In August, an extra 47,500 Australians entered the workforce, while the unemployment rate held steady at 4.2%. This development is more than just a numerical success; it represents a major achievement for both the Australian government and the Reserve Bank of Australia (RBA).
The ability to create jobs while keeping the unemployment rate steady, all in the face of global inflationary pressures, is an indicator that Australia is deftly navigating a delicate economic situation. The challenge has been to reduce inflation without inducing excessive economic damage, and so far, the results suggest that this balancing act has been a success.
Walking the Narrow Path: A Delicate Balancing Act
Former RBA Governor Philip Lowe, in a speech shortly before his tenure ended, emphasized that Australia’s economic success would require walking a “narrow path.” His vision was for inflation to be tamed while ensuring that the economy continued to grow and that as many of the gains in the labor market were preserved as possible. Michele Bullock, who succeeded Lowe as RBA Governor, inherits this responsibility. The data from August, showing both job creation and steady unemployment rates, suggests that the RBA has so far managed to keep Australia on this narrow path, despite significant challenges.
- Bringing inflation back to the target range within a reasonable timeframe.
- Maintaining economic growth.
- Preserving as many labor market gains as possible.
That Australia has managed to hit these milestones is no small feat and reflects careful decision-making from both the RBA and the federal government.
Fiscal and Monetary Policy
A major reason for Australia’s success in maintaining economic stability has been the effective use of both fiscal and monetary policy. Fiscal policy refers to government decisions regarding spending and taxation, while monetary policy is controlled by the central bank and primarily involves managing interest rates. The synergy between these two has been a key to keeping the economy balanced during a period of global turmoil.
The Australian government has managed its spending and taxation policies effectively, avoiding the extremes seen in other parts of the world. Meanwhile, the RBA’s approach to raising interest rates has been more cautious than in many comparable economies. This conservative approach has allowed Australia to constrain inflation while minimizing damage to the labor market and the broader economy.
At first glance, this might seem like an overly optimistic assessment. Indeed, public discourse often revolves around criticism of governmental and central bank policies. However, the data suggests that Australia has fared better than many of its economic peers. Let’s explore three key facts that demonstrate how well policymakers have navigated the difficult path of managing inflation while sustaining economic growth.
Less Aggressive Interest Rate Hikes: When inflation began to surge globally, many countries responded by aggressively hiking interest rates. Australia’s response, though firm, was notably more restrained. Since inflation began rising, the RBA has raised interest rates by 4.25 percentage points—lower than the 5.25 percentage points seen in the United States.
This restraint has had the benefit of not overly constraining economic activity. While other countries imposed sharp interest rate hikes to slow their economies and curb inflation, Australia opted for a more moderate approach. This has allowed for inflation control without inducing excessive damage to employment or growth.
Inflation Falls at a Similar Rate Despite a Softer Touch: Despite a more cautious approach to interest rate hikes, inflation in Australia has fallen at a rate comparable to that in other advanced economies. From its peak, inflation in Australia has dropped by an average of 0.7 percentage points per quarter. This matches the pace of Canada and nearly that of the United States (0.8 percentage points), while slightly lagging behind the United Kingdom’s 1 percentage point drop per quarter.
The fact that Australia has achieved a significant reduction in inflation without resorting to extreme interest rate measures underscores the effectiveness of the country’s monetary policy. By comparison, more aggressive rate hikes in the United States and the United Kingdom have resulted in deeper impacts on their respective labor markets.
Better Labor Market Outcomes: One of the standout achievements of Australia’s more measured approach has been its ability to protect the labor market. Since the RBA began raising interest rates, Australia’s unemployment rate has only risen by 0.6 percentage points. By contrast, unemployment has risen by 0.8 percentage points in the United States and a notable 1.6 percentage points in Canada.
These statistics become even more impressive when considering that more Australians are participating in the labor market than before. Australia’s participation rate—reflecting the percentage of people either employed or actively looking for work—has climbed by 0.7 percentage points. In contrast, the United States has seen only a 0.3 percentage point increase, while the United Kingdom’s participation rate has actually fallen by 0.2 points.
Inflation Under Control, but Challenges Remain
While Australia’s inflation rate has fallen below 4%, and further improvements are expected when new data is released, there are concerns that unemployment could rise higher in the near future. So far, unemployment has only increased from 3.5% to 4.2%, but structural changes in the economy may pose challenges going forward.
Much of the job growth seen in recent months has been fueled by an extraordinary increase in immigration. The Australian population grew by an average of 50,000 per month over the past year—more than double the pre-COVID rate of 20,000 per month. This has boosted the labor supply and helped meet demand for workers in key sectors. However, the federal government’s proposed cap on international students is likely to slow this immigration-fueled job creation in the near future.
Government-Funded Sectors and the Labor Market
Moreover, many of the jobs created have been in government-funded sectors such as education, healthcare, and social assistance. For example, employment in childcare has surged by 53,000 over the past two years, while residential aged care added 47,000 jobs. In the broader “social assistance” sector, which includes disability care, employment increased by 83,000 positions. These fields have benefited from government support, but as this wave of job creation slows, labor market challenges may arise.
Data from the Australian Bureau of Statistics shows that in recent months, more than 40% of the extra hours worked in the economy came from these largely government-funded sectors. As this boost fades, and if immigration slows, the broader labor market may start to feel the strain.
Narrow Path Ahead: The Case for Jobs-Centered Monetary Policy
The current state of Australia’s labor market is a reminder of how critical it is for the RBA to remain cautious in setting monetary policy. With inflation now under greater control, it may be time for the central bank to place a stronger focus on preserving jobs.
If unemployment starts to climb more steeply, or if labor force participation begins to fall, the balance between inflation control and economic growth may shift. This would present a risk of falling off the “narrow path” that Philip Lowe spoke of. The risk now is not so much runaway inflation but the possibility of an unnecessary labor market downturn.
Looking forward, the key challenge for Michele Bullock and the RBA will be to avoid pushing the economy too far into contraction. Maintaining steady, moderate interest rate policies while focusing on job creation will be critical in the months ahead. Otherwise, Australia risks undoing the hard-won gains of the past year and finding itself on a much rockier economic path.
Australia’s ability to add 47,500 jobs in August while keeping the unemployment rate steady at 4.2% reflects the success of a carefully calibrated mix of fiscal and monetary policies. The government’s spending and taxation decisions, coupled with the Reserve Bank’s more measured approach to interest rates, have allowed the country to walk the narrow path that balances inflation control, economic growth, and labor market health.
However, challenges remain on the horizon. With immigration and government-funded job growth slowing, the labor market could face headwinds. The RBA’s next challenge will be to maintain a focus on employment as inflation continues to come under control. By doing so, Australia can continue to chart a course of economic stability and growth while avoiding the pitfalls that have troubled other advanced economies.
