Unemployment: Wage growth gets worse as inflation hits, mortgages rise, immigration

Last week, the Australian Bureau of Statistics (ABS) released data suggesting that the Australian labor market is in good health as we approach Christmas.

Australia’s unemployment rate fell by just 3.4 percent in October to its lowest level since 1974.

The unemployment rate also fell to just 5.9 percent, close to its lowest level since 2008.

And the combined underutilization of labor fell to its lowest level since 1982, at just 9.3 percent.

Separate data from the ABS also showed wages rose 3.1 percent in the year to September, the strongest annual growth since March 2013; although not enough to keep pace with inflation.

While the Australian labor market is currently doing well, despite the inflation-induced fall in real wages, there is good reason to believe that this data represents a high frontier and that conditions for Australian workers will deteriorate seriously next year.

RBA’s aggressive monetary tightening to slow job growth

As anyone with a mortgage already knows, the Reserve Bank of Australia (RBA) has been aggressively raising interest rates, raising the Official Cash Rate (OCR) by 2.75 percent since May.

This is the fastest pace of rate hikes in Australian history, and has seen the benchmark floating mortgage rate rise from 3.45% in May to 6.20% today.

As a result, average variable mortgage payments are up 37 percent from April levels before the RBA’s first hike. For a borrower with a $500,000 variable mortgage, this represents an $831 increase in monthly mortgage payments.

Nearly every analyst predicts that the RBA will increase OCR by another 0.25 percent in December.

From there, opinions are divided on the RBA’s next moves. For example, the CBA expects the RBA to remain on hold, while NAB expects another 0.5 percent of tightening, and ANZ and Westpac another 0.75 percent of increases.

The table below shows how much variable mortgage repayments would increase if the interest rate forecasts of the four major banks came true.

It’s important to note that the full effects of the RBA’s monetary tightening are yet to be felt due to an abnormally large number of borrowers who locked their mortgage rates at around 2 percent last year. This mitigates the initial impact of rate hikes, but also means monetary conditions will tighten significantly in 2023 as many of these mortgages mature.

Therefore, if the RBA continues to rise, it will affect not only existing floating rate mortgage borrowers, but also huge numbers of fixed rate borrowers who will face a doubling or tripling of their mortgage rates.

In turn, consumer spending will slow significantly in the new year as tens of billions of dollars of household income are spent on mortgage payments, hindering both jobs and growth.

Record immigration will boost labor supply

As the economy slows in response to the RBA’s aggressive monetary tightening, Australia’s labor supply will grow strongly in 2023 due to record high net overseas migration (NOM).

A major reason why unemployment in Australia has fallen to its lowest level since 1974 is that Australia has lost hundreds of thousands of migrants during the pandemic. Therefore, many of the jobs created went to unemployed Australians rather than migrant workers.

As illustrated in the following chart, Australia’s working population today is about 430,000 smaller than it would have been had pre-pandemic migration trends continued.

The latest federal budget projects NOM will restore to 235,000 in fiscal year 2022-2023 and beyond. This means Australia’s labor supply will grow strongly in the face of a slowing economy, increasing unemployment and dampening wage growth.

There are already signs that NOM’s federal budget projections will be exceeded by a very large margin as net arrivals of students and work visas rose to record levels in the September quarter.

The Albanian government also claimed last week that it will cut Australia’s ‘visa backlog’ by nearly 400,000 by the end of this year and plans to clear the remaining 600,000 strong backlog as soon as possible.

The inevitable result is that next year Australia will experience unprecedented levels of immigration and a major surge in labor supply, just as the economy is stalling and job growth is stalling.

In turn, by the end of 2023, there is likely to be a sharp rise in unemployment and declining wage growth.

In fact, there will be more workers fighting for fewer jobs and making less money.

Leith van Onselen is chief economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Read related topics:Employment Reserve Bank

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