More tariffs and Australia’s changing labour market

It’s been a quiet week on the Australian data front. Monthly survey numbers on consumer sentiment reported that the RBA’s February 2025 rate cut, together with easing cost of living pressures, had produced an improvement in confidence this month, although the latest weekly data captured the adverse impact of ex- Tropical Cyclone Alfred and (maybe) of increased global uncertainty. 

Meanwhile, NAB’s monthly business survey showed business confidence fell back into negative territory last month, even as business conditions improved modestly. Below, we take the opportunity of a data-light week to dig into last Friday’s ABS Labour Account release and examine recent developments in vacancy rates and industry employment shares, along with post-pandemic trends in non-market and public sector employment.

Otherwise, the main Australian economic news in recent days has been the arrival of promised US tariffs on steel and aluminium and Canberra’s failure to secure an exemption. As noted a few weeks back, the relatively modest size of these items in Australia’s merchandise trade basket means that direct macro implications are limited. More interesting is what these will tell us about the (lack of) Australian leverage here. We have a Free Trade Agreement (AUSFTA) with the United States. We run a bilateral trade deficit (bilateral imbalances are supposedly one important focus of President Trump’s ire although – in a case of somewhat unhelpful timing –unusually we did manage to run a monthly surplus with the United States in January this year). And we have pledged to spend what could eventually add up to hundreds of billions of dollars on nuclear submarines. None of which was enough to secure a deal. Trade deals are proving to be long-lived right now.

Next up on the trade front are reciprocal tariffs under the so-called ‘Fair and Reciprocal Plan’, which is currently scheduled to take effect from 2 April. In theory, this should not pose much of a threat to Australia. After all, according to the US Trade Administration itself, under AUSFTA ‘99 per cent of US-origin goods enter Australia duty free’. And according to World Bank data, Australia’s average applied tariff rate is only about one per cent (compared to 1.5 per cent for the United States). But – and no surprise here – it might not be that simple. The White House has also said it will consider a range of non-tariff barriers including value-added taxes (which could put the GST in the cross hairs) and ‘burdensome regulatory requirements’ (the United States doesn’t much care for some of Australia’s sanitary and phytosanitary measures (see pages 21-22)). Applied worldwide, that approach would seem to make for an even more horrendously complex process than just seeking to match tariff rates, but then, these are strange times.

Finally, a quick note to say thank you to those readers and podcast listeners I managed to chat to at the AGS. It was lovely to meet you.

The shifting labour market

Last Friday, the ABS released Labour Account data for the December quarter 2024. According to the Bureau, on a seasonally adjusted basis, total jobs increased 0.4 per cent over the quarter to 16.4 million, filled jobs rose 0.4 per cent to 16 million and the share of vacant jobs remained at around 2.1 per cent, although the number of vacancies rose 2.3 per cent, breaking a run of eight consecutive quarterly falls and marking the first increase since the September quarter 2022.

The Bureau also highlighted that the number of multiple job holders rose to over one million for the first time in the Australian labour market, while the rate of multiple job holding returned to a record high of 6.7 per cent.

The ABS reckons the Labour Account is the best source for industry and sectoral employment data, including the split between market and non-market industries and between public sector and private sector jobs. It therefore offers a useful view of structural shifts in the Australian labour market since the COVID-19 pandemic. For example, according to the vacancy rate discussed above, the current post-pandemic rate of vacancies at 2.1 per cent (down from a peak of 3.1 per cent in September 2022) is well-above the pre-pandemic rate, which averaged just 1.4 per cent between end-2009 and end-2019. All else equal, that suggests tight labour market conditions and the possibility of a labour market matching issue for businesses.

A look at the structure of employment by industry shows that the most important source of filled jobs (that is, jobs that involve a relationship between an employee and employer, as opposed to jobs that exist in the absence of an employed person, which are classed as vacant jobs) in the economy is the Health and social assistance industry. This is followed by Retail trade and then by Professional, Scientific and Technical Services. That order is the same as pre-pandemic, in the December quarter 2019.

Since the pandemic, however, there has been a marked increase in the share of filled jobs accounted for by the non-market sector (defined here as comprising the Public administration and safety, Education and training, and Health care and social assistance industries). That is mostly due to a substantial rise in the relative importance of the Health care and social assistance industry. The biggest contraction in job share over the same period has been in Accommodation and food services.

Overall, between December 2019 and December 2024, the non-market sector’s share of filled jobs has risen by almost four percentage points. As the chart below shows, this represents a trend that started well before the pandemic, although there are also signs that the shift has accelerated post-pandemic.

