The view on jobs from booming NSW supports Reserve Bank governor Philip Lowe's idea that the Australian economy is close to the level at which tightness in the jobs market starts fuelling desperately needed wage inflation.
With unemployment at 4.8 per cent in the state, NSW is close to the full employment level implied by a jobless rate of 4.75 per cent, budget papers released on Tuesday show. Still, wage inflation in the state is the weakest on record, in line with the national trend.
It is why the governor urged Australians on Monday not to trade job security for a pay rise, telling an audience in Canberra he hoped ultra-low jobless levels would "energise" the labour market.
It is NSW that remains best placed to test the RBA's faith in NAIRU – the non-accelerating inflation rate of unemployment.
"The problem with this is, it's one of those things in the economy we put a lot of weight on but we can't actually observe," said Paul Dales, economist at Capital Economics. "We can see how much retail spending there is in the economy or how many people don't have a job; we can't see what the NAIRU is."
The problem with NAIRU is central banks keep uncovering new pockets of slack in the job market, even when they hit the target level. Last week US Federal Reserve chairwoman Janet Yellen was questioned about the Fed's downward revisions to NAIRU.
"Inflation doesn't respond very much or very quickly to movements in unemployment," Dr Yellen said. "Nevertheless, that relationship, I believe, remains at work."
The national unemployment rate was 5.5 per cent in May – half a percentage point above the RBA's view of full employment for the broader economy.
However, NSW retains some spare capacity, and interstate migration trends are transmitting national "downward" wage pressure to the NSW workforce. The under-utilisation rate in NSW is 12.9 per cent, compared with 15 per cent nationwide. A wage inflation forecast rising to 2.5 per cent for 2018-19 is supported by activity in the construction and professional services sectors.
The allure of NAIRU has never been greater. But Capital finds that even though in most advanced economies unemployment is below GFC levels, the natural rate of unemployment is lower than it used to be.
That's because the labour force is better educated and more adaptable, and the internet is better at matching up employers and jobseekers. Further, older people are staying in the workforce longer because they cannot afford to retire, female participation is higher and disenchanted people are returning to the workforce.
The implications are that interest rates stay lower for longer because wage inflation is insufficient to keep up with the cost of living.
"On top of that, there's a lot of companies that have flatter cost curves now," Mr Dales said, meaning even when the business cycle is booming, technology means they don't have to hire more staff.
Budget papers show that NSW's share of net overseas migration is at the highest level since the early 2000s, at about 40 per cent. Even high house prices are not deterring NSW arrivals, with interstate net outflows tracking at 12,000 a year, below the average of 17,000.
"These flows have lifted inward migration well above the historic average of 0.5 per cent of the population, driving strong working-age population growth and demand for goods and services," the budget papers say.
