{"id":38947,"date":"2025-07-26T14:56:39","date_gmt":"2025-07-26T14:56:39","guid":{"rendered":"https:\/\/www.newsbeep.com\/us\/38947\/"},"modified":"2025-07-26T14:56:39","modified_gmt":"2025-07-26T14:56:39","slug":"understanding-the-journey-to-full-employment-speeches","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/us\/38947\/","title":{"rendered":"Understanding the Journey to Full Employment | Speeches"},"content":{"rendered":"

\t\t\t\t\tWatch video: Understanding the Journey to Full Employment<\/a><\/p>\n

I would first like to pay respect to the traditional and original owners of this land, the Gadigal people
\n\t\t\t\t\t\tof the Eora Nation, to pay respect to those who have passed before us and to acknowledge today\u0092s
\n\t\t\t\t\t\tcustodians of this land. I also extend that respect to any First Nations people joining us here today.\n\t\t\t\t\t<\/p>\n

Today I\u0092d like to talk about the labour market. Employment is crucial to our living standards and our
\n\t\t\t\t\t\tlives. A job is not just a source of income. For many of us it is also a key part of our identity and way of
\n\t\t\t\t\t\tlife. Those that experience a period of unemployment can suffer for a long time afterwards, and the
\n\t\t\t\t\t\teconomy can \u0091lose\u0092 their skills and expertise.<\/p>\n

The Reserve Bank Board has historically set monetary policy to achieve both low and stable inflation and
\n\t\t\t\t\t\tfull employment. Our full employment mandate became more explicit in the updated Statement on the
\n\t\t\t\t\t\t\tConduct of Monetary Policy that was agreed between the Reserve Bank Board and the Treasurer
\n\t\t\t\t\t\tlate last year.<\/p>\n

This morning I\u0092d like to unpack our view of the labour market \u2013 how we\u0092ve interpreted
\n\t\t\t\t\t\trecent data, and what we expect over the next couple of years. But first I want to outline what we mean
\n\t\t\t\t\t\tby and how we assess full employment. Then I\u0092ll follow with our assessment of labour market dynamics
\n\t\t\t\t\t\t\u2013 whether we think they\u0092ve changed, and where we\u0092ve been somewhat surprised recently.
\n\t\t\t\t\t\tFinally, I\u0092ll wrap up by talking about our outlook and the risks and uncertainties we\u0092re
\n\t\t\t\t\t\tclosely monitoring.<\/p>\n

\t\t\t\t\tWhat do we mean by \u0091full employment\u0092?<\/p>\n

First, let\u0092s start with our definition of full employment. Then I\u0092ll unpack some of the
\n\t\t\t\t\t\tcomplexities around how we measure and evaluate it over time.<\/p>\n

We define full employment as the maximum level of employment that is consistent with low and stable
\n\t\t\t\t\t\tinflation. When the economy is at full employment, demand and
\n\t\t\t\t\t\tsupply in the labour market are in balance. In turn, this leads to wages growing at a rate consistent
\n\t\t\t\t\t\twith achieving the inflation target, after accounting for growth in productivity. In the medium term,
\n\t\t\t\t\t\tthis coincides with a balance between demand and supply in the markets for goods and services. And over
\n\t\t\t\t\t\ttime, the absolute level of full employment will typically rise, underpinned by growth in the working-age
\n\t\t\t\t\t\tpopulation.<\/p>\n

Our full employment objective is easy to describe, but it is difficult to measure or capture in a single
\n\t\t\t\t\t\tmetric. So, it may not be a surprise that we use a range of methods and indicators to understand how the
\n\t\t\t\t\t\tcurrent state of the labour market compares to full employment, and to understand how much uncertainty
\n\t\t\t\t\t\tthere is around our assessment.<\/p>\n

While the unemployment rate is a key metric in our analysis, we consider a range of different measures to
\n\t\t\t\t\t\tholistically assess the labour market. These include leading indicators such as firms\u0092 employment
\n\t\t\t\t\t\tintentions, measures of unmet demand such as vacancies, and other cyclical measures of underutilisation
\n\t\t\t\t\t\tsuch as the medium-term and youth unemployment rates, and the underemployment rate (Graph\u00a01).<\/p>\n

