MNI POLICY: RBA Inflation Fight Aided By Increased Migration

Revised labour force estimates have provided some marginal comfort to the Reserve Bank of Australia around the supply of workers and the prospects for wage-push inflation, despite recent jobs data being stronger than expected by monetary policymakers, MNI understands.

As the government ramps up efforts to increase migration to compensate for skills shortages, the Australian Bureau of Statistics' major rebenchmarking of labour force estimates unveiled on Dec 15 revealed "larger than usual" revisions to the net overseas migration component in 2022, hinting there may be more workers available than previously thought. Seasonally-adjusted employment was revised up by 87,500 people for October.

The RBA has been concerned that a 48-year-low unemployment rate could spark a wage-price spiral. Governor Philip Lowe said in late November that a return to the RBA's 2-3% inflation target would be "smoother" if labour costs didn't accelerate too much more. (See MNI BRIEF: RBA's Lowe Flags Wages Risk In Inflation Fight). Now the migration-led labour force revisions suggest the pool of workers may not be fully tapped, potentially helping keep wage rises in check. The Wage Price Index rose 3.1% y/y in the September quarter.

IMMIGRATION BOOST

The RBA sees immigration as a solution to filling vacancies in some industries. Around 65,000 temporary skills visas have been processed since the government prioritised this class in late October. The government announced a one-off increase in immigration to 195,000 from 160,000 this financial year, but there has been pressure from business lobby groups to lift this target. However, higher immigration risks adding to demand at a time when the RBA is trying to slow growth to tame inflation. The government announced a review of the immigration system in September

Policymakers are also keen to better understand changes in workforce composition since the pandemic. Participation is at a record 66.8%, with women and the young benefitting from a growing number of jobs in hospitality as restrictions eased, but also more older workers in employment. The RBA is keen to understand the impact of churn on productivity as workers leave for better jobs, requiring employers to not only plug gaps but also undertake the expense of training replacements.

The RBA expects unemployment to edge higher over 2023 as growth cools in the wake of a cumulative 300bp of tightening over eight months in 2022. The Statement of Monetary Policy forecasts an unemployment rate of 3.7% by December 2023, up from 3.5% in November. December labour force data will be released on Jan 19. The RBA next meets on Feb 7.