New South Wales appears to be rewriting the economic textbooks

Tight labour market conditions are not leading to an increase in worker wages in NSW. Chris Hyde/Getty Images
  • When unemployment falls wage pressures tend to rise, unless you live in New South Wales.
  • New analysis from Macquarie shows the level of unemployment in NSW doesn’t have a meaningful impact on wage growth. It does, however, in other Australian states.
  • Unemployment in NSW sits at 4.4%, a decade-low. Participation rates also hit the highest level on record in October.

When unemployment falls wage pressures tend to rise, as the economic theory goes.

However, for workers in New South Wales, Australia’s most populous state, employers appear to have missed the memo.

As seen in the chart below from Macquarie Bank, no matter what the level of unemployment, it has no meaningful impact on annual wage growth in NSW.


The Phillips curve, as it is known — looking at the inverse relationship between unemployment rates and wage pressures — appears to be broken in NSW but not Victoria where, broadly speaking, wage growth tends to lift whenever unemployment falls, and vice versus.

As seen in the next chart from Macquarie showing the Phillips curve for Australia’s smallest states, the inverse relationship between unemployment and wage pressures is even more evident than it is in Victoria.


So why then is the link between unemployment and wage pressures not evident in NSW, home to a whopping 4.06 million workers?

In short, there’s no clear-cut explanation as to why the state is seemingly rewriting the economic textbooks.

It could have something to do with continued growth in the size of the New South Wales labour force, which rose to 4.25 million in October, the highest level on record, according to data from the ABS,.

Labour force participation — measuring the number of people in employment or actively seeking work as a proportion of the working-age population — also hit 65.2% last month, the equal highest level on record.

The NSW employment to population ratio — measuring the proportion of working-age population in employment — also rose to a record-high of 62.3% in October.

Put simply, why employment growth in the state remains strong, so too has been growth in available workers, preventing the unemployment rate from falling below the 4.4% level it sits today.

Whether that’s behind the recent lack of wage pressures is uncertain, as are other factors such as increased globalisation, ongoing employee caution, reduced unionisation of the workforce and other non-monetary forms of rewarding staff.

For whatever reason, despite unemployment sitting at a decade-low, there’s no sign yet that broader wage pressures are emerging for workers in the state.