The strength of the Australian labor market has prevented the Reserve Bank from cutting interest rates, but growing evidence suggests it is not as crucial as previously thought.
The Reserve Bank of Australia believes unemployment remains too low despite falling inflation and wage growth in recent months.
However, some economists argue that this shows that the central bank’s assumptions are wrong.
Unemployment during the month of December rose to four per cent, the Australian Bureau of Statistics reported on Thursday.
This paints a picture of a resilient labor market, with the unemployment rate still well below the RBA’s implied estimate of 4.5 per cent for the non-inflationally accelerated unemployment rate (NAIRU).
The NAIRU represents “full employment” or, essentially, the lowest possible unemployment rate that does not lead to an acceleration in wage growth and an increase in inflation.
Commonwealth Bank economist Gareth Aird said recent labor market data, along with a slowdown in wage growth, support the view that the NAIRU is likely to be around the current rate of four per cent. hundred.
“Australia should be able to maintain an unemployment rate of around four per cent and see inflation within the target band on a sustainable basis,” he said.
The RBA has refrained from lowering rates partly due to the relative strength of Australia’s labor market.

Treasurer Jim Chalmers says progress has been made on inflation while maintaining low unemployment
“But we don’t know if the RBA shares our view (or is adopting our view).”
The Reserve Bank has refrained from cutting interest rates, unlike its counterparts in the United States, New Zealand and elsewhere overseas, in part because of the relative strength of Australia’s labor market.
However, core inflation has been moving inexorably downward, towards the central bank’s target range of 2 to 3 percent.
The CBA forecasts that the cut average consumer price index in the December quarter will again fall short of expectations, which “should cause the RBA to start changing its thinking on the NAIRU”, Aird said.
Other economists, including JP Morgan’s Ben Jarman, AMP’s Shane Oliver and ANZ’s Jeff Borland, also believe the NAIRU is lower than the RBA’s estimates.
Treasurer Jim Chalmers acknowledged the definition of full employment in Australia’s economy was a controversial figure.
“But if you look at the data and what has been achieved in our economy, we see that we have had unemployment between three and four for some time now, at the same time that inflation has increased.” from its peak, almost eight per cent, to within the Reserve Bank’s target band,” he told reporters.
“What that tells us is that we can make this very substantial and sustained progress on inflation while maintaining very low unemployment.”
Jarman argued that should give the RBA the freedom to cut rates at its next board meeting in February.
“With NAIRU likely in the low fours and inflation receding within the band, the RBA’s forward-looking approach should make it comfortable to initiate a relatively shallow and measured easing cycle, to secure some gains in the labor market,” he said. .