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An Australian Labour Market Conditions Index

Treasury Working Paper 2016-041

Release date: 8 December 2016

Angelia L. Grant, Wilma Gillies, Ray Harris and Melissa Ljubic 2 | Working Paper | ISBN: 978-1-925504-18-7

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Treasury Working Paper 755KB

This paper constructs a labour market conditions index for Australia using principal components analysis with 16 labour market variables. The index is broadly consistent with the business cycle in Australia. It shows that there was a large amount of slack in the Australian labour market during the global financial crisis and it has only recently returned to around average conditions. The index explains between 64 and 87 per cent of the variation in half of the labour market variables used in the analysis. The correlation between wage growth and the labour market conditions index is stronger than the correlation with the unemployment rate alone. In addition, the labour market conditions index appears to be a strong leading indicator of wage growth. The index is not sensitive to the addition of other variables.


1 All authors work in the Australian Treasury. The authors would like to thank Jed Armstrong, Christine Barron, Natasha Cassidy, Joshua Chan, Alexandra Heath, John McDermott and Nigel Ray for helpful comments. Correspondence to: Australian Treasury, Langton Crescent, Parkes ACT 2600, Australia. Email: angelia.grant@treasury.gov.au.

2 The views expressed in this paper are those of the authors and do not necessarily reflect those of The Australian Treasury or the Australian Government.

© Commonwealth of Australia 2016

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