The RBA wants to raise unemployment to fight inflation – but who will that hurt the most?

Groups who benefited from strong jobs growth will be the first to lose work come a recession …

What should we expect to be talking about in this new financial year? It seems likely the debates will be about rising wages, rising unemployment and a recession.To be honest, the first of these is no great prediction. There is always fearmongering from the usual suspects that wages are rising too fast.One reason for the current fear has been the latest enterprise bargaining agreements data. In the March quarter, the average annual wage growth of approved agreements was 3.7% – the strongest since the middle of 2012. But, to be honest, this merely reflected what was observed in the March wage price index, which saw all wage rises in the March quarter average 4.3%:If the graph does not display click hereThe big jump in enterprise agreement wages was mostly driven from the education sector. But only 134,400 employees were party to approved agreements in the March quarter. This was less than the 298,100 in the December 2022 quarter, which had an average annual wage rise of just 3.0%.So hardly a wages breakout.As it is, the average wage rise for all employees covered by all enterprise agreements is now just 2.9% – well below the current wage price index average growth of 3.7%:If the graph does not display click hereAgreements are usually for 2-3 years and thus it takes time for wage rises to go up (or down) – unlike with other employment contracts.The 3.7% growth remains not only below the current level of inflation but also the expected rate until the middle of next year. So a worker who entered into an agreement with 3.7% annual wage rises for 2 and a half years is going to see their wages fall in real terms for most of that period.It’s worth reminding everyone where we are at the moment. Since the start of the pandemic, real wages have fallen nearly 6%:If the graph does not display click hereWorse, had real wages risen as expected, they would be some 8.3% higher than they are now.The only way to get that back is through wages rising faster than inflation. All those preaching restraint and spreading fear about wages driving inflation should at least be honest that they believe real wages should stay 5-6% below 2020 levels.Wages growth should begin to increase now. In the situation where inflation is driven by profits and factors other than wages, it is natural that wages should get their turn to rise as workers see their living standards fall.This is why more should have been done to limit the profit side of inflation rather than assume companies are just price takers who have no control over their margins.But it also means we now find ourselves with workers naturally wanting stronger wage rises at the point where the Reserve Bank is doing what it can to increase unemployment.The RBA hopes to get unemployment to 4.5%. That suggests anywhere from 130,000 to 150,000 more people unemployed over the next 18 months.So, who will be hurt the most from that?We get some clue from a recent speech by the deputy governor, Michele Bullock, last month when she boasted of “people on lower incomes and with less education who have benefited the most from the strong labour market conditions”.Since the start of last year, an outsized number of jobs have come in community and personal service occupations (especially those of “carers and aides” and labourers, especially farm, forestry and garden workers):If the graph does not display click hereShe also noted that “the labour market for younger people – whose opportunities for employment tend to decline most during recessions – has also improved by much more than at the aggregate level.”This is also true. Younger people have made up a much greater share of the increase in jobs over the past 18 months than would be expected:If the graph does not display click hereBut the key line is “whose opportunities for employment tend to decline most during recessions”.We know that these same groups who have benefited from recent strong employment growth will be the first to lose work come a recession. And we know the RBA is expecting to go very close to a recession.One increasingly common way to measure recessions is the Sahm Rule (named after economist Claudia Sahm). It defines a recession as when the three-month average of the unemployment rate is more than 0.5 percentage points above the lowest point in the previous 12 months.Thus, if in the next year the unemployment rate averages more than 4.1% over three months, then we would be in a recession, given the current rate of 3.6%.The RBA knows about this rule because its internal correspondence about the likelihood of a recession references it. The difference is they believe the mark for a recession in Australia should be 0.75 percentage points above the lowest point.Perhaps they believe this because their current estimates for unemployment would see the Sahm rule hit 0.6 percentage points early next year:If the graph does not display click hereFor now, the RBA is predicting a small recession-like experience, but then all will go well.The problem is that when the unemployment rises more than 0.5% in a year, it often keeps rising.Youth unemployment also always rises first and faster. And right now, the three-month average for unemployment of 15 to 24-year-olds is 0.8 percentage points above its 12-month minimum:If the graph does not display click hereThe RBA has taken some credit for the current state of low unemployment, but it will need to take the blame for purposefully seeking higher unemployment – especially if it does not turn out as easy to control as they predict and locks in a loss of living standards.

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