Australia’s unemployment rate continued to tick along at 5.2% in July, amounting to almost 713,000 Australians without a job. The consensus is now that full employment is around 4.5%, partly to soak up under-employment where workers have insufficient hours to meet their needs. The combination of the two factors – unemployment and under-employment creates a labour under-utilisation rate that is growing, and is dragging on wages, right when the economy could use a little spending.
When fewer people are in work and/or they have fewer hours of work, they earn less income, meaning they can spend less. In a low inflation (low prices growth) environment, it might seem that would be acceptable because lower wages growth and lower prices can match up. But the economics of consumption, economic growth and business reinvestment for example, rely upon consistent growth in prices. And in general, so too does wages growth rely on prices growth.
As a result, latest data, like the unemployment rate shown below, is itself worrying, if only because it appears stuck at the current level, while clearly, it knows how to go lower.
To go straight to the dashboard and take a closer look at the data, click here.
It is when we combine the unemployment rate with the under-employment rate (those wanting more hours) that we can see the labour under-utilisation rate is tracking up. In total, we are talking about the economy under-utilising its nominal labour availability by a climbing 13.6%, impacting about 1.855 million Australians.
To go straight to the dashboard and take a closer look at the data, click here.
The impact of the climbing under-use rate is that labour’s wages leverage is reduced. The consequence, as Greg Jericho displayed in The Guardian, is that wages growth is decidedly flat for private sector workers. Their public sector counterparts fared significantly better in the June quarter.
Private sector wages growth has again stalled, growing at just 0.5% in the June Quarter, delivering just 2.3% wages growth, on average, over the year.
It is true that wages growth kicked up above the terrible lows of 2017. But not by much, and the growth has not been sustained.
There are those who consider slow wages growth to be fuelled by factors other than supply and demand dynamics. While it is true there are other dynamics (public policy on bargaining, exchange rates, entrenched and inexplicably lower wages for women performing the same work as men and the costs of major household expenditure items in some instances are examples), there should be little doubt that it is levels of labour utilisation that really drive wages movements.
The following chart, also from Greg Jericho, shows the close relationship between wages growth and levels of underemployment in the Australian economy.
Crunching the numbers, Jericho wrote:
“What this suggests is that for wages growth to get to the government’s hope of 2.75% by next year and 3.25% the year after, the underemployment rate would need to fall to 7.7% and then 7.2%.
“That is the equivalent of 80,000 fewer underemployed by June next year and 150,000 fewer by June 2021.”
As Jericho puts it, that would be welcome, but right now, it is a ‘big ask’.
