Australian employment growth was up by a decent 16, 000 in January, pretty much in line with expectations, and this follows months of strong jobs growth.

Annual employment growth is running at 3.3% which is a very strong pace of jobs growth for Australia (see chart below). The unemployment rate lowered to 5.5% in January and has been stuck in a 5.4-5.6% range since the middle of last year. The participation rate remains high at 65.6% which is normal in times of a strong labour market as more workers are encouraged back into the labour force. Female participation is especially strong.

1.      We’re working fewer hours

Aggregate hours worked have taken a hit recently (green line in chart below) and this is partly because part-time employment was stronger than full-time employment in January. But, lower hours worked are also a sign that there is still more capacity for labour demand to rise.

2.      Fewer of us are working full-time

Full-time jobs fell by a large 498,000 in January but was offset by a 659,000 lift in part-time jobs. This is a reversal of the trend observed over the past year (see chart below). Weakness in full-time employment is a risk for consumer incomes and spending by extension.

3.     There are more women working

Female participation was especially strong, coming in at 60.5%, its highest level on record.  This is part of a longer-run trend for female employment in the workforce. 

What does it all mean?

The labour market has been running red hot for over six months which does stand at odds with an economy that is running below its potential overall. Looking ahead, our jobs leading indicator (a combination of various job vacancies and business hiring intentions) is pointing to a slowdown in employment growth (see chart below). Employment growth appears to have reached a peak for now.

Slower employment growth means that the unemployment rate is unlikely to decline significantly over the next few months, which indicates that we will need to wait longer for substantial wages growth to emerge. The Reserve Bank is still counting on wages growth to lift by some extent, but only gradually and this has been clearly outlined in recent speeches and publications from the central bank.

In the US, there are clear signs of a lift in wages growth. But, the US labour market has been running at full capacity for around one year. In Australia, we haven’t reached full employment yet (which would occur with an unemployment rate well below 5 per cent), with underutilisation (the measure of unemployment and underemployment which is employees who would like to work longer hours) in the labour market still an issue and well above the US (see chart below).

We still see the Reserve Bank keeping interest rates on hold for now. There are pockets of strength in the Australian growth story – business confidence and conditions are very strong, non-mining investment growth is lifting and iron ore price rises are good news for commodity exporters. But, the low inflation environment, risks in the housing market and a high currency will limit growth in the economy this year and keep the Reserve Bank cautious. A rate rise is likely from the Reserve Bank, but its only likely to come at the end of this year.