MNI ANALYSIS: Labor Participation May Challenge Hawkish RBA

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia's guidance for the next move

in the cash rate to be higher could face a challenge from a jobless rate that

may not decline as expected due to an elevated participation rate, potentially

forcing a tweak in the stance that could suggest the cash rate is likely to

remain on hold for longer and, possibly, even move lower.

     The risk for participation comes from the National Disability Insurance

Scheme, which has seen just a 25% rollout so far. According to a Treasury

official, there is a substantial amount of the scheme that has still to be

implemented and its impact could be huge for the labor force participation.

     The RBA's current guidance is that higher interest rates are likely to be

appropriate at some point, although the guidance is conditional on the economy

performing according to forecasts made in the latest Statement on Monetary

Policy.

     Those forecasts are based on the progress seen in lowering the unemployment

rate and on inflation so far, and the expectations that this progress will

continue.

     "Our central scenario is for a gradual pick-up in wages growth, a gradual

lift in inflation, and a gradual reduction in the unemployment rate," Governor

Philip Lowe said in a recent speech.

     A key element in the progress is the unemployment rate, because both the

gradual pick-up in wages growth and lift in inflation are reliant on that.

However, there are now risks that the jobless rate may increase further, rather

than declining.

     --PARTICIPATION RATE

     This could happen because of two main reasons. The pace of employment

growth may not be enough to cause a reduction in the jobless rate, and the labor

participation rate may remain elevated and a key reason for that would be

rollout of the NDIS.

     In April the jobless rate rose to a nine-month high of 5.6% as the

participation rate increased. The risk now is that 5.6% could increase to 5.7%

and beyond if employment growth doesn't pick up pace from the sharp slowing seen

in recent months. 

     In the three-month period to April, total employment gain was just 14,500

compared with an increase of 113,600 in the same period in 2017, and 33,800 in

2016. 

     The labor participation rate could rise further due to increased demand for

health-related jobs, attracting more people into the labor force. 

     In the May SOMP, the RBA discussed the the rollout of the NDIS and the

gradual ageing of the population as likely to continue to support demand for

health-related jobs for some time. The RBA also pointed to the gradual increases

in the age at which workers can access the pension or superannuation, rising

longevity and changes in the demographic composition of the labour force as

factors affecting the participation rate.

     However, in the discussion the RBA missed another key element.

     --CARER CAREERS

     The NDIS rollout is increasing not just healthcare and related jobs, but it

is also increasing participation by others. These are the people that couldn't

work previously because they were primary carers, and are now able to work

either part-time or full-time, or switch from part-time to full-time.

     In the May SOMP, the RBA didn't specifically give its forecasts for

participation, merely stating that it expects the jobless rate to remain around

its current level (5.5%).

     Significantly, the RBA discussed the possibility of the unemployment rate

falling faster than expected based on leading indicators but didn't discuss a

risk scenario where it goes up.

     At the same time, the RBA acknowledged that participation rate is important

for estimating the degree of spare capacity in the labor market which is in turn

important for wage growth to accelerate and for inflation to move to the

mid-point of target band.

     It appears now that the participation rate could become a policy

game-changer if it stalls the progress of the jobless rate moving towards full

employment rate which could be 5.0% or lower.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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