Full Employment: What It Means for the Aussie

Who would’ve expected it? A couple of years ago, the world was in a full blown financial meltdown but just this Thursday, we learned that Australia has reached “full employment” with a 5.1% unemployment rate.

The Australian Bureau of Statistics revealed two days ago that the unemployment rate of the country has dropped to 5.1% from 5.2% the previous month. It came as a surprise to market participants because they were expecting it to actually rise to 5.3%.

Huh? 5.1%? What’s so significant about that number? Here’s a quick lesson on economics for you: when a country reaches an unemployment rate of around 5%, basic macroeconomic theory suggests that the country is in “full employment.”

But if 5% of the people are still without jobs, how can you consider the country to be fully employed? One important thing you should realize is that for economists, “full employment” does not necessarily mean what regular non-geeky people think it does. It does not mean that each individual who is looking for a job has one.

To economists, full employment pertains to the LOWEST SUSTAINABLE rate of joblessness. If the unemployment rate gets any lower, it could actually have a negative effect on the economy. If there is an excessive shortage in labor, the country could experience steep wage increases which would trigger an extremely high rate of inflation.

In fact, in 2008, when unemployment in Australia fell to 4%, the private sector’s wage index had risen by a whopping 4.3%. This pushed the inflation rate above the Reserve Bank of Australia (RBA)‘s 2-3% target range for the next few years.

That is something that the central bank does not want to happen, especially in a time when the global economy is just starting to get back on its feet. Also remember that one of the RBA”s main mandates is to keep inflation at their desired rate. Anything more than that and the central bank normally will be forced to alter its monetary policy.

But then again, these aren’t normal times. As I mentioned, the economy is the middle of recovery, which means a rate hike is something you probably shouldn’t count on from the RBA. What this new development does, however, is greatly decrease the possibility of a rate cut in the coming months.

For the Aussie bulls, this is a good thing, as it fits very well with the RBA’s decision (which was also an unexpected one, by the way) to keep rates unchanged at 4.25%. In addition, the bulls could also count on market participants who initially doubted the RBA’s wait-and-see approach to re-evaluate their short bias.

As for you my dear readers, if you’re bullish on the Aussie, then all is well. But if you err on the side of bearishness, will this new information change your perception of the Aussie? Will you take on a more bullish stance? Feel free to answer the poll below and leave a comment a below!

  • Daniel

    Overall a good article, although I don’t belive the 4.3% rise in priate sector jobs was the reason for inflaiton rising above its target range…

    “To economists, full employment pertains to the LOWEST  SUSTAINABLE rate of joblessness. If the unemployment rate gets any lower, it COULD actually have a negative effect on the economy. If there is an excessive shortage in labor, the country COULD experience steep wage increases which would trigger an extremely high rate of inflation.”

    - Emphasis on the COULD, interesting theory with mixed viewpoints depending on what evidence your looking at.

    A few interesting things I find is how they focus on the the 5.1% rate which is seasonally adjusted, looking at trend (5.2%, this has been unchanged since august 2011) and original (5.5%, up 0.5% from last month,5.0%).
    Year to Year estimates also show a better results for the S.A figure, compared to the trend or original figures.

    Also looking at the underemployment and underutilisation rate also helps create a better overall picture of the labour market.

    Some info released over the the last week is commonweath bank post record qtr profits, GM Holden is also looking into its operations in australia, most likely moving these manufacturing jobs overseas, and several other companies are planning on job cuts so I definatly thing there are some interesting times ahead for the australian labot market.