Hunter details RBA's evolving view on full employment and inflation
RBA Assistant Governor Sarah Hunter discussed the central bank's evolving understanding of full employment and its intertwined relationship with inflation. She noted that despite some easing, the Australian labor market remains somewhat tight, consistent with ongoing inflationary pressures.
Beyond the unemployment rate
The RBA's approach to assessing full employment has evolved significantly, moving beyond a single measure like the unemployment rate to a broad set of labour market indicators.
This refined methodology, outlined in the latest Statement on Monetary Policy, aims for a more systematic, comprehensive, and transparent evaluation.
It incorporates various price and wages indicators, models, and new statistical detrending methods to establish benchmarks for a balanced labour market.
This allows the RBA to account for underlying trends in indicators that may shift over time, such as the rising proportion of adults in the workforce.
Currently, a majority of these indicators suggest the labour market remains at least a little tight, despite some series like job ads showing conditions closer to balance.
This comprehensive view is crucial for understanding future inflation and wage growth, given full employment's inextricable link to price stability.
Persistent tightness, persistent inflation
Recent labour market adjustments have primarily occurred through declining job vacancies and reduced average hours worked, rather than a significant increase in the unemployment rate.
While the number of people in jobs continues to grow at a slowing pace, average hours remain below pre-pandemic levels.
Firms still report substantial difficulty in finding staff, particularly in specific sectors and states, indicating persistent tightness.
This overall picture, where the labour market remains somewhat tight, is consistent with ongoing inflationary pressures in the economy.
The RBA's framework suggests that when the labour market operates beyond full employment on an ongoing basis, underlying inflation will hold above target, even with anchored inflation expectations.
Anchored, but not complacent
The RBA's updated framework for full employment provides a more comprehensive view of labour market dynamics beyond simple metrics.
While inflation expectations remain anchored, the continued tightness signals that the path to target price stability remains challenging.
This nuanced approach allows for a more flexible policy response, acknowledging persistent pressures without succumbing to outdated accelerationist fears.