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Employment, wages and inflation

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Employment, wages and inflation

Labour market

The labour market has remained more resilient than expected at Budget, consistent with stronger growth outcomes. The unemployment rate is now expected to peak at around 8 per cent, down from 8½ per cent at Budget. This still represents a significant deterioration in the labour market over the forecast horizon.

Employment growth is expected to be flat through the year to the June quarter 2009, slightly stronger than the ¼ per cent contraction published at Budget. Employment is anticipated to contract by 1½ per cent through the year to the June quarter 2010, in line with Budget. This equates to a less severe fall in employment than previous downturns. A broad-based, albeit weak, recovery in the economy expected for 2010-11 will support employment growth, resulting in employment increasing by ¾ per cent through the year to the June quarter 2011.

Weakness in employment and solid growth in the labour force is expected to result in a higher unemployment rate.

Although the participation rate is expected to decline, in the near term there is expected to be some support to participation from older workers remaining in the workforce in reaction to adverse wealth effects. As such, the participation rate is expected to remain at high levels at 65½ per cent in the June quarter 2009, before declining gradually over the next two years to 64¾ per cent in the June quarter 2010 and 64½ per cent by the June quarter 2011.

Chart 10: Employment Growth and Participation Rate

Source: ABS Catalogue Number 6202.0 and Treasury.

Wages

The outlook remains broadly unchanged from Budget, with wages growth expected to slow in line with a weakening labour market.

Wage outcomes since Budget show that slowing demand for labour is beginning to exert a downward influence on wages growth, with growth in the WPI moderating in the March quarter, though still remaining elevated in through the year terms.

The National Accounts measure of average weekly earnings fell sharply in the March quarter, partly reflecting a fall in average hours worked. The fall in average hours worked indicates that employers are cutting back employees' hours in response to weakening demand for their outputs, a trend that is also reflected in the rising share of part-time employment seen over the past year.

Prices

Inflation forecasts are broadly unchanged from Budget. Both headline and underlying inflation are forecast to ease over the forecast period.

The inflationary pressures from higher oil prices and a smaller output gap relative to Budget are expected to be balanced by lower wage growth and import prices.

Both headline and underlying inflation are expected to be 1¾ per cent through the year to the June quarter 2010 and 1½ per cent through the year to the June quarter 2011. The WPI is expected to grow by 3¼ per cent through the year to the June quarters of 2010 and 2011, unchanged from Budget.