Note that this increase in non-market jobs has not been matched by an equally dramatic increase in public sector jobs. While the latter’s share of total filled jobs is up from 14.5 per cent in the December quarter 2019 to 15.1 per cent in in the December quarter2024, that leaves it only marginally higher than the 15 per cent series average pre-pandemic (September quarter 2010 to December quarter 2019).

What is driving change in the Australian labour market?

Both the detail of the labour account data and the broader experience of OECD and rich economies suggest several noteworthy characteristics of post-pandemic labour markets.

First, once the worst of the pandemic was over, there was a tendency for labour demand to grow faster than labour supply. In the Australian context, that is visible in the still-elevated vacancy rate noted above, as well as in other signs of a tight labour market. Initially, on the labour supply side that gap was driven by the impact of the abrupt cessation of migration flows during the pandemic, along with a longer-running slowdown in the rate of growth in the domestic working age population. Subsequently, on the demand side the post-COVID recovery then proved to be a ‘job-rich’ one as cross-country unemployment rates coming out of the pandemic fell roughly twice as quickly as might have been expected based on historical experience.

Second, the OECD reckons that COVID-19 exacerbated existing labour shortages that had been increasing across rich countries since the global financial crisis. In part, this simply represented the impact of cyclical shortfalls due to temporary effects arising from the pandemic and the subsequent policy response. Those cyclical effects have now faded. But there have also been structural factors at work, and they remain in play.

Third, some of those structural factors influencing labour demand include digitalisation, the growing adoption of Artificial Intelligence (AI), and the green transition. These trends are driving significant changes in skill requirements across industries throughout OECD member countries, particularly in sectors such as professional services, information communications technology and finance. OECD survey results report that at least 40 per cent of firms experiencing labour shortages also report changes in skill needs – a much higher proportion than firms without labour shortages.

Fourth, another important structural factor is population ageing. This demographic shift has broad implications for labour supply (for example, through its impact on participation rates, and potentially via changes in the rate of skill obsolescence). It also has consequences for specific sectors and industries, particularly health and aged care, where population ageing boosts demand.

Fifth, in a tighter labour market, poor working conditions and low pay are more likely to contribute to labour shortages via an adverse labour supply response, given that workers have more alternative options. OECD survey data reports that a significant share of firms across OECD countries report experiencing shortages because they offer poor conditions (for example, long unsocial hours in transportation, limited opportunities for remote or flexible work in accommodation and low wages and elevated levels of stress in health and aged care).

Several of these trends are visible in the shifting job shares in Australian employment already noted above. They may also be apparent in the changing pattern of vacancies by industry, where high vacancy rates in Accommodation and food services could be consistent with adverse trends in labour supply, while those in Professional, scientific, and technical services could reflect increased skills shortages or mismatch.

What happened on the Australian data front this week?

The monthly Westpac-Melbourne Institute Consumer Sentiment Index rose four per cent over the month in March 2025, climbing to an index level of 95.9 from 92.2 in February. That took the index to a three-year high and closer to the ‘neutral’ level of 100, where the number of optimists and pessimists are in balance. Westpac pointed to a combination of the RBA’s February 2025 rate cut and a further easing in cost-of-living pressures as key drivers of the increase in confidence. It also noted that while consumers were feeling more upbeat about domestic developments, they had become more concerned about international conditions.

The weekly ANZ-Roy Morgan Consumer Confidence Index fell 0.8 points to an index reading of 86.9 for the week ending 9 March 2025. Some of the decline reflected the impact of ex- Tropical Cyclone Alfred on Southern Queensland and northern NSW, while there may also have been negative spillovers related to global economic uncertainty. Weekly inflation expectations rose 0.2 percentage points to 4.7 per cent.

The NAB Monthly Business Survey for February 2025 reported that business conditions improved slightly last month, while business confidence fell back into negative territory. Business conditions edged up from +3 index points in January to +4 index points in February. Both the trading and profitability subcomponents strengthened by one percentage point, although the employment subindex retreated by one percentage point. In contrast, business confidence fell six points to an index reading of -1 index points, largely unwinding the improvement registered in January this year. NAB said the decline in confidence occurred across all industries, with the mining, recreation and personal and transport and utilities sectors leading the fall. On the cost front, the survey reported that growth in labour costs slowed from 1.7 per cent to 1.5 per cent (quarterly equivalent terms) while growth in purchase costs picked up from 1.1 per cent to 1.5 per cent. The rate of increase in final products prices eased from 0.8 per cent to 0.5 per cent, while retail price increases were unchanged from January’s result at one per cent.

The ABS Monthly Business Turnover Indicator reported increases in 10 of the 13 published industries in January 2025, translating into a 1.4 per cent monthly rise in the 13-industry aggregate, which was also up 3.8 per cent over the year. The Bureau noted that turnover was up 0.6 per cent over the month on a trend basis, which marked a sixth consecutive monthly increase and the strongest period of sustained growth in the Indicator since August 2022.

