Bulletin – March Quarter 2016 The Labour Market during and after the Terms of Trade Boom 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 contain the increase in consumption prices, so the purchasing power of employees' earnings rose and growth in the labour force picked up. 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. However, low interest rates and the depreciation of the exchange rate have supported labour demand in other sectors. 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 is no longer outpacing growth in consumption prices, encouraging 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.

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