RBA’s Kent Says Unemployment to Remain Elevated for Next 2 Years

Australia’s unemployment rate will remain elevated for the next two years, while moderate wage growth and better productivity help the economy adjust to lower mining investment, central bank official Christopher Kent said.

“Unit labor costs have stopped rising relative to our trading partners and even declined just a little since mid 2012,” Kent said in the text of a speech in Sydney today. “This is part of the adjustment to the decline in commodity prices and will assist the non-mining economy regain some competitiveness and generate employment growth as demand for labor in the resources sector turns down.”

The Reserve Bank of Australia cut the overnight cash-rate target by 2.25 percentage points between late 2011 and August to a record-low 2.5 percent to aid a recovery in domestic demand and boost industries like residential construction. Unemployment held at 5.8 percent for the past three months, after reaching 6 percent at the start of the year, and the economy has added almost 100,000 jobs this year.

Some of the rise in jobs “may reflect a ‘catch-up’ after a period of weak employment growth last year,” said Kent, an assistant governor at the RBA. “The bank’s latest forecasts are for employment growth to pick up gradually over the next two years. The unemployment rate is expected to remain elevated over that period, declining from later in 2015.”

Currency Strength

The Australian dollar climbed from 2009 to 2012 as the resource investment boom intensified, rendering other parts of the economy uncompetitive. It fell last year before rebounding more than 5 percent so far this year.

“A decline in the real exchange rate is one important way in which the economy can adjust to the decline in the terms of trade and the transition to the production phase of the mining boom,” Kent said at today’s event hosted by the Wall Street Journal. “Over the past year, we’ve seen a noticeable decline in the nominal exchange rate, although it still remains high by historical standards, particularly given the further decline in commodity prices in recent months.”

About 50,000 jobs in Australia’s auto and parts industry are in jeopardy after Toyota Motor Corp. in February followed General Motors Co. and Ford Motor Co. in announcing plans to quit manufacturing in the country. All three companies cited high costs in their decisions. At the same time, loose monetary policy has boosted household spending. Coles supermarkets and Woolworths Ltd. are among companies adding employees.

Kent said today that that over the past 18 months growth in nominal wages has been matched by higher labor productivity.

“Adjustment via slower wage growth and stronger productivity growth may not contribute as much nor as quickly to a real depreciation as might be expected from a decline in the nominal exchange rate,” he said. “However, it is still preferable to the alternative of little or no adjustment in the growth of unit labor costs, which would come at the expense of more unemployment and the associated economic and social costs.”

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