So far, Australia’s economic recovery from deep recession is progressing better than forecast widely even just a month ago. There are still concerns however that the better-than-expected initial improvement cannot last as income support measures step down crimping spending down the track. These concerns are real but may fade if paid employment lifts and fills the income hole produced as income support steps down. There is some evidence in recent monthly labour force readings that this positive offset from paid employment growth could occur.

The latest labour force report for September released last week was again better than expected, even with the effects of continuing lockdowns in Victoria. Employment fell nationally in September, by 29,500, but that was less than the consensus forecast fall of 35,000. The employment fall was accounted for entirely by a 35,500 reduction in Victoria. Employment rose in all other mainland states and continues an impressive lift since the recession low-point readings back in May.

In New South Wales, employment rose by 3,300 in September and has lifted by 173,900 or 4.5% since May. In Queensland the September lift was an impressive 32,200 and the gain since May has totalled 160,400 or 6.8%.

Both New South Wales and Queensland have been working towards opening their economies to operate in a covid-safe fashion. There is still more work to be done in terms of opening state borders, but internally generated demand within the two states – especially for the regions outside the capital cities – is rising much more strongly than expected.

Life has returned much closer to pre-covid-19 normal in South Australia and Western Australia. In South Australia employment rose by 8,700 in September and has lifted by 35,900, or by 4.4% since May. In Western Australia employment rose by 2,900 in September and is up by 75,900 or 5.9% since May.

Employment has risen enough in much of Australia to stabilise the national unemployment rate around 7% even with a sharply increasing labour force participation rate. Most forecasters do not see the unemployment rate falling below 6% for at least two years but the risk based on what has happened over recent months is that progress may be quicker.

It is worth considering what may happen as the covid-19 lockdown in Victoria eases. Victoria’s lengthy lockdown has generated labour market outcomes at odds with the rest of the nation. Employment fell by 35,500 in September and uniquely is lower than in May, by 20,900 or 0.6%. As restrictions are lifted and the most significant lift for many businesses in Victoria are likely late-October/early-November employment growth could start playing catch-up with the rest of Australia.

It is also likely that covid restrictions elsewhere in Australia will continue to ease adding to employment opportunities. There may not be a perfect match between the income boost from rising paid employment and income loss from the stepping down in income support, but the gap could be less than has been allowed widely in most economic forecasts.

The monthly labour force readings through the covid-19 recession and in the early recovery since have been better than expected even with the extended lockdown in Victoria. As the lockdown in Victoria eases and restrictions elsewhere continue to lift it is highly likely that employment will rise further. Reduction in income support payments will cut back economic growth prospects but tempered by the positive impact of paid employment rising relatively faster than widely expected.

Policymakers will take time to adjust to better-than-forecast improvement in economic conditions. They will quite rightly remain cautious wanting to be certain of the improvement especially with the uncertainties around covid-19. As a result, substantial fiscal stimulus and very easy monetary conditions will remain in play for a period – probably an extended period – even if the economy gathers pace faster than forecast. The likely unusually long lag this time around in policy adjusting to better economic conditions is another factor that points to increasing risk of upside surprises.