Targeting Inflation Through Higher Joblessness
RBA Governor Michele Bullock Warns Unemployment May Need to Reach 5% to Curb Inflation
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Key Points
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Raising unemployment from 4.5% to 5% would mean roughly 83,000 additional people becoming jobless, assuming the size of Australia’s active workforce remains unchanged.
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The RBA views the current 4.5% unemployment rate as the lower limit of the range likely to bring inflation down, while August labor-force figures were expected to show unemployment holding at 4.5%.
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The RBA forecasts productivity growth of only 0.7% by December 2028; Treasury, meanwhile, expects Australia’s labor-force participation rate to rise gradually toward a peak of 67.7% by 2040.
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Bullock said Australia’s slow productivity growth means even relatively subdued economic growth can push inflation above the RBA’s 2%–3% target band, and suggested governments could improve productivity by cutting red tape or increasing competition while businesses also need to become more dynamic.
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The RBA had raised rates at the first three meetings of the year before holding them steady, while central banks in Europe, the United States and Japan had continued raising borrowing costs in recent weeks.
Reserve Bank of Australia Governor Michele Bullock said unemployment may need to climb to between 4.5% and 5% to cool a still-tight labor market and reduce persistent inflation RBA Source. She acknowledged the social costs of higher joblessness but emphasized that demand is outpacing the economy's supply of goods and services, with tight labor conditions driving up wages and prices RBA Source.
Australia's unemployment rate reached 4.6% in August, the highest in almost five years ABS Data. A rise from 4.6% to 5% would mean roughly 83,000 additional people becoming jobless, assuming the workforce size stays the same Analysis. Financial markets and economists broadly expect the RBA to raise interest rates at its late-September meeting Market Consensus.
Slow Productivity Growth Worsens Inflation Pressure
Australia's sluggish productivity growth is forcing the RBA to push unemployment higher to control inflation. The RBA forecasts productivity growth of only 0.7% by December 2028 RBA Forecast. Bullock explained that slow productivity means even modest economic growth can push inflation above the RBA's 2%–3% target band RBA Governor.
Bullock suggested governments could boost productivity by cutting red tape or increasing competition in key industries RBA Comments. Businesses also need to become more dynamic and innovative. Without productivity improvements, the only way to control inflation is to cool labor demand and raise unemployment Economic Analysis.
Labor Market Shows Signs of Cooling But Remains Tight
Australia's unemployment rate rose to 4.6% in August, up 0.4 percentage points year-over-year ABS August Data. Despite the increase, the country still added 39,500 jobs in August — nearly twice the market forecast Employment Report. The RBA views 4.5% as the lower limit of the range needed to bring inflation down RBA Assessment.
Labor force participation increased by 0.2 percentage points to 67.1% in August ABS Data. Treasury expects Australia's participation rate to rise gradually toward a peak of 67.7% by 2040 Treasury Forecast. More people are entering the job market, even as some lose work.
AI Disruption May Temporarily Raise Joblessness Required to Control Inflation
Bullock warned that artificial intelligence could temporarily raise the unemployment rate needed to contain inflation RBA Governor Comments. As workers are displaced by automation, they will need time to find jobs in new industries and sectors RBA Analysis. This transition period means higher overall unemployment, even if job creation continues in AI-driven fields.
The RBA has held rates steady after raising them at the first three meetings of 2024 RBA Decision. Central banks in Europe, the United States, and Japan have continued raising borrowing costs in recent weeks Global Rates, putting pressure on Australia to follow. Bullock declined to signal how she will vote at the September meeting RBA Statement.
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