Making sense of Australia’s current economy

Making sense of Australia’s current economy

Unemployment is on the way down. Cost of living and interest rates are on the way up. And employers are desperate for staff. So what exactly is going on with the Australian economy?

When the COVID-19 pandemic first hit the Australia economy, all eyes were on protecting jobs and keeping the economy afloat.

Top of mind for governments and businesses was the concern that lockdowns and border closures – while necessary to control the spread of COVID-19 – would snuff out household spending and business activity, leading to unemployment and widespread financial pain.

Policymakers injected a mass stimulus into the economy to pump up household income and keep spending strong. This was reminiscent of policies used in the Global Financial Crisis, which was fuelled by crashes in demand.

As a life raft to the economy, thousands of dollars of taxpayers money went towards subsidies for households to book travel tours, dine out at restaurants, and renovate their homes.

But at the same time that governments were focused on boosting this ‘demand’ side of the economy, the pandemic was also crippling the ‘supply’ side of the economy.

By supply-side, we mean the inputs needed on the production side of the equation. Supply chain breakdowns around the globe disrupted the availability of materials and equipment, amplified by recent climate change disasters and geopolitical conflicts.

But one of the most important ingredients on the production side of our economy are the skills and capabilities of people.

Cracks in the supply-side of the economy began to show early in the pandemic when sick workers couldn’t turn up for their shifts. When mothers with young children had to drop out of the workforce to support learning from home. When shutting the borders to migrants left gaping holes in Australia’s workforce. And when staff exhaustion and burnout in healthcare, aged care and a full range of other underappreciated community service workforces took a severe toll on the delivery of these essential services.

We are now seeing the fuller effects of this erosion in workforce capacity in our unemployment and vacancy numbers.

Australia’s low unemployment is a sign of shortages

Australia’s record low unemployment rate – at 3.5% as at June 2022 – should be an economic statistic to celebrate. It’s now lower than pre-pandemic rates and accompanied by strong labour force participation rates, now sitting at over 71% for men and 62% for women.

While low unemployment is great news for job-seekers, there’s a catch. Such a low rate is also a reflection of worker shortages and employers struggling to attract the staff they need.

Job vacancies – a signal of unfilled jobs – are soaring across all states and territories. The most rapid increases are being experienced in healthcare and social assistance, with hospitality, professional services, retail and construction sectors also reported tens of thousands of unfilled positions.

Job Vacancy Data1
Job Vacancy Data2
Job Vacancy Data3

The fixation of propping up demand and playing limbo with the unemployment rate (just how low can we go?), meant that we took our eye of the ball when it came to the supply side of the economy.

The construction sector, for example, is now facing mass shortages in materials and skilled workers. The stimulus from the previous government, aimed at boosting demand and protecting tradies’ jobs, has ended up bumping up prices and blowing out wait times for building materials. (And in any case, if the government wanted to support construction, instead of than subsidising home renovations through its HomeBuilder scheme, a more productive use of taxpayers’ money would have been to refit businesses and public buildings to become COVID-safe such as subsidising upgrades to air ventilation.)

A current picture of Australia’s economy

Our economy is now in a really tight squeeze.

The same supply side constraints that are pushing unemployment to a record low are also pushing the inflation rate to a record high.

Australia’s inflation rate, as measured by the Consumer Price Index, is now at a 20-year high of 6.1%. It’s largely because supply shortages are pushing up production costs for businesses, with the latest Producer Price Index rising to a 14-year high of 5.6%. Businesses are passing on these steeper production costs to customers.

The explosion in job vacancies means that the vacancy rate now almost matches the unemployment rate. In other words, there’s around one job vacancy for every jobseeker out here.

Job Vacancy Data4

What about wages?

Even though there are clear worker shortages, wages growth is still weak at only 2.4% and is now being outpaced by an inflation rate. The gap between the inflation rate and wage growth means that workers ‘real’ purchasing power is weakening.

The logic that employers who need more workers should offer higher wages, as the way to attract and retain the workers they need, is not bear out in this current picture. It’s possible that the shift to working-from-home is distorting this link, if people are bargaining for more flexible working arrangements as a form of non-wage benefit in place of a higher wage. It is also possible that the high inflationary environment is prompting people to take any job they can get, at current wages, as a way to battle rising prices.

What can be done to ease the pressures?

Conventionally the economy’s main lever to combat higher inflation is for the central bank (Reserve Bank of Australia) to lift interest rates. While it might seem paradoxical to try to combat rising prices by making it even more expensive for mortgage owners and borrowers, that is the point. By making it costly to access credit and redirecting a larger fraction of household budget towards loan repayments, higher interest rates leave households with less money to spend on other products and reduces total ‘demand’ in the economy.

And if demand can be dialled down to be more in line with actual supply, this alleviates the need for businesses to keep pushing up prices to deal with ongoing shortages.

The dilemma, of course, is that interest rates can’t target the source of the supply-side constraints themselves. Hiking up interest rates is not going to generate more skilled workers. This instead requires is dedicated focus on supply-side factors and reigniting our economy’s productive capacity.

Among future policy directions, we need a dedicated strategy to manage COVID, so that we don't let ongoing illness and absenteeism, caring duties, and the debilitating effect of long-COVID erode our workforce productivity. On skills, we need ways to fast-track upskilling and invest in better job-matching processes. We need to do a better job of recognising jobseekers’ existing capabilities, and the broad transferability of skills from one industry to another, especially among migrants and women returning to the workforce after having children.

On wage growth, there’s a lot of talk about lifting labour productivity to boost real wages. But we need to firstly ensure we have the right industrial relations mechanisms in place that will see gains in labour productivity flow through to higher wages, instead of being siphoned off to employers or investors instead.  And we need to ensure we are properly measuring the true value of workers’ contributions to the economy and wider society, especially in the care sectors and human services which are characterised by low pay, low status, and a disproportionately higher share of women. It’s possible that labour productivity has been rising in these industries – look at the workload that nurses, teachers, aged care workers delivered during the pandemic – but it’s just not being counted and valued properly.

There is, at least, no shortage of issues to explore at the Australian Government’s upcoming Jobs and Skills Summit.

The Australian Government’s Jobs and Skills Summit will be held at Parliament House in Canberra on 1-2 September. For more information, visit Jobs and Skills Summit.


Author: Dr Leonora Risse, Senior Lecturer in Economics, RMIT University


16 August 2022


16 August 2022


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Acknowledgement of Country

RMIT University acknowledges the people of the Woi wurrung and Boon wurrung language groups of the eastern Kulin Nation on whose unceded lands we conduct the business of the University. RMIT University respectfully acknowledges their Ancestors and Elders, past and present. RMIT also acknowledges the Traditional Custodians and their Ancestors of the lands and waters across Australia where we conduct our business - Artwork 'Luwaytini' by Mark Cleaver, Palawa.