Given the positive growth outlook, labour market pressures will become more pronounced over the first half of 2005, at a time when forward indicators of the housing sector are also likely to be strengthening, Westpac predicts.
This could have significant implications for interest rates, the bank's senior economist Andrew Hanlan suggests.
In an analysis of the extent of such shortages, through the lens of labour market tightness, he notes the latest Westpac-ACCI Survey of Industrial Trends revealed that firms have found it increasingly difficult to find labour over the past year.
"The index for this series was at +17 in the September quarter, in line with the highs of 1994 and 1999/00 - periods when the RBA raised interest rates. Indeed, labour is more difficult to find now than in late 2003, when the RBA last tightened monetary policy," he says.
"However, when asked to nominate the single factor most limiting production only 3% of respondents nominated labour - a reading in line with the historical average. In reconciling these apparently contradictory responses it may be that while labour is more difficult to find firms have put in place adequate strategies to combat the current 'bottlenecks'. This is arguably one of the benefits of our more flexible labour market."
Additionally, Hanlan says the Department of Employment and Workplace Relations' skilled vacancy index shows that skill shortages are concentrated among the 'trades' rather than 'professionals'. The level of the total trades vacancies index has doubled over the past three and a half years, while vacancies for professionals remain relatively few.
Supporting this, the Housing Industry Association's 'trades report' found there was deterioration in the availability of trades people in the September quarter, particularly for plumbers. This saw prices and wages continue to rise.
The Association's 'trade contractor price index' rose 1.7% in the period to be up 8.3% on a year ago. The contract price for plumbers jumped 8% in the quarter, and 12.5% over the year.
"The official ABS data show wages accelerating in the construction sector - although not to the extent suggested by the HIA. Aggregate wages growth remains well contained though, reflecting more subdued conditions in the white collar area," Hanlan says.
Another guide to overall labour market tightness, he says, is the employment to population ratio: the higher the ratio the smaller the pool of potential additional workers.
Hanlan reports that the ratio has increased to 60%, equal to the previous peak of 1989, when the Reserve Bank (RBA) was "frantically" raising interest rates.
"However, the ratio of full-time employed to population is well off previous peaks and has been relatively stable for the last three years. This may help to explain the absence of general wage acceleration, which typically emerges as pressure grows in the full-time labour market," he says.
So what's the outlook? Hanlan says business surveys, such as Westpac-ACCI and NAB, point to robust jobs growth. This suggests the unemployment rate will either hold around current low levels or edge down over the forecast period.
"So for the RBA, labour market conditions point to the need for a tightening bias. However, the shades of grey suggest the RBA will be content to watch and wait for some key triggers to emerge. The Bank will focus on the hard employment data, as well as the forward indicators; they will look for evidence of a more pronounced and widespread tightening of labour market conditions; and for any signs that this is flowing through to general wage pressures.
"Given the positive growth outlook, we expect such pressures to become more pronounced over the first half of 2005, at which time forward indicators of the housing sector are also likely to be strengthening," he says.
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