This chart bodes well for larger pay increases in Australia

Australia’s December jobs report will be released later this week.

Of the 23 economists polled by Bloomberg, the median forecast looks for an increase in employment of 15,000. If correct, and without any revisions from the ABS, that would leave employment growth in 2017 at 376,000, the largest increase over a calendar year on record.

Quite the statistic, even if flattered a little by strong growth in Australia’s population size over the past few decades.

And if the chart below is anything to go by, the strength in hiring seen in 2017 might finally start to translate to stronger wage increases for workers.

Source: NAB

From the National Australia Bank (NAB), it overlays Australia’s unemployment rate against job vacancies as a proportion of Australia’s total labour force — the number of Australians either in or actively looking for work. The NAB has moved the vacancies data forward nine months to demonstrate the relationship between the two.

As the chart suggests, should the relationship between the two be maintained, it points to Australia’s unemployment rate falling heavily in the year ahead, an outcome that usually bodes well for wage increases for workers.

“Trend employment growth currently exceeds the level needed to keep the unemployment rate unchanged and at 22,000 is enough for it to drop 0.1 percentage points every two to three months,” says Tapas Strickland, Economist at the NAB.

“The most recent employment indicators suggest it could fall below the RBA’s 5% non-accelerating inflation rate of unemployment, or NAIRU, in 2018.”

NAIRU is a level where unemployment neither detracts or adds to inflationary pressures in the Australian economy. In the past, when Australia’s unemployment rate has fallen below this level, it has tended to coincide with a pickup in inflationary pressures as a worker shortages lead to faster wage increases from employers.

While recent data both at home and in other advanced economies suggests that the relationship between unemployment levels and wage increases has weakened in the post GFC-era, Strickland remains optimistic that stronger labour market conditions will help to lift inflationary pressures, allowing the Reserve Bank of Australia (RBA) to begin lifting official interest rates.

Job vacancy [data last week was] very strong,” Strickland says.

“Our view of a continuing strong labour market is part of the reason why [we] see the RBA hiking rates twice in the second half of the year.”

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