Graph 1<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

The RBA also uses a suite of models to estimate the unemployment rate and hours-based underutilisation
\n\t\t\t\t\t\trate (a broader measure of spare capacity which captures the shortfall in hours worked from unemployment
\n\t\t\t\t\t\tand underemployment) that would be consistent with full employment. These models use wages growth and
\n\t\t\t\t\t\tinflation to provide us with information on the balance between demand and supply in the labour market
\n\t\t\t\t\t\tand in the economy. If inflationary pressures appear persistent, it may suggest that there remains excess
\n\t\t\t\t\t\tdemand in the economy and labour market. Deviations of the actual unemployment and hours-based
\n\t\t\t\t\t\tunderutilisation rates from these estimates \u2013 namely the unemployment and underutilisation gaps
\n\t\t\t\t\t\t\u2013 provide yet another metric of the degree of tightness in the labour market.<\/p>\n

I want to draw out another critical point. The level of full employment can change over time as the
\n\t\t\t\t\t\tstructure of the economy and labour market evolve. The maximum number of employed people that is
\n\t\t\t\t\t\tconsistent with the RBA achieving its price stability mandate will increase as the population grows or if
\n\t\t\t\t\t\tthe labour force participation rate rises (Graph\u00a02). So, it is also useful to monitor trends in the
\n\t\t\t\t\t\temployment-to-population ratio and the participation rate.<\/p>\n

Graph 2<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

So what does all this mean for our current assessment of the labour market? Taking into account the
\n\t\t\t\t\t\tmethods and indicators that I\u0092ve just taken you through, our current assessment is that the labour
\n\t\t\t\t\t\tmarket is operating above full employment but has moved towards better balance since late 2022.<\/p>\n

In the context of the first graph that I showed, we can see that a range of labour market indicators have
\n\t\t\t\t\t\teased since late 2022, at which time many of these indicators suggested conditions were very tight. Our
\n\t\t\t\t\t\tmodels also suggest that the unemployment and underutilisation gaps have narrowed over this period, which
\n\t\t\t\t\t\talso points to a labour market that is moving towards full employment. This assessment is based on what
\n\t\t\t\t\t\twe know now. And from here, the return to full employment could play out in many ways. This will be
\n\t\t\t\t\t\tdetermined by developments across the economy and in the labour market. So monitoring these developments
\n\t\t\t\t\t\tis a crucial part of how we assess the overall outlook.<\/p>\n

\t\t\t\t\tUnderlying dynamics of the labour market<\/p>\n

As many of you will know, when the economy begins to soften, the first thing firms generally do is to pull
\n\t\t\t\t\t\tback on unmet demand for workers. That is, they recruit less intensely and put out fewer new job adverts,
\n\t\t\t\t\t\tand cancel pre-existing vacancies. A softening of the labour market through this channel is not captured
\n\t\t\t\t\t\tin data series such as the level of employment or the unemployment rate. Overall demand for labour can be
\n\t\t\t\t\t\tfalling even when employment is rising.<\/p>\n

During the current cycle, we first observed declines in both job vacancies and measures of employment
\n\t\t\t\t\t\tintentions from business surveys and the RBA\u0092s liaison program in 2022. At the time, conditions were
\n\t\t\t\t\t\tvery tight and there were many vacant positions. As momentum in demand started to moderate, firms
\n\t\t\t\t\t\tresponded to the slowing in momentum by withdrawing positions or posting fewer vacancies. The vacancy
\n\t\t\t\t\t\trate has subsequently fallen since mid-2022 but remains above its pre-pandemic level.<\/p>\n

To date, the decline in vacancies has coincided with only a modest increase in the unemployment rate. The
\n\t\t\t\t\t\ttypically inverse relationship between vacancies and unemployment is what economists call the
\n\t\t\t\t\t\t\u0091Beveridge curve\u0092. The economy appears to have been operating on the steeper portion of the
\n\t\t\t\t\t\tcurve of late, where a fall in vacancies can occur without a large increase in unemployment
\n\t\t\t\t\t\t(Graph\u00a03). We also can\u0092t see clear evidence that the curve permanently shifted over the
\n\t\t\t\t\t\tpandemic years. For example, if the curve had shifted out, this would suggest that matching workers to
\n\t\t\t\t\t\tjobs had become harder, which could be because firms are demanding new or different skills, or because
\n\t\t\t\t\t\tworkers weren\u0092t able to move to the sectors or regions where there are job openings.<\/p>\n

