Spotlight on Australia - January 2025

Vacancies have more than doubled for some Australian industries since just before the pandemic. Companies just can’t get enough workers! This is despite rising interest rates and a slowing economy. The situation is similar in the US, however, there are some key differences.

Job vacancies remain at record levels

As the chart above shows, the pandemic marked a structural shift in labour demand in Australia. Job vacancies have risen dramatically for most industries but for several service industries, such as arts and recreation services and accommodation and food services, the number of vacancies have more than doubled.

This increase in vacancies is despite the participation rate (percentage of working-age people working or looking for work) and the employment-to-population ratio having recovered to well beyond their pre-pandemic levels (see charts below). More people are working in absolute and relative terms but there are still many more jobs available!

The increase in vacancies  is also despite interest rates rising 425 bps between 2022 and 2023 and GDP trending down since September 2022.

Bottleneck

On one hand, we have a labour market that is stronger than it was pre-pandemic and on the other hand, we have a slowing economy - so what on earth is going on?

The answer is a bottleneck. The sudden increase in demand for labour post-pandemic was so fast that the labour market has not yet been able to adjust along its long-term equilibrium (from points A to C in the diagram below). Instead companies have faced a much steeper short-term supply curve (with equilibrium at point B) which has meant they face higher wages (W1) and excess demand (E2-E1). And it is this excess demand that has resulted in record vacancies. The reluctance of workers to change jobs immediately following the pandemic has also contributed.

The other area where the impact of the bottleneck can be seen is in unemployment. Despite slowing growth and rising interest rates, unemployment has fallen and then remained stable post pandemic (see chart below).

RBA Governor Michele Bullock has often talked about the bottleneck in the wider economy, when she has talked about aggregate demand being higher than aggregate supply, even as aggregate demand is falling.

Healthcare and social assistance

One industry stands out in terms of the rise in vacancies post pandemic: healthcare and social assistance. It is the largest industry by employment and its vacancies are up 111% since the pandemic.

Its vacancies have been growing over the last decade (see chart below) but with the jump since the pandemic, it now has more than double the vacancies of retail trade, which is the second largest employer, and has more vacancies than manufacturing, mining, construction, and the transport, postal, and warehouse industries combined.

Despite immigration, Australia’s population is aging and demand for labour in health care and assistance will only grow over the next 50 years. By 2050, there will be around 4 old people per 10 working-age people (the old-age dependency ratio), today, that ratio is only 2.8 old people.

US: the same but different

Anyone who has been following developments in the US labour market post pandemic will have noted the similarities with what has happened in Australia. Namely, rising vacancies (see chart below) and low unemployment despite a recovery in the participation rate and employment numbers, and a slowing economy and rising interest rates.

However, there are at least two key differences between the American and Australian experiences.

Australia has a much higher participation rate and the gap between the rate of the two countries has only grown since the pandemic (see chart below). The US participation rate is also below the OECD average.

Some US commentators ascribe its lower participation rate to baby boomers retiring early, and this was exacerbated by the pandemic. However, Australia has its own large baby-boomer cohort, and for most of this century has had an old-age dependency ratio higher than the US (see chart below).

Research by the Federal Reserve Bank of San Francisco in 2018 suggests that the reason the US participation rate is lower is that less US women stay in the workforce as they get older compared to other OECD nations. The reason being that other countries have introduced more pro-women and child-friendly workplace policies over recent decades.

The other main difference between the Australia and the US experience is that the professional and business services industry competes with health and social assistance for the most number of vacancies, pre and pst pandemic (see chart at the start of this section). Manufacturing vacancies are a strong third. In Australia, health and social assistance stands alone.

As already mentioned, until recently Australia had a higher old-age dependency ratio than the US, which could account for its higher vacancies in healthcare and assistance compared to other industries.

The stronger relative growth in the number of vacancies in accommodation and food services and retail in Australia compared to professional services in the US and manufacturing, shows the structural differences and points of recovery between the two economies. 

Final thoughts

Like the US, Australia still has a labour market bottleneck. The bottleneck is easing but looks likely to remain in the medium term.

This of course has implications for monetary policy. It explains why rising interest rates have been better at reducing inflation for goods compared to services - service industries are more labour dependent than manufacturing.