Unemployment drops to 4.2% as Underutilisation slides to 10.8%

Australia’s unemployment rate dropped to just 4.2% in December as the retail and hospitality sectors sucked up labour in the year-end frenzy that included recovery from lockdowns. The number of people out of work fell by more than 62,000 compared to the prior month, as a record 13.242 million people were in work.

Leaving aside the lockdown induced spike in unemployment, the rate has been on the slide since it peaked at 7.6% in July 2020. This good news can be seen in the chart below, but must be tempered by the reality that hundreds of thousands of temporary residents on work and student visas are not in the country. If they were, Australia’s unemployment rate would look somewhat different.


In this case, unemployment per se is not the problem for the Australian economy, it is the signal that low unemployment sends that is of most concern.

The reality is that low unemployment, coupled with a relatively high Participation Rate (stable at 66.1% in December) is evidence that there is a labour shortage. All labour is skilled in some respects, so we think it wisest not to buy into the ‘skilled labour shortage’ trope. That masks the reality there are insufficient people for the work available in the nation.

One of the better measures of this is the Labour Underutilisation Rate, which continues to fall, crashing to 10.8% in December. The underutilisation rate, shown below in green, combines the number of people who are unemployed (574,400 in December), with the number of people who don’t have sufficient hours and who are therefore underemployed (916,000 in December). Together, they account for a still sizeable 1.490 million people, or almost 11% of the total potential workforce.


The first and best opportunity to improve labour availability is to solve some of the intractable problems with linking people with employment. The new Australian of the Year, Dylan Allcott identified the opportunities available from getting people with disabilities into jobs in recent days. There are other examples.

Another measure of labour shortages is ‘intensification of labour utilisation’. That jargon means Australians are working more hours – on average – than they were previously. In December, the average hours worked rose 1.0% to 87.00 hours, comfortably above the long-term average of 85.70 hours.

Labour utilisation intensity has been a roller coaster ride of its own over the pandemic, as we can see below, by contrasting the lockdown era with the pre-pandemic era.


Unsurprisingly, these more sophisticated measures are feeding into long overdue wages growth. For too long, economic growth has relied on anything but wages and consumer sales and the demand pull it creates to provide healthy price movements that can be predicated and against which firms can invest.

For the quarter-ended November, there were a record 400,000 jobs on offer from Australian employers. Many went unfilled, despite some employers offering more money than before.

It is early days yet, but the signs for wages growth are good with private sector wage increases moving ahead of the public sector in 2021, to the point where year-ended September 2021, average private sector wages growth lifted 2.4%, against the metronome of public sector wages lifting 1.7%. Combined they fed into wages growth of an annualised 2.2%, right in the middle of the RBA target for inflation.


Still, despite the good news of wages growth, combined with sliding unemployment figures, by the end of January, that combination of inflationary pressures had the pundits predicting an interest rate rise well before the RBA’s preferred 2024 date.

Writing in the Australian Financial Review, John Kehoe correctly opined that the critical question is whether the labour market remains so tight it virtually guarantees higher wages and inflation.

Unless there is a flood of additional labour or something else happens to dampen employment, that seems the most likely bet.