Jobless rate 'supertanker' heads lower despite capacity concern

Growing evidence of skill shortages and the equal-lowest jobless rate in almost 5½ years is stoking speculation the labour market is gradually absorbing the spare capacity blamed for weak wages growth.

The unemployment rate recorded the biggest fall in two years in May, down 0.2 percentage points to 5.4 per cent – matching the lowest rate recorded since November 2012 as the resources boom crested.

"I like the jobless rate going down," said Stephen Walters, chief economist at the Australian Institute of Company Directors. "This is a slow-moving beast, and the jobless rate rarely spikes or plunges – it moves like a supertanker and over the last two or three years it's been going down."

While the numbers showed the labour market is still not yet out of the woods – with an official measure of "underemployment" edging up – they buttress the Reserve Bank of Australia's central assumption that a declining unemployment rate will eventually push wages growth back above 3 per cent from the current 2 per cent pace.

The economy created 12,000 jobs last month, which was below market forecasts for a 19,000-job increase, according to data published by the Australian Bureau of Statistics on Thursday.

Full-time work fell 20,600 while part-time employment rose 32,600 in the month.

Upward pressure

James Pearson, chief executive of the Australian Chamber of Commerce and Industry, said that while there were growing skill shortages in key industries and locations, there were still too many young Australians looking for work.

"The positive on skills shortages is that we should start to see some upward pressure on wages, but it's far healthier if we can successfully translate more Australians into work as labour demand improves," he said.

Alex Joiner, an economist at IFM Investors, said the rate of monthly employment growth has slowed materially so far this year, to an average of 16,300 from last year's 33,800 pace.

While ongoing population growth could hamper the absorption of spare capacity in the jobs market, it also appears the participation rate is peaking, he said.

"It may just be population growth adding to labour supply and not as much addition from rising participation. That may help to lower the unemployment rate should employment growth continue," Mr Joiner said.

The bureau's quarterly update of the so-called under-utilisation rate, which captures those who have jobs but would like more hours, was steady at 13.9 per cent, and below the February 2017 peak of 14.7 per cent. The average of the past decade is 13.3 per cent.

The related underemployment gauge increased by 0.1 percentage points to 8.5 per cent.

"Even if the pace of job creation picks up again in the coming months, this excess slack and other structural forces are likely to prevent wage growth from increasing much above its current rate of 2.1 per cent this year," said Kate Hickie, an economist at Capital Economics.

"In fact, we suspect it will remain below 2.5 per cent throughout this year and next."

Capacity constraint

In a speech on Wednesday, Reserve Bank governor Philip Lowe said it was reasonable to expect wages growth to pick up given surveys that show the proportion of companies reporting a lack of suitable skilled workers as their biggest capacity constraint is close to a quarter-century high.

"The only other time in the past 25 years where this share has been as high as now was in the early stages of the resources boom," Dr Lowe said, adding that many firms had focused on cost cuts in recent years and pulled back on work-related training.

"With the labour market now tightening, we are perhaps starting to pay the price for this," he said.

Annual growth in employment slowed to 2.5 per cent in May from 2.7 per cent in April, and below the record 3.5 per cent pace in January.

Employment is up by 303,901 jobs over the past 12 months.

The dollar fell in the wake of the data to as little as US75.47¢ from around US75.78¢ early on Thursday.

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