The RBA has finally gotten unemployment to 4.5% - but this never should have been the goal

I wonder if the release of the September labour force figures today got the champagne corks popping in the Reserve Bank executive offices. Ever since the RBA began raising rates in the middle of 2022, it has been desperate to return unemployment to 4.5%, and now the aim has been achieved!

In September the seasonally adjusted unemployment rate rose from 4.3% to 4.5% – the highest it has been since November 2021.

None of this is a great shock. Employment has been growing ever slower over the past year and especially so since April. In the year to September employment grew just 1.3% – the slowest rate since 2017 when you exclude the impact of the pandemic.

And none of this is accidental. The Reserve Bank raised interest rates during 2022 and 2023 as it believed there was excess demand in the economy that was pushing up prices because, in effect, Australians had too much money.

When the RBA talks of wanting to slow the economy or reduce excess demand what it really means is it wants unemployment to rise.

It thinks that the best way to cure excess demand is to raise interest rates which forces people to spend more money on their mortgage and have less to spend in the shops and on services. This then leads to business cutting back on staff and hours, and so unemployment rises.

Even more importantly, the RBA thinks that if unemployment rises then workers will be less able to bargain for better wages. So not only will fewer people have a job that pays, but fewer will also be getting good wage rises.

The RBA has long thought 4.5% unemployment was the level at which the labour market is balanced and so it raised rates through 2022 and 2023. And while it has cut rates this year, it has been reticent to keep cutting them even when unemployment went above 4% and kept rising.

At the last RBA meeting, the policy board members noted that “the unemployment rate was 4.2 per cent in August, unchanged from July. The underemployment rate had edged lower while other measures of labour underutilisation had been broadly stable. Business surveys and liaison suggested that availability of labour had been little changed. Half of the firms that mentioned the labour market in liaison described labour availability as tight.”

All in all, the RBA thought that there were still too many people with a job and so they kept rates steady because they did not want to do anything to stop unemployment rising.

Congratulations, it worked.

Never mind that in its August Statement on Monetary Policy, the RBA forecast that unemployment would not rise above 4.3% for the next two years!

Oops.

Last month when announcing the decision to keep the cash rate at 3.6% the governor of the RBA, Michele Bullock, stated that she was unsure how restrictive that level of interest rates was.

The evidence is now clear that the current level is still slowing the economy. It is more vital than ever that interest rates are cut again unless the RBA wants to see unemployment keep rising.