Our current assessment, however, is that this hasn\u0092t happened. In other words, we think the labour
\n\t\t\t\t\t\tmarket today is operating broadly the way it did prior to the pandemic.<\/p>\n

Graph 3<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

While we have not seen a sharp lift in the unemployment rate, the decline in demand for labour and
\n\t\t\t\t\t\tfirms\u0092 hiring intentions has translated into a lower rate of new hiring and slower employment
\n\t\t\t\t\t\tgrowth. We can see this in the rate at which jobseekers have been able to find work. The job-finding rate
\n\t\t\t\t\t\trose to multi-decade highs in 2022 before falling back, though it remains well above its 2010s average
\n\t\t\t\t\t\t(Graph\u00a04). This observation is consistent with people taking a bit longer to find work if they are
\n\t\t\t\t\t\tlooking for it. All else equal, this dynamic contributes to a higher unemployment rate.<\/p>\n

Graph 4<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

Firms also respond to slowing growth in demand by reducing the hours of their existing workforce. We know
\n\t\t\t\t\t\tthis is easier for some roles and sectors than others. We may therefore observe a reduction in average
\n\t\t\t\t\t\thours worked per employee.<\/p>\n

Average hours worked did decline over much of 2023. But the level of average hours worked has not fallen
\n\t\t\t\t\t\tmaterially since late last year and looking through the volatility we\u0092ve seen this year, has
\n\t\t\t\t\t\tremained broadly steady since (Graph\u00a05). The data also highlight the volatility we\u0092ve seen in
\n\t\t\t\t\t\taverage hours worked over the past four years or so, and understanding how it might evolve from here is a
\n\t\t\t\t\t\tkey uncertainty in our forecasts.<\/p>\n

Similar to average hours, other measures of labour underutilisation have also not increased noticeably in
\n\t\t\t\t\t\trecent months. As an example, the underemployment rate, which captures workers who would like to work
\n\t\t\t\t\t\tmore hours, rose in 2023 but has been relatively steady since earlier in the year.<\/p>\n

The limited signs of further easing in the latest observations for variables such as average hours worked
\n\t\t\t\t\t\tand the underemployment rate at a time when economic growth has continued to slow is somewhat surprising
\n\t\t\t\t\t\tand is a key uncertainty in the outlook. However, taken together, they suggest that conditions in the
\n\t\t\t\t\t\tlabour market remain tighter than implied by full employment.<\/p>\n

Graph 5<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

In a downturn, particularly in a more severe downturn, firms may also turn to layoffs to reduce labour
\n\t\t\t\t\t\tcosts. This would further raise the unemployment rate. Past downturns tell us that firms resist laying
\n\t\t\t\t\t\toff staff, if possible, as they try to avoid the costs associated with rehiring and reskilling workers as
\n\t\t\t\t\t\tthe economic outlook improves.<\/p>\n

The layoffs rate has been trending up recently, but it remains very low by historical standards
\n\t\t\t\t\t\t(Graph\u00a06). Our assessment is that this is consistent with the labour market loosening from very
\n\t\t\t\t\t\ttight conditions, but it is still operating above full employment. Changes to the layoffs rate is another
\n\t\t\t\t\t\tkey metric we monitor.<\/p>\n

Graph 6<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

Conditions in the labour market are also typically reflected in the pace of wages growth, and tightness in
\n\t\t\t\t\t\tthe labour market has contributed to strength in wages growth in recent years. More recently, there are
\n\t\t\t\t\t\tsome signs that the easing in the labour market since late 2022 has started to flow through to wage
\n\t\t\t\t\t\toutcomes for workers. Nominal wages growth appears to have passed its peak and has moderated since late
\n\t\t\t\t\t\tlast year, though wages growth remains solid (Graph\u00a07). Having said that, real wages, which matter
\n\t\t\t\t\t\tmore for households, have been weaker, reinforcing the costs of high inflation.
\n\t\t\t\t\t\tMoreover, growth of labour costs, as measured by growth of labour costs per unit of output, has also
\n\t\t\t\t\t\tdeclined (in part due to an improvement in productivity outcomes).<\/p>\n

