Australia’s unemployment rate in June dipped to 4.9%, amounting for 679,100 people being unemployed. Just a year earlier, at the height of the pandemic, there were 982,800 people unemployed. That is a remarkable 30.9% improvement over the year. However, with more than half the nation locked down for at least half of July and some for much longer, the next round of employment data maybe challenging.
First up, the good news is very much the June employment data, which shows there were 13.154 million people in work over the month, 9.062 million of whom were in full time employment. That fed in, as we see below, to the participation rate remaining solid at a satisfactory 66.2%. In total, June saw 29,000 net new jobs created, with full time positions lifting almost 52,000 and part time jobs slipping back about 23,000.
Second, again a note of happiness, because the counterfactual to employment – unemployment – is also headed in the right direction. At 4.9% in June compared with the 5.9% in February, the unemployment rate was dropping fast. It will climb again in July thanks to the pandemic, but because of migration factors discussed later, the employment data should bounce back pretty quickly.
The chart here shows good progress, but its troughs and peaks do demonstrate the fragility of the labour market right now.
July will provide one signal of an employment side to the economy that is very fragile, but the other factor that may weigh on economists’ minds is the underemployment rate (up 0.5% to 7.9%) and the labour underutilisation rate (12.8% in June, up from 12.5% in May).
The trend is good on this front, as the chart below shows, but the marginal value of pushing the labour market underutilisation rate ever lower is typically quite high.
Also reflecting the level of underemployment was the decline in hours worked. Having climbed strongly through February to May. the June number was 85.22 hours worked (-1.8%) compared to the historic average of 85.65 hours worked per month. In this case: blame it on the pandemic, with Victorian hours worked down 8.4% in June thanks to its earlier lockdown.
In that context, the NSW data for July is likely to be really horrible with the construction sector closed entirely for what unfortunately seems will be weeks.
In aggregate, these rates measure how effectively an economy uses its labour resources, and while they have been and could be worse, fully utilising all the nation’s available resources is a primary objective of Governments.
One reason this is so important right now is that temporary workers left Australia in droves (about 300,000 of the 500,000 temporary foreign workers) during the pandemic. With at least two years of negative net overseas migration (NOM) with which to contend, any significant growth in the workforce will come from a lower unemployment rate and people being able to work as many hours as they want and need.
These results provide an interesting backdrop to the RBA’s policy aim of unemployment falling below 5%, probably to 4.5%, and the generation of decent wages growth that will pull the economy out of the lethargic growth cycle that existed pre-pandemic.
As we can see here, there was growth in private sector wages in the March quarter of 2021, but at 0.6%, it was adequate, no more than that. With the combined annualised wages growth rate at just 1.5%, despite all that has occurred, we need significantly more than that if growth is going to be sustained without massive Government cash injections on an ongoing basis.
On the issue of wages growth, it was valuable that the RBA Governor Philip Lowe pointed to immigration as a contributor to lower wages growth. In classical or traditional terms, when you increase supply (add more labour), the demand side response is to find equilibrium at a lower price point.
That would of course be a somewhat simplistic way to describe a national economy, with an ageing and declining natural population, which supplements its population with working age migrants. Indeed, Governor Lowe had a lot to say on the topic and certainly did not oversimplify. Central Bank governors don’t do that.
Sure, net overseas migration adds to the labour force, appears to do some at mid to lower levels in general and probably has a mild suppressive effect on wages. But, the wages of the lower paid are consumed buying things, which adds to demand and inflation and those feed into wages growth also.
Whether, as John Kehoe wrote in the Australian Financial Review (AFR): “Lowe’s pivotal speech on the labour market will force the political class and business community to reflect on their strong backing for relatively cheap, easy growth via the large importation of foreign workers.” remains to be seen.
It could be that the nature of, for instance, the gig economy