On Thursday the latest labour force data for June 2018 will be released. The market consensus forecast is that the unemployment rate will remain around 5.4% a four-year low-point based on a steady, but very high labour force participation rate of 65.5% and employment growth around 16,000 in the month. If the numbers are around where the market expects it will mark another month of solid improvement in the labour market and a month closer to what is shaping up as quite a squeeze starting to develop in the labour market and one that will almost inevitably lead to noticeably higher wages growth over the next year or so.

The factors promoting the squeeze are continuing strength in employment growth; job vacancies rising much faster than the pool of unemployed labour; and a cut back in immigration numbers.

If employment rose another 16,000 in June (the market consensus forecast), employment growth in 2017-18 will total around 290,000, or up around 2.4% y-o-y. While employment growth has moderated in the first half of 2018 from the extraordinary 400,000+, 3% y-o-y+ annual pace in late 2017, it continues to run at a very fast pace. Comparing with the United States for example, a 16,000 lift in Australian monthly employment when adjusted for the difference in size of the US population and economy is the equivalent of around 210,000 monthly lift in US non-farm payrolls.

How well Australian employment has been growing has been poorly recognised in Australian news reports, perhaps because stories of job cuts – such as in the banking sector of late – make more sensational headlines than stories about where labour is being recruited even though those recruitments have been considerably outnumbering job losses over recent years. The sense that jobs growth is not as good as it really is can also promote other blind spots relating to how quickly Australia is running towards labour shortages. Local financial market sentiment, especially the view that the RBA is under no pressure to lift the cash rate, represents a significant blind spot.

Total employment growth has been growing fast but advertised job vacancies have been growing even faster. Job vacancies, according to the quarterly survey by the Australian Bureau of Statistics, rose to a record high 236,000 in its latest May report, up 5.7% q-o-q and by 24.1% y-o-y. Between May 2017 and May 2018 the number of people unemployed in Australia edged down by 0.4% y-o-y.

Looking at the relationship between the number of job vacancies and the number of unemployed people, there were 3.77 unemployed people for every job vacancy advertised in May 2017, but the number had fallen to 3.03 unemployed people for every job vacancy in May 2018. The sharp fall in this ratio over just one year provides one indication of the squeeze developing in the labour market. The ratio looks set to fall even further over the next year.

When employers seek increasingly large numbers of staff as they are currently according to job vacancy statistics the pool of unemployed people often only provides a small part of what they need because of the lack of suitability of many of those unemployed to fit the job profiles offered. Many of the vacancies will be filled by poaching staff from other employers or finding skilled migrants to fill positions.

Australia still has a large annual migrant quota, although over the past year by applying migration requirements more rigorously has undershot its migrant quota by around 30,000 people. As a result, net immigration in 2017-18 was the lowest in ten years and the Government is giving indication that it will continue to limit migration over the 2018-19 year too. Lower intake of skilled migrants coinciding with still rapidly rising job vacancies and a diminishing pool of unemployed implies that employers will have to compete more to get the labour they need. Wages growth seems almost certain to accelerate in this tightening labour market.

We will watch with interest the June labour market report when it is released on Thursday. If it shows another respectable increase in employment it will be another sign that the RBA may soon need to factor in to its economic forecasts for 2019 greater upward pressure on wages and inflation than it is currently allowing. Such a move will be a surprise for local financial markets increasingly taking a view that not only is the RBA under no pressure to lift its cash rate, but the next move may possibly be downwards. That view is very much at odds with what seems to be happening in the labour market.