Labour shortages are a top business challenge facing Australian industry today. Across all occupational classes – high and low skilled, professional and technical – employers simply cannot recruit and retain the staff they need.

According to ABS surveys, in June this year 31% of Australian businesses were unable to find suitable staff to fill jobs. Labour shortages were even worse in medium (62%) and large (66%) businesses. Despite the economic headwinds currently facing Australia, our labour markets have not been this tight for over a generation.

And there is a simple explanation – a missing batch of migrants that were unable to arrive during the pandemic.

Australia is a migration-driven economy. In the decade to 2019, Australia attracted an average of 215,000 net new migrants per year, of which two thirds entered employment. With a national labour force of around 13 million people, migration offers an approximate 1.0% infusion of new workers each year.

However, the pandemic temporarily cut this critical labour supply. To stop the intrusion of COVID, Australia closed its international border for 23 months between March 2020 and February 2022.

But very few new migrants were able to enter the country, while many temporary migrants already in Australia chose to return home. As a result, Australia’s net overseas migration (or NOM) turned negative in the second quarter of 2020.

This was historically unprecedented, as it was the first time Australia has experienced a net outflow of people since 1947. The NOM remained negative until early 2022 and is only now returning to normal levels.

Australia lost two years’ worth of new migrants — around 400,000 people — due to border closures.

These missing migrants are now wreaking havoc with Australia’s labour markets. Migrants play a critical role in supplementing the national labour supply, because:

New Ai Group economic analysis shows the impact of the closed border on Australia’s labour force.

As the COVID recession hit in early 2020, the size of the workforce shrank with layoffs and lockdowns. As the economy recovered in late 2021, these jobs were recreated and unemployment levels returned to normal. But with several hundred thousand missing migrants, the labour force couldn’t fully recover.

A ‘labour force gap’ — the difference between the actual Australian workforce, and that which would be expected based on past trends — opened up.

Today, the national labour force is 425,000 workers smaller than it would have been on pre-COVID trends. So, when the Australian economy roared back to life following the COVID recession, we quickly felt the impact of the missing migrants.

A lack of workers saw unemployment steadily fall — from just over 5% before the pandemic to only 3.5% today. The under-employment rate — people employed but looking for additional work — has also cratered, from 9% pre-pandemic to around 6% now.

There is also evidence that the economy has hit the limits of the available labour supply in mid-2022:

The number of unemployed persons has fallen from 700,000 pre-pandemic to 470,000 lowering the supply of available workers by 31%.

As the economy had rebounded, the number of job vacancies has more than doubled — from around 200,000 pre-pandemic to 480,000 today.

There are now about as many unemployed people as advertised jobs in Australia.

It will require the return of normal migration to restore balance in the Australian labour market. Fortunately, there are some positive signs this will occur soon.

The Federal Government has temporarily raised the permanent migration cap from 160,000 to 195,000 in 2022-23, specifically to address workforce gaps.

NOM bounced back very strongly in the first quarter of 2022, indicating pent-up demand for migration to Australia.

But it will take many more years to claw back the migrants lost due to the pandemic border closures. In the meantime, Australia’s tight labour markets are here to stay.


Dr Jeffrey Wilson

Dr Jeffrey Wilson is Ai Group's Director of Research and Economics. He leads our economics team, and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities. He specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.