Graph 7<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

\t\t\t\t\tThe recent easing in historical context<\/p>\n

It\u0092s important to put the recent easing into the context of historical episodes, so we can better
\n\t\t\t\t\t\tforecast how the labour market is likely to evolve from here. Overall, our current assessment is that the
\n\t\t\t\t\t\trecent easing in labour market conditions has, to date, been similar to mild downturns in Australian
\n\t\t\t\t\t\thistory (Graph\u00a08).<\/p>\n

Excluding the pandemic period, downturns in economic activity and their associated impacts on labour
\n\t\t\t\t\t\tmarket outcomes were larger in the early 1980s and 1990s compared to downturns in the 2000s and 2010s.
\n\t\t\t\t\t\tThis is shown by the magnitude of declines in total hours worked which accounts for both changes in
\n\t\t\t\t\t\temployment and average hours worked.<\/p>\n

Graph 8<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

In the current episode, the decline in total hours worked has come from reductions in average hours worked
\n\t\t\t\t\t\trather than declines in employment, repeating the pattern seen in the most recent episodes. A likely
\n\t\t\t\t\t\texplanation for this is that more recent downturns have been smaller in magnitude, but it may also partly
\n\t\t\t\t\t\treflect increased flexibility in the labour market. This has allowed firms to contain labour costs while
\n\t\t\t\t\t\tretaining employees, and avoid the costs associated with layoffs and rehiring. It has
\n\t\t\t\t\t\talso meant fewer layoffs and smaller increases in the unemployment rate, which has kept more workers in
\n\t\t\t\t\t\tjobs.<\/p>\n

With the recent adjustment in total hours arising via average hours worked, total employment has continued
\n\t\t\t\t\t\tto increase, notwithstanding the unemployment rate rising from late 2022 onwards. Aggregate employment
\n\t\t\t\t\t\tgrowth has been supported by the rebound in migration since late 2021, which has contributed to both an
\n\t\t\t\t\t\tincrease in the supply and demand for labour. <\/p>\n

Employment growth has also been uneven across sectors, with aggregate employment supported by strong
\n\t\t\t\t\t\tgrowth in the health, education and public administration sectors. Importantly, the labour market appears
\n\t\t\t\t\t\tto be doing a good job of facilitating this flow of workers to these industries. Our
\n\t\t\t\t\t\tpreliminary analysis of the healthcare sector, for example, suggests that it has drawn significantly from
\n\t\t\t\t\t\tthose who were outside the labour force or unemployed, while also bringing in some people previously
\n\t\t\t\t\t\temployed in other industries.<\/p>\n

\t\t\t\t\tWhat has been surprising?<\/p>\n

I don\u0092t want to create an impression that we know everything about the labour market, particularly
\n\t\t\t\t\t\tabout how it will evolve from here.<\/p>\n

It\u0092s true that recent unemployment rate outcomes have not been unusual given the historical
\n\t\t\t\t\t\trelationship between changes in the unemployment rate and GDP growth rates (Graph\u00a09).<\/p>\n

Graph 9<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

What has been more surprising is the strength in the labour force participation rate and, as discussed
\n\t\t\t\t\t\tearlier, the limited easing more recently in some measures such as the underemployment rate and average
\n\t\t\t\t\t\thours worked. This is occurring against a backdrop of slow momentum in the economy, a decline in
\n\t\t\t\t\t\tvacancies and a gradually rising unemployment rate.<\/p>\n

The participation rate has continued to trend upwards, reaching a record high in July. This has not been
\n\t\t\t\t\t\tthe experience in most other peer economies (Graph\u00a010). Whereas participation rates amongst this
\n\t\t\t\t\t\tgroup have largely begun to stabilise, in Australia the participation rate has continued to increase
\n\t\t\t\t\t\tsteadily in the post-pandemic period.<\/p>\n

Graph 10<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

While the slowing in the economy may have weighed on the participation rate (all other things equal),
\n\t\t\t\t\t\tother factors have likely provided support, including the longer-run trend towards greater female
\n\t\t\t\t\t\tparticipation. We have also seen the share of employed people with multiple jobs continue to trend
\n\t\t\t\t\t\tupwards since the pandemic, notwithstanding the decline in the latest quarterly data (Graph\u00a011).<\/p>\n

Graph 11<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

\t\t\t\t\tSo where to from here?<\/p>\n

To sum up, conditions in the labour market have eased since late 2022, but our assessment is that the
\n\t\t\t\t\t\tlabour market is still tight relative to full employment.<\/p>\n

