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Rethinking unemployment as wages languish


Australia’s headline unemployment rate continued to plunge in July, falling to just 4.6%, with 639,200 people without a job. The remarkable unemployment rate has not however contributed to the expected wages growth that can drive the economy from its economic woes and long-term debt challenges.

The orthodox thinking is that when unemployment rates fall progressively, wages will rise. It’s a demand and supply thing, considered along classical economic lines. So, what has occurred with unemployment rates as the pandemic has progressed is – in its own right – little short of remarkable. As we can see below, Australia has experienced ten successive months of falling unemployment.


As we have routinely discussed in Statistics Count, the unemployment rate is one thing, but it is the make-up of the counter-factual that is more significant. That is, we need to understand what is going on with employment, to see the real impact on the economy.

While the number of unemployed people declines, employment levels have increased, to the point where a record 13.156 million people had a job in July 2021. That was just 2,000 people more than the month before, as the Participation Rate (the proportion of people in work or actively seeking work) fell to 66.0%.

Another indicator of interest is the balance between part time and full time work. In July, full-time jobs declined by 4,200, while part time work lifted 6,400 jobs. Not much of a difference perhaps, but a reversal of a trend, if nothing else.


Coupled with the changing balance in the full-time to part-time work numbers is the slight (0.1%) rise in the Underutilisation Rate. It lifted to 12.9%, representing the combination of a falling unemployment rate and a rising underemployment rate.

Underemployment is an increasingly insidious measure of employment – telling us of people with work who need more hours. It used to be described as people ‘wanting’ more work, but that language supposes that a person with a casual few hours cleaning work is desiring additional work, rather than desperately seeking it. We focus economy wide attention on unemployment rates, but truth is that the total underutilisation rate tells the true story of economic loss.


The rising underutilisation rate was driven by lockdowns more than anything else. In July, the average hours worked per person fell 0.2% to go with June’s fall of 1.8%. Fully 2% of hours worked were lost to the economy over June and July, and August will be worse. Historic average hours worked – shown below – are 85.72 per person per month. Right now, the average is down to 85.04 hours. That may not sound like much at just 0.68 hours per month, per person, but that is for 13,156,400 people in work, or a massive 8.9 million hours of lost opportunity in July alone.


Meantime, and clearly related to perceived bargaining power and the uncertainty of so much employment, Australia’s wages growth continues to languish behind inflation and is way below the levels required to truly stimulate the economy.

Two charts tell the grim story.

The first displays annual wages growth in the private and public sectors. With combined wages growth at 1.7% on an annualised basis, the private sector contributed 1.9% of the growth and the public sector 1.3%.


Now, as Greg Jericho wrote in The Guardian, some of the stall in wages growth is linked to State Governments holding off wages negotiations as they navigate the pandemic, but the longer-term impact is probably the Federal Government refusing all wages increases ahead of private sector wages growth.

The result is the public sector has the lowest ever level of recorded wages growth, right at a time when it is needed most.

The second chart emphasises this point, showing the private sector growth at 0.5% for the quarter and a static 0.3.6% growth for the public sector.


Jericho does the analysis and makes the excellent point that under past conditions, with unemployment at 4.9% and underemployment at manageable levels, expectations would be that wages would grow. He writes:

“I have noted often how since 2016 the link between wages and unemployment has shifted – where once an unemployment rate of, for example, 5.5% would have wages growing over 3.25%, now only has growth of around 2%.”

To underscore the problem this creates for the economy, Jericho makes the most salient point – all the wages growth of the last year has been consumed by the higher prices reflected in the inflation rate. That means spending power is pretty much exactly what it was a year ago – and that will not grow the economy, especially as we approach full employment.



Posted Date: August 25, 2021

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