{"id":660429,"date":"2026-05-09T19:51:13","date_gmt":"2026-05-09T19:51:13","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/660429\/"},"modified":"2026-05-09T19:51:13","modified_gmt":"2026-05-09T19:51:13","slug":"confounding-bankers-assumptions-the-rbas-post-covid-rate-hikes-caused-australians-to-work-more-not-less","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/660429\/","title":{"rendered":"Confounding bankers’ assumptions, the RBA’s post-COVID rate hikes caused Australians to work more, not less"},"content":{"rendered":"

Now that the Reserve Bank has lifted interest rates for the third time this year<\/a>, how will you respond?\u00a0<\/p>\n

Are you thinking about getting a second or third job, or entering the workforce, to pay for your household’s rising interest payments?<\/p>\n

Because a recent working paper<\/a> published by the International Monetary Fund (IMF) found that this is exactly what thousands of Australians did when the RBA hiked rates rapidly in 2022 and 2023.<\/p>\n

Reserve Bank lifts interest rates by 0.25pc, to 4.35pc<\/a><\/p>\n

The RBA has lifted rates by 0.25 basis points to 4.35 per cent, which fully unwind last year’s rate cuts.<\/p>\n

It found that it led to an increase in the supply of labour in Australia that was so significant that it challenged a long-held central bank idea.<\/p>\n

As the paper explained, a common working assumption for central banks is that labour supply is not significantly affected by monetary policy.<\/p>\n

As the thinking goes, when central banks lift interest rates, the higher rates increase firms’ borrowing costs, which, in turn, reduces investment, output, and employment. So, tighter monetary policy impacts labour markets indirectly through firms’ demand for labour.<\/p>\n

But the paper found that this is not what happened in Australia in 2022-23.\u00a0<\/p>\n

It said that when the RBA lifted rates rapidly, many Australians in highly indebted households entered the workforce (if they were not already working), or took on second or third jobs, or increased their hours, in a pronounced way.<\/p>\n

“We have tested and rejected the hypothesis that labour supply is unresponsive to monetary policy settings,” the paper said.<\/p>\n

Most Australian mortgages are floating-rate<\/p>\n

The paper’s authors are Mitali Das, Jonathan Hambur, Klaus-Peter Hellwig, and John Spray.<\/p>\n

Jonathan Hambur is an RBA economist, but the paper represents his personal views, not those of the bank.<\/p>\n

They studied the period of monetary policy tightening that began in Australia in May 2022 and ran their analysis through to June 2025 (the RBA started cutting rates again in February 2025). During that time, the RBA increased the cash rate target by a cumulative 4.25 percentage points over 13 consecutive rate hikes.<\/p>\n

“The scale and speed of this episode provide an unusually sharp and well-defined shift in monetary conditions, creating an ideal quasi-experiment to assess the effects of monetary policy tightening on household behaviour,” their paper says.<\/p>\n

In the graph below, the black line shows the RBA’s rapid rate hikes from mid-2022, compared to other RBA rate-hiking cycles.<\/p>\n

\"A<\/p>\n

(IMF Working Paper, “Labor Supply Effects of Monetary Policy: Evidence from Australian Mortgage Holders,” prepared by Mitali Das, Jonathan Hambur, Klaus-Peter Hellwig & John Spray, April 2026.)<\/p>\n

The paper says the transmission from monetary policy to mortgage holders happens very quickly in Australia.<\/p>\n

That is because the share of households with variable-rate mortgages (typically indexed to the RBA’s policy cash rate) is substantially higher than in other advanced economies, accounting for around 70 per cent of outstanding mortgages in 2022, compared with less than 20 per cent in the United Kingdom and under 5 per cent in the United States.<\/p>\n

More Aussies working two or more jobs<\/a><\/p>\n

More people than ever before are picking up multiple jobs as the high cost of living pushes Australians to take on extra work, but the tax office warns people not to get caught out and know their obligations.<\/p>\n

That combination of a high prevalence of variable-rate borrowing and elevated household debt levels in Australia implies that interest rate changes can generate large and immediate effects on household cash flows in Australia.<\/p>\n

The paper also notes that the RBA’s rapid rate hikes occurred against a backdrop of an unusually strong labour market when unemployment was near multi-decade lows, and labour demand (from businesses) was elevated relative to historical tightening cycles.<\/p>\n

That suggests that the ability for Australians to increase their supply of labour partly reflected strong underlying labour demand.<\/p>\n

Overall, the paper shows that the labour supply response to higher interest rates was significant in Australia.<\/p>\n

“The share of individuals working more than one job in Australia increased by 0.4 percentage points since the beginning of the rate-hiking cycle, which was equivalent to more than 100,000 additional workers,” it found.<\/p>\n

