christopher kent : cyclical and structural changes in the labour market address by mr christopher kent, assistant governor ( economic ) of the reserve bank of australia, to the wall street journal ’ s labour market developments gathering, sydney, 16 june 2014. * * * i thank david jacobs, kim edwards, daniel de voss, sharon lai and josef manalo for help in preparing these remarks. i appreciate the opportunity to talk to you today about some key cyclical and structural forces affecting the australian labour market over recent years. not surprisingly, we spend considerable time and effort at the bank trying to understand labour market developments given their relevance to both unemployment and inflation. developments over the past couple of years over recent months, labour market conditions have shown some signs of improvement. following only very modest growth last year, employment has grown by almost 0. 9 per cent so far this year. the unemployment rate ticked down a few months ago and the participation rate appears to have stabilised somewhat, after a significant decline through 2013. these improvements appear consistent with some signs of better growth in economic activity, although i ’ ll come back to this point in a few minutes. 1 despite these improvements, there is still a fair degree of spare capacity in the labour market. this is apparent across a number of dimensions ( graph 1 ) : • the unemployment rate is high relative to its recent history • the participation rate is around the lowest it ’ s been over the past eight years • there ’ s been a significant decline in the ratio of employment to the working - age population since 2010 • wage growth has declined, to be well below its average of the past decade. graph 1 the lags between activity and the labour market are discussed in rba ( 2014 ), “ box b : lags from activity to the labour market “, statement on monetary policy, may, pp 39 – 41. bis central bankers ’ speeches my plan today is to discuss some of the key forces at play that have led the labour market to this point, and think about prospects for the future. demand and supply : what ’ s driving labour market developments? like all markets, developments in the labour market reflect the interplay of demand and supply. these determine outcomes in terms of quantities ( such as employment ) and prices ( namely wages ). there are three key developments that help to explain the dynamics over the past few years : • first, over that period there has been a weakening in the growth of labour demand, reflecting the decline in mining investment and the

– and through the forthcoming introduction of the leverage ratio. furthermore, the european fiscal framework has been enhanced across several dimensions, thus addressing the sovereign - to - bank nexus : the stability and growth pact has been amended, reinforcing both its preventive and its corrective arm ; member countries have strengthened their national budgetary processes and institutions ; and a surveillance mechanism has been set up for early detection and correction of macroeconomic imbalances. finally, the european stability mechanism was established. second, tightening regulatory standards on sovereign exposures can hardly be sufficient to safeguard banks against their domestic sovereign default. direct exposures are just one of the channels that transmit sovereign risk to the domestic banking system. sovereign defaults are associated with severe economic crises, which have a widespread negative impact on domestic banks quite independently from the degree of their direct exposure. 6 third, preventing an excessive concentration of risks may be desirable in principle. however, the historical experience shows that in a “ normal ” economic environment eu banks autonomously reduced their sovereign portfolios ( as well as the concentration ) without any need for regulatory nudges ( fig. 1 ). indeed, the evidence suggests that most eu countries ’ sovereign holdings behaved counter - cyclically : they declined during the “ normal period ” between the introduction of the euro and the beginning of the financial crisis ; increased during the crisis period ; and started once more to decline in the last two years, as the crisis began to subside ( see the cases of italy - fig. 2 – and spain ). 7 this pattern suggests that regulation is not an important driver of banks ’ exposures towards their own sovereign : throughout this entire period, the prudential treatment of sovereign exposures remained broadly unchanged. it also indicates that high sovereign exposures are a symptom and a consequence, rather than a driver, of the crisis. 8 fourth, whereas in “ normal ” times banks ’ sovereign exposures declined spontaneously, the imposition of risk weights or – worse – tight concentration limits could create substantive difficulties in “ crisis ” times. they could be particularly disruptive for banks ’ ability to act as shock absorbers in the event of sovereign stress. there is evidence that sovereign debt to be precise, in the eu the capital exercise in 2011 and the subsequent stress tests have amounted to the introduction of a capital charge on sovereign exposures. in spite of this, exposures continued to increase until the sovereign crisis subsided, in 2014. committee on the global financial system ( 2011 ),