicates domestic demand pressures have not softened sufficiently to reduce inflation risks.
“At the same time, supply shocks in global energy markets are becoming more persistent and harder for the Reserve Bank to ‘look through’.
“Today’s result is unlikely to materially change the policy outlook, with financial markets pricing a 90 per cent probability of a rate hike [next week],” she said.
Citi economists Faraz Syed and Josh Williamson say they still expect the RBA to lift rates next week and again in November.
ACOSS says unemployment rate above 5 per cent would be a ‘human disaster’
However, the Australian Council of Social Service (ACOSS), the peak council for community services nationally, has called on the RBA to try to keep the unemployment rate as low as possible.
Cassandra Goldie, ACOSS chief executive, said Australia’s comparably low unemployment rate was a considerable achievement of the post-COVID era and we should not take it for granted.
“It must be protected,” she said on Thursday.
“There is no question that increasing unemployment towards 5 or 6 per cent would represent a human disaster, with long-lasting damaging impacts for people unnecessarily locked out of the labour market and forced to rely on grossly inadequate income support payments.”
She reminded policymakers that Jobseeker was now worth just 40 per cent of the minimum wage.
“The RBA should resist rate rises that would trigger further loss of the post-pandemic labour market gains,” she continued.
“The government must now take the lead in managing inflation, with an emphasis on ensuring that inflation is reduced fairly and that people on low incomes are protected.”
AI data centres and inflation
The rise in the unemployment rate comes as the RBA grapples with the inflationary impact of Australia’s data centre construction boom.
On Tuesday, RBA governor Michele Bullock said AI would hopefully deliver great productivity benefits in the future but until then, the rush to build data centres was “adding” to short-term inflation pressures.
Building data centres requires huge amounts of spending on construction, electrical infrastructure and skilled labour, as well as imported equipment such as advanced chips and servers.
Ms Bullock said that while AI investment was already adding to demand, there were “very few signs yet” that it was boosting the economy’s supply capacity.
“AI is the great white hope to improve productivity,” she said.
“But I think everyone also agrees that there are very few signs yet that AI is actually influencing the supply side of the economy [while] there’s lots of evidence that it’s influencing the demand side of the economy.
“So we’ve got this awkward sequencing event at the moment where, in Australia at least, we are in a situation of excess demand, and the AI boom is adding to that demand ahead of any potential supply impacts that it might have going forward.”
Meanwhile, Victorian residents living just metres from a sprawling, hyper-scale data centre in Melbourne’s west have called for remediation and financial compensation, including voluntary home buybacks.
This week a Senate inquiry on artificial intelligence and data centres heard from residents and local councils about the impact of an influx of data centres in Melbourne’s west and north.