• Australia’s unemployment rate, at 5%, currently sits at the lowest level since mid-2011.
• Australia needs to create over 15,400 jobs every month to see unemployment fall further, if participation rates hold steady.
• The RBA’s forecasts for GDP and inflation are underpinned by an expectation that unemployment will continue to fall gradually over the next few years.
• Not everyone believes recent trends will be maintained. Financial markets are still fully priced for a 25 basis point rate cut by the middle of next year.

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Australia’s unemployment rate, at a smidgen under 5%, currently sits at the lowest level since June 2011.

If the Reserve Bank of Australia (RBA) is to achieve its GDP growth and inflation forecasts in the years ahead, further progress in reducing unemployment will almost certainly be required.

So how many jobs does Australia need to create each and every month to see unemployment continue to fall?

This chart from the National Australia Bank (NAB) has the answer.

Akin to the run-rate required for the cricket fans out there, it shows that Australia currently needs to create over 15,408 jobs per month to keep the unemployment rate steady.

The NAB’s calculations are based upon the participation rate remaining steady at 65.6%. Given participation tends to fluctuate based on a variety of factors, including economic conditions, that means the required rate for job growth should be regarded as a rough estimate.

As the chart shows, be it in seasonally adjusted or trend terms, average employment growth per month has exceeded the level required to keep unemployment steady for several years, helping to explain why the rate now sits at 4.98% rather than the 6% plus levels seen in the middle of the decade.

The RBA is expecting recent trends to continue over the next few years with its latest forecasts seeing unemployment falling to 4.8% by the middle of 2021. So some progress, but glacial in nature.

Given growing signs that the slowdown in the Australian economy in the September quarter last year extended into the fourth quarter, not everyone is convinced that unemployment will continue to trend lower in the coming quarters as the RBA expects.

The RBA is alert to the risk that recent trends may not be repeated, an outcome that would likely mean it will take even longer for the bank to achieve its inflation mandate.

In a speech delivered earlier this month, RBA Governor Philip Lowe acknowledged the bank is “monitoring developments in the labour market closely”.

“If Australians are finding jobs and their wages are rising more quickly, it is reasonable to expect that inflation will rise and that it will be appropriate to lift the cash rate at some point,” Lowe said.

“On the other hand, given the uncertainties, it is possible that the economy is softer than we expect, and that income and consumption growth disappoint.

“In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point.

“We have the flexibility to do this if needed.”

So, if unemployment begins to trend higher again, making further progress towards the bank’s inflation target harder to achieve, the RBA may cut interest rates again as financial markets currently expect.

Australia’s January jobs report will be released later this week. Unemployment is expected to remain steady at 5%, although several forecasters have warned of potential upside risks due to the characteristics of the outgoing sample group.

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