As predictable as Pauline Hanson’s racism, the commentariat leapt on Thursday’s labour market figures as more evidence of fiscal doom and monetary policy gloom. Michael Pascoe worries that the RBA will too.
Isn’t it great to have an economy where unemployment is low without causing an inflationary wages breakout?
Apparently not, according to the main fishwrappers that greeted the unemployment rate remaining steady at 4.1 per cent in January as a bad
bad thing requiring higher interest rates forthwith.
The Reserve Bank monetary policy board three weeks ago wasn’t waiting for more figures, happy to wish for higher unemployment on the back of the rate falling to 4.1 in December. The minutes of the February 3 meeting, released on Wednesday, showed the board wasn’t pussyfooting about labour market tightness the way the bank’s staff and Governor tended to do.
It’s been a feature of the past year or so for the RBA to call the labour market “a bit tight” without every quite spelling out if it was “too tight”.
Being “a bit tight” is actually a good thing as it encourages lazy management to seek productivity improvements instead of just hiring another body. It’s “too tight” when the laws of supply and demand have their way, pushing up wages to fuel an inflationary spiral.
When is tight too tight?
According to the board minutes: “The staff’s overall assessment was that the labour market was a little tighter than consistent with full employment.”
“Full employment” is the euphemism the RBA uses for the rate of unemployment that doesn’t push up inflation. It is a little nonsense of the bank having “twin mandates” of targeting 2.5 per cent inflation and “full employment” when “full employment” is merely whatever the unemployment rate is when inflation is in the zone.
Thus we don’t have “full employment” now with a 4.1 per cent unemployment rate, we have overfull employment with the RBA board looking forward to unemployment rising to 4.5 per cent in the bank’s forecasts after another couple of interest rate rises.
The monetary hawks cherry pick various numbers to make their case, especially unit labour costs that reflect slack management as much as labour demand and pricing.
What they prefer to ignore or downplay is the headline figure and achievement of this economic cycle, the wage price index showing wages growth is consistent with the inflationary target range, not galloping out of control.
Wednesday’s December quarter wage price index release was mainly greeted with the headline that real wages had again turned negative, CPI inflation for 2025 being 3.8 per cent while the WPI grew by 3.4 per cent.
The tax impact
This wasn’t really news, as regular MWM readers would have read back in December. Readers also know it’s actually worse than the rest of the commentariat ever report as everybody else ignores the tax impact.
For example, to repeat myself repeating myself, someone on a median full-time wage this year of $90,000 before tax who gets a 3 per cent pre-tax raise will only receive a 2.6 per cent increase in their after-tax pay packet.
But I digress. The important part of the December quarter WPI was confirmation that private sector wages, the area that best reflects market forces, grew by a steady 0.8 per cent. Annualise the past two quarters and private wages growth is running at a healthy 3.2 per cent, a figure in keeping with the RBA’s inflation target as the workers are supposed to share a little of our productivity growth.
That’s not what we keep being told though by the lobby most interested in minimising wages and maximising profits.
The tradies wind
Instead, the example most often cited as representing our “too tight” labour market is the cost and availability of tradies. Construction workers “on the tools” make up only about six per cent of the workforce, but that six per cent wags the policy and commentariat dog.
In November when asked about who was to blame for the uptick in inflation, RBA Governor Bullock went straight for the ute drivers:
“Well, I guess there’s a couple of things. The first is that it’s possibly telling us that there’s a little more excess demand in the economy than we had thought, and it’s sometimes hard for people to understand that, but if you take just a very – a microcosm, a very sort of simple example, I don’t know how many people have tried to get a tradie, perhaps, to work on their house. It’s difficult.
“What that’s telling you is that in that particular microcosm of the Australian economy that the demand for these services is above the ability of this to supply it.”
Bullock right on housing
And Ms Bullock is right, our core inflation problem comes back to housing which just happens to also be our core political problem when we’re not distracted by parties imploding and racist grandstanding and/or dog whistling.
It’s the housing, stupid.
Three decades of both parties and all levels of government thinking “the market” could look after providing adequate shelter for the population have landed us in our current crisis of both affordability and availability.
And policy overwhelmingly promises to at best maintain the present unsatisfactory status quo, as explained two years ago, and, more likely, worsen it.
This month’s board minutes allude to it:
“The staff judged that the larger part of the increase had reflected less-persistent factors, including price volatility in categories such as electricity, travel and groceries, and some sector-specific demand and price pressures that had affected prices of new dwellings and durable goods. Inflation in administered prices (excluding electricity) was only a little above its historical average and had picked up only modestly.”
The “sector-specific” bit is housing.
Housing and the cost of living
It was the area that showed the biggest growth in the CPI over 2025, 5.5 per cent, and that’s without the ABS even measuring all housing inflation as it underplays what rent is doing.
It’s housing that is the key factor in our “cost of living” crisis, the cost of renting, buying and building. It’s housing that is at the root of much of our social division, giving rise to One Hanson.
To help both the RBA and Australia, much more is needed than fiddling with capital gains tax in the May budget, if Albanese is game enough to do even that.
We need to much more seriously target the building trades in our immigration policy and we need governments to commit to doubling the percentage of housing stock that is social/public. We have created a swathe of Australians who will never be able to afford their own home and cannot be adequately cared for by private landlords.
Otherwise, interest rates and unemployment will rise, the population will become more disgusted with both mainstream parties and living standards will continue to go backwards.
Michael Pascoe is an independent journalist and commentator with five decades of experience here and abroad in print, broadcast and online journalism. His book, The Summertime of Our Dreams, is published by Ultimo Press.