The seasonally adjusted unemployment rate fell in May to 3.6 per cent, according to the latest labour market data from the Australian Bureau of Statistics (ABS).
This followed an unexpected increase of 0.2 percentage points to 3.7 per cent in April from the 50-year low of 3.5 per cent.
The May result has taken markets by surprise, with observers, including two of the major banks (the Commonwealth Bank and Westpac) anticipating no change.
An additional 75,900 Australians entered the labour market in May, the ABS data revealed, supporting an increase to the participation rate to 66.9 per cent.
However, the underemployment rate increased by 0.2 percentage points to 6.4 per cent.
Despite the improvement in May, analysts expect a gradual deterioration in labour market conditions as the full effect of a cumulative 400 bps in monetary policy tightening filters through to households and businesses.
“Given the rapid increase in population that is underway, a record level of monthly employment growth is required to keep the unemployment rate steady,” CBA noted ahead of the data release.
“As a result, the unemployment rate will grind higher over time.”
Westpac said the trajectory for the unemployment rate would be determined by whether record high levels of labour demand are sustained in the near-term.
“Indicators suggest it remains robust for now, but the outlook is uncertain,” Westpac observed.
“On the one hand, job vacancies and advertisements are at historically elevated levels, and hours worked are rising strongly.
“On the other, emerging evidence from other business surveys points to an unfolding softening in labour demand.”
The release of the latest labour market figures come just over a week after the RBA lifted the cash rate by a further 25 bps to 4.1 per cent.
In its post-meeting statement, the Reserve Bank’s monetary policy board acknowledged labour market conditions were weakening but “remain very tight”.
“Firms report that labour shortages have eased, although job vacancies and advertisements are still at very high levels,” the RBA noted.
Tightness in the labour market, the central bank added, has put upward pressure on wages growth, undermining the RBA’s fight to return elevated inflation to the 2–3 per cent target range.
“Wages growth has picked up in response to the tight labour market and high inflation,” the RBA added.
“Growth in public sector wages is expected to pick up further and the annual increase in award wages was higher than it was last year.
“At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.”
As such, the board said it “remains alert” to risks associated with expectations of ongoing high inflation, including the potential contribution to larger wage increases.
“Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms,” the RBA added.
The RBA said “some further tightening of monetary policy may be required” to achieve its inflation target.
Some observers, including ANZ and NAB economists, are projecting a terminal cash rate of 4.6 per cent.