Global Macro Service > Research Briefings > Australia

Firms and workers are driving the NAIRU lower

 

After a hiatus of almost three years, the RBA has resumed its loosening cycle, cutting the cash rate at consecutive board meetings and taking the policy rate to 1%. A reassessment of the degree of spare capacity in the labour market has been the trigger for the rate cuts.

 

This has been a common experience across several advanced economies; many countries are finding they can accommodate a lower unemployment rate without sparking an inflationary cycle.

 

In the Australian experience, there are both labour demand- and supply-side explanations for the shift. Firms are increasingly responding to demand fluctuations by adjusting hours worked, leading to less unemployment.

 

Meanwhile on the supply side, labour force participation has never been higher. The increase has been driven by women and older Australians, who are able to (and have to) work longer than before. This additional supply of workers is weighing on both wage growth and the natural rate of unemployment.

 

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