We expect the demand for labour to grow at a slower pace relative to the supply of labour in the coming
\n\t\t\t\t\t\tquarters, gradually bringing the labour market into better balance. Our view is that some of this slowing
\n\t\t\t\t\t\tin labour demand is likely to occur via a decline in average hours (Graph\u00a012).<\/p>\n

We also expect employment to continue to increase, but at a slower pace than population growth. In this
\n\t\t\t\t\t\tview of the outlook, measures of underutilisation \u2013 including the unemployment rate \u2013 are
\n\t\t\t\t\t\texpected to continue rising gradually from here, before stabilising as the pace of growth in GDP picks up
\n\t\t\t\t\t\tto be broadly consistent with the economy\u0092s underlying trend pace of growth.<\/p>\n

Graph 12<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

As my colleague Andrew Hauser recently pointed out, the outlook is highly uncertain, and we should be
\n\t\t\t\t\t\thumble about our ability to predict the future. If we can be confident about anything, it\u0092s that our
\n\t\t\t\t\t\tforecasts will be wrong at least in some way. We therefore spend a lot of time thinking about how and why
\n\t\t\t\t\t\twe could be wrong, including by considering scenarios where the economy evolves differently to our base
\n\t\t\t\t\t\tcase forecast and by continuously updating our assessment of risks as economic conditions change. This is
\n\t\t\t\t\t\tparticularly important given that changes in economic conditions can take time to flow through to changes
\n\t\t\t\t\t\tin labour market conditions.<\/p>\n

It\u0092s possible that employment growth slows, and the unemployment rate rises more quickly than we
\n\t\t\t\t\t\texpect. As previously noted, various leading indicators, such as vacancies, are continuing to ease,
\n\t\t\t\t\t\tsuggesting further softening in the labour market from here. Our view is that further falls in vacancies
\n\t\t\t\t\t\tcan still occur alongside a relatively modest increase in the unemployment rate. Compared to other
\n\t\t\t\t\t\teconomies that have seen larger increases in their unemployment rates, the Australian economy has a
\n\t\t\t\t\t\thigher ratio of vacancies to unemployment, relative to historical experience, which suggests that there
\n\t\t\t\t\t\tis space for vacancies to fall further without a sharp increase in the unemployment rate (Graph\u00a013).\n\t\t\t\t\t<\/p>\n

Graph 13<\/p>\n

\t\t\t\t\t\t\t\"Graph<\/p>\n

This outcome is consistent with our assessment that we are still on the steeper part of the Beveridge
\n\t\t\t\t\t\tcurve that I showed earlier. But the slope of the Beveridge curve is highly uncertain, and our view could
\n\t\t\t\t\t\teasily be wrong.<\/p>\n

Our central forecast is also predicated on the assessment that few firms are operating with excess labour
\n\t\t\t\t\t\t\u2013 engaging in so-called \u0091labour hoarding\u0092. If it turns out that more firms are currently
\n\t\t\t\t\t\thoarding labour, then we may expect to see a larger pick-up in the unemployment rate as firms reduce
\n\t\t\t\t\t\theadcount to cut costs given the backdrop of weak growth in demand. The implications of this alternative
\n\t\t\t\t\t\twere explored in a scenario in the RBA\u0092s August Statement on Monetary Policy.<\/p>\n

It is also possible that our assessment is wrong in the other direction. Conditions may be tighter than we
\n\t\t\t\t\t\texpect, or demand for labour could grow more strongly than we anticipate.<\/p>\n

Forecasting the labour market is a difficult but important challenge. Our current assessment is that
\n\t\t\t\t\t\tlabour market dynamics haven\u0092t fundamentally changed, although we have been surprised by some of the
\n\t\t\t\t\t\trecent data. While our forecasts will almost certainly be wrong in some way, we remain humble about our
\n\t\t\t\t\t\tability to predict the future, and we continue to update our views based on the incoming data and our
\n\t\t\t\t\t\tongoing analysis.<\/p>\n","protected":false},"excerpt":{"rendered":"Watch video: Understanding the Journey to Full Employment I would first like to pay respect to the traditional…\n","protected":false},"author":2,"featured_media":38948,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[38],"tags":[28,134],"class_list":{"0":"post-38947","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-jobs","8":"tag-business","9":"tag-jobs"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/38947","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=38947"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/38947\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/38948"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=38947"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=38947"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=38947"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}