Economy now has no spare capacity as unemployment rate hits landmark sub-4 percent

Labour shortages push hours worked up; under-employment is down; worker illness shows new ‘COVID-normal’ for businesses

Dr Sarah Hunter, KPMG Senior Economist, responds to today’s ABS figures

After hovering close for a couple of months, the national unemployment rate has now dropped below 4 percent (to 3.9 percent). The ABS confirmed that data revisions meant this landmark rate – the lowest since 1974  –  was actually achieved in March.

More importantly, the data also indicate that the economy is now effectively operating with no spare capacity. Despite job adverts remaining at record highs and a higher-than-average proportion of businesses looking to bring people on, employment increased by just 4,000 over the month.

Firms are partially compensating for the lack of employees by increasing hours worked (up 1.3 percent from March) though part of the increase also reflects fewer disruptions to activity due to weather events. This has pushed the underemployment rate down to 6.1 percent, but labour shortages have become a binding constraint in many sectors.

Given the continued strength in demand and limited additional domestic supply of workers (including the slow recovery in inward migration), it is likely wages growth will accelerate from here. While the headline rate in yesterday’s Wage Price Index was softer than expected, the data also highlighted that of those people who received a pay rise in the March quarter, the average increase was 3.4 percent (the fastest pace since June 2013).

Today’s data also shines a light on the new ‘COVID-normal’ for businesses. 742,000 workers in April had to reduce their hours due to illness or injury, up from around 400,000 in the years immediately before the pandemic. With COVID now endemic in the community, employers will need to adapt their working patterns to allow for higher levels of absenteeism going forward.

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