Monday , August 8 2022

Australia's unemployment rate in July sits at 5.2 per cent, "slow" in labor market



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Not good enough.

That was the verdict on Australia's new unemployment data, which showed that many people were relocating to jobs, but not enough that the unemployment rate would actually drop.

Unemployment is locked at 5.2 percent, which means that RBA will aim to reach even higher rates.

Australia's labor market has been a problem for some time now. We need to keep unemployment low so there is not so much "slowness" in the labor market and companies are forced to offer higher wages.

On Thursday we received evidence that it was not yet abundant. ABS data for July showed that the economy was doing well in one sense – moving 41,000 people to jobs, mostly full-time. But that large number was not enough.

We have so many more people in the job market every month that we haven't reduced the number of unemployed. In fact, the ABS measure of the unemployed rose to 800.

What's more, the suppressed rate rose, meaning even more people would like to work more hours. It only shows how greedy Australians work if the jobs are out. We are not slowing down, the economy is.

THE WORLD QUESTION

Unfortunately, wage growth in Australia continues to weaken. Average weekly earnings have increased by just 2.5 percent over the last year, only keeping their nose up for inflation. Wage growth was usually higher, averaging 4 percent or more.

There are two main reasons for a weak pay rise:

1. The economy is a big cycle. One man's expense is another person's income, and weak wage growth slows that cycle. If we think our wages will not increase, we spend less, making someone else's salary.

They call this the "paradox of prosperity." One person trying to be early is good, but if we all do it at once, the economy is rocking.

2. Australia has amazing, record high levels of domestic debt. Paying a down a million dollar mortgage is not that difficult if you can rely on a 4 percent wage income a year.

The magic of compounding means that a 4 percent increase in salary annually will make an income of $ 70,000 a year to $ 179,000 a year in 25 years. More than double

In contrast, annual 2 percent pay raises raise salaries by far, making $ 70,000 a year to $ 113,000 a year in 25 years.

A homeowner calculating a strong wage growth to pay off their loan may find it much more difficult than previous generations.

And of course causes one and two are linked. The more debt you have in relation to your income, the more you spend to repay the loans and less at the shops. This is why we need a wage increase and why the RBA has promised to keep interest rates low until the wage situation is resolved.

INTEREST TARGETS

Interest reductions are the large pressure release valve from the situation described above.

RBA hopes that by reducing tariffs, life will ease the Australian economy.

The people who have to repay their loans find their repayments a little less. They have more money saved, and they spend more, and the cycle of the economy can work freely again. Cutting interest rates is like taking the brakes off.

Yesterday's ABS workforce data was enough to make the Commonwealth Bank change its forecast of interest rates.

They are now predicting two more tariffs this year instead of just one – basically saying we need to tighten the brakes.

Higher rates would be unprecedented. It would take official interest rates from its current level of 1 percent to just 0.5 percent.

(The official interest rate is the rate that banks pay when they borrow from the central bank. The interest rates on the loans they sell are set slightly higher than the official rate.)

The big risk in all of this is that the lower interest rates are not improving the economy and not doing enough to solve the employment market.

The risk is that they will only burst the housing market. And god knows there's not much slowness in the housing market.

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