- There will be competing forces impacting the supply of labour over the coming year or so.
- A slowdown in the demand for labour could see a fall in participation as discouraged workers drop out of the labour force.
- However working the other way some new workers may enter the labour force, or demand more hours due to rising housing costs, negative real wages growth and changes to government policies. Overseas migration has returned also adding to the supply of labour.
- In net terms we expect the supply of labour to expand over the next year. Together with slower demand for labour due to weaker economic conditions we expect the unemployment rate to drift higher to 4¼% by end 2023.
There are a number of competing forces that could impact the labour market in Australia over the next year. We expect demand for labour to slow due to the material lift in interest rates in 2022. While rising housing costs from both mortgage payments and rent, a lift in net overseas migration and changes to government policy could see more people enter the workforce or demand more hours. We are also likely to see a normalisation in staff absenteeism from illness compared to 2020 – 2022. These factors will change the supply of labour.
One measure that captures the supply of labour is the participation rate. The participation rate is the proportion of the working age population who are either employed or actively looking for work. In previous analysis both we and the Reserve Bank of Australia (RBA) have noted the participation rate is influenced by the economic cycle.
When the economy and labour market is strong, the participation rate tends to lift as people feel that they are more likely to gain employment. This is known as the encouraged worker effect. Conversely when the demand for labour is weak the participation rate typically falls as some people become discouraged and stop looking for work and leave the labour force. Outside of cyclical factors there has been a structural lift in female workforce participation over recent decades.
Changes in labour supply are also reflected through hours worked, composition of employment and the share of multiple job holders.
In this note we explore in more detail some of the factors that may impact on labour supply over the coming years.
CBA’s Global Economic and Markets Research (GEMR) team publishes a wide range of economic and financial research each week covering the latest data, trends, policy developments and topical issues in Australia and other major economies. To access these publications please visit the GEMR website.
Our Economic Expert
Belinda Allen is a Senior Economist at the Commonwealth Bank. She has extensive experience as a financial markets economist. Belinda joined the Commonwealth Bank in 2017. Her work primarily involves developing and communicating views on the Australian and international economies. Prior to joining the Bank, Belinda spent over 10 years at Colonial First State Global Asset Management, the Bank’s asset management arm as a Senior Analyst in the Economic and Market Research team. Here Belinda developed extensive experience in analysing both the Australian and global economies as well as the various investment markets. Belinda works in the Institutional Banking & Markets division of the Commonwealth Bank. This division is responsible for managing the Group’s relationships with major corporate, institutional and government clients and providing a full range of capital raising, transactional and risk management products and services. Belinda holds a Bachelor of Economics and Bachelor of Applied Finance from Macquarie University and has been awarded the CFA designation.
