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The Labour Market during and after the Terms of Trade Boom

Author

Listed:
  • Kathryn Davis

    (Reserve Bank of Australia)

  • Martin McCarthy

    (Reserve Bank of Australia)

  • Jonathan Bridges

    (Reserve Bank of Australia)

Abstract

During the terms of trade boom, strong growth in output prices meant that the real cost of labour declined from the average firm’s perspective and demand for labour increased. At the same time, the appreciation of the exchange rate helped to contain the increase in consumption prices, so the purchasing power of employees’ earnings rose and growth in the labour force picked up. Overall, Australian employment grew strongly and the unemployment rate fell. Since 2011/12, the terms of trade have declined substantially. The mining investment boom is coming to an end and the less labour-intensive phase of resource production has begun. While mining-related labour demand has declined, low interest rates and the depreciation of the exchange rate have provided support to labour demand in other sectors. Overall, firms’ output prices and unit labour costs have been little changed since the peak in the terms of trade, though there have been differences between industries. Growth in employee earnings has declined and it is no longer outpacing growth in consumption prices. The lower growth in employee earnings appears to have encouraged firms to retain or employ more workers than would otherwise have been the case. Growth in the labour force has also responded to changes in labour market conditions, and population growth has slowed. This labour market flexibility has helped to smooth the adjustment following the end of the terms of trade boom and limit the increase in the unemployment rate.

Suggested Citation

  • Kathryn Davis & Martin McCarthy & Jonathan Bridges, 2016. "The Labour Market during and after the Terms of Trade Boom," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 1-10, March.
    • Handle: RePEc:rba:rbabul:mar2016-01
    as

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    File URL: https://www.rba.gov.au/publications/bulletin/2016/mar/pdf/bu-0316-1.pdf
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    References listed on IDEAS

    as
    1. Adam Gorajek & Daniel Rees, 2015. "Lower Bulk Commodity Prices and Their Effect on Economic Activity," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 31-38, September.
    2. Peter Tulip, 2014. "The Effect of the Mining Boom on the Australian Economy," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 17-22, December.
    3. Michael Plumb & Christopher Kent & James Bishop, 2013. "Implications for the Australian Economy of Strong Growth in Asia," RBA Research Discussion Papers rdp2013-03, Reserve Bank of Australia.
    4. Vanessa Rayner & James Bishop, 2013. "Industry Dimensions of the Resource Boom: An Input-Output Analysis," RBA Research Discussion Papers rdp2013-02, Reserve Bank of Australia.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Dean Hyslop & Amy Rice & Hayden Skilling, 2019. "Understanding labour market developments in New Zealand, 1986-2017," Reserve Bank of New Zealand Discussion Paper Series DP2019/02, Reserve Bank of New Zealand.
    2. Geoff Weir, 2018. "Wage Growth Puzzles and Technology," RBA Research Discussion Papers rdp2018-10, Reserve Bank of Australia.
    3. Sean Langcake & Emily Poole, 2017. "The Resources Economy and the Terms of Trade Boom," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 27-34, September.

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