The ABS said the total value of residential dwellings in Australia rose by $26.4 billion to $11 trillion in the December quarter of last year. The number of residential dwellings rose by 53,200 to 11.3 million, while the mean price fell by $2,300 over the quarter to $976,800. By state, the mean price of dwellings in NSW remains the highest in the country at $1,214,100, while the lowest mean price is still to be found in the Northern Territory ($500,900).

In the December quarter 2024, there were 69 industrial disputes involving 25,200 employees and 53,800 lost working days. Across the year to December 2024, there were 194 disputes and 139,100 working days lost. That compares to 198 disputes and 99,300 working days lost in 2023.

Last Friday, the ABS said its Monthly Household Spending Indicator (MHSI) rose 0.4 per cent over the month in January 2025 (current price, seasonally adjusted) to be up 2.9 per cent over the year. That marks a fourth consecutive monthly increase for the MHSI and follows a 0.2 per cent rise in December 2024 and a 0.8 per cent increase the month before. The Bureau said growth in household spending in February reflected more expenditure on a range of services including health, air travel and sports and physical recreation. In contrast, spending on goods fell 0.6 per cent. That latter fall broke a run of three months of spending increases fuelled by promotional activities including Black Friday sales at the end of last year.

Other things to note . . .

• The ABS presents 11 facts about the Australian economy in the final quarter of 2024.
• According to the ANU’s 2025 Election Monitoring Survey Series, Australians are increasingly pessimistic about the future (50.3 per cent of respondents believe life will be worse in 50 years, while only 16.3 per cent believe it will improve) while life satisfaction has fallen to its lowest level since the COVID-19 lockdowns (only 21.7 per cent of respondents believe their life has improved in the past year, while 30 per cent believe it has worsened).
• Two interesting pieces from the e61 Institute. The first asks, who pays from bracket creep? It finds that, holding income percentiles constant, as of 2022 nearly everyone was paying a higher average tax rate than in 2012 (about one per cent more), with rates having risen most for the top quartile of earners, given the stability of the top income tax bracket over this period.  The second piece considers whether tariffs are a first step in a new world of corporate taxation, paving the way for a destination-based cash flow tax (DBCFT). A DBCFT would change the tax base from corporate income to corporate cash flow and would stop taxing the worldwide activities of domestic firms and instead tax the domestic activities of all firms (such that imports would be taxed while exports would be exempt). The author also notes that, given the importance of resource exports in the Australian economy, the IMF has estimated that Australia would be a significant loser from a global move to a DBCFT.
• On measuring the cost of catastrophes, post-Alfred. And a look at under-insurance in Australia.
• Related, Insuring the world of tomorrow will require finding a balance between affordability and fiscal viability.
• In the Lowy Interpreter, Jenny Gordon on how Australia should respond to Trump’s tariffs.
• The AFR goes inside the sudden exit of Governor Orr from the Reserve Bank of New Zealand.
• In the FT, Joseph Nye on Trump and the end of American soft power.
• Also from the FT, a Big Read on Japan’s struggle with rising prices.
• The March 2025 edition of the BIS Quarterly Review looks at financial market cross-currents and includes articles on the global drivers of private credit and the evolution of inflation targeting since its introduction in 1990.
• An OECD report on Africa’s urbanisation dynamics. Over the next three decades, Africa’s urban population is set to double from 0.7 billion to 1.4 billion people, giving the continent the second largest urban population in the world after Asia.
• The WSJ examines what went wrong with Saudi Arabia’s Neom mega-project.
• Evidence from Brazil on housing and fertility.
• The Economist magazine on China’s plan to cope with 2025.
• The March 2025 edition of the IMF’s Finance & Development magazine focuses on the economics of talent.
• A look at the ‘productivity J-curve’ which suggests that high costs associated with digitalisation during an investment boom lead to an underestimate of productivity growth. This is because the introduction of a new general-purpose technology (GPT) into the economy will frequently involve investment in a range of intangible assets (for example in recruiting and training skilled labour) to fully exploit it. If associated spending is treated as spending on current costs rather than investment in assets, then these large costs will reduce measured productivity during initial periods of high investment in digitalisation. If instead they are treated as intangible assets, measured productivity will be higher. The authors apply this thesis to data from the US, UK, France, Germany and Japan and find the strongest evidence for a J-curve effect in the United States, which has made considerably larger investments in digitalisation than the rest.
• Can Vietnam escape the Middle-Income Trap?
• The Australia in the World podcast’s incoming government brief.