The graph below shows when the multiple job-holding rate jumped well above its long-term trend.<\/p>\n

\"A<\/p>\n

(IMF Working Paper, “Labor Supply Effects of Monetary Policy: Evidence from Australian Mortgage Holders,” prepared by Mitali Das, Jonathan Hambur, Klaus-Peter Hellwig & John Spray, April 2026.)<\/p>\n

“Meanwhile, the participation rate has reached an historic high of 67 per cent, up from its pre-COVID level of roughly 66 per cent,” the paper says.<\/p>\n

Natural experiment: Interest rates and childcare<\/p>\n

The paper found that the increase in interest rates in Australia induced a labour supply response among households most exposed to rising debt servicing costs.<\/p>\n

It did not find a larger labour supply response from renters.<\/p>\n

“Unlike mortgage holders, renters are not directly exposed to increases in mortgage interest costs but are fully exposed to changes in the cost of living,” it says.<\/p>\n

“Across all outcomes and periods, we find no differential labour supply response among renters.”<\/p>\n

It also found that members of highly indebted households responded specifically to rising interest rates, not rising inflation.<\/p>\n

And the effects were strongest among those without children. Highly indebted workers with children exhibited small (or even zero) labour supply responses to tightening interest rates.<\/p>\n

Child care subsidies are increasing \u2014 Here’s what you need to know<\/a><\/p>\n

From today, about 1.2 million Australian families are in line for a\u00a0\u00a0childcare rebate boost. Here’s what the new federal government changes could mean for you.\u00a0<\/p>\n

However, it also found that when rising childcare costs became a national concern in Australia in 2022, which prompted the federal government to increase childcare subsidies from July 2023 onwards<\/a>, this provided a “quasi-experiment setting” to examine how labour supply would respond.<\/p>\n

And it found that, in response to those childcare subsidy reforms, there was a notable increase in the probability of employment, and a notable increase in the number of jobs per 100 workers, for individuals with young children, relative to those with no children.<\/p>\n

In the graph below, see the light-blue line.<\/p>\n

\"A<\/p>\n

(IMF Working Paper, “Labor Supply Effects of Monetary Policy: Evidence from Australian Mortgage Holders,” prepared by Mitali Das, Jonathan Hambur, Klaus-Peter Hellwig & John Spray, April 2026.)<\/p>\n

The authors said in the context of their paper that Australia’s childcare subsidies were a clear illustration of fiscal-monetary policy interaction in determining the supply of labour.<\/p>\n

Challenges a long-held assumption<\/p>\n

In all, the paper says macro-economic models largely preclude a labour supply response to monetary policy shocks, and that view of monetary policy is reflected in explicit statements by major central banks.<\/p>\n

For example, in its February 2024 quarterly statement on monetary policy<\/a>, the Reserve Bank of Australia commented:<\/p>\n

“Monetary policy has little direct effect on labour supply or structural features of the job market, and so generally takes the current level of full employment as given.”<\/p>\n

But, the paper says, a small number of recent papers have started to question that assumption, arguing that rising interest rates can lead to increased supply of labour.<\/p>\n

“If this is the case, it has important implications for both the interpretation and forecasting of macroeconomic conditions, as well as for our understanding of the transmission of monetary policy,” it says.<\/p>\n

“An increase in labour supply following an interest rate hike would dampen the effect of contractionary policy on output, while potentially amplifying its effect on inflation through downward pressure on wages and, in turn, prices.<\/p>\n

“Moreover, such responses may have distributional and welfare consequences, particularly if the labour supply response is more evident among certain household types,” it says.<\/p>\n

It reminds people that the results are derived from the specific context of post-COVID Australia, but it says they still hold lessons for advanced economies more generally, notably countries where variable-rate mortgages are more prevalent.<\/p>\n

So, now that the RBA has lifted rates for the third time this year, how are you planning to pay for your household’s rising interest payments?<\/p>\n","protected":false},"excerpt":{"rendered":"Now that the Reserve Bank has lifted interest rates for the third time this year, how will you…\n","protected":false},"author":2,"featured_media":67354,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[64,63,319112,5465,5626,15324,319113,13196,44,183],"class_list":["post-660429","post","type-post","status-publish","format-standard","has-post-thumbnail","category-australia","tag-au","tag-australia","tag-childcare-subsidies","tag-inflation","tag-interest-rates","tag-international-monetary-fund","tag-labour-supply","tag-monetary-policy","tag-news","tag-reserve-bank-of-australia"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/660429","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=660429"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/660429\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/67354"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=660429"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=660429"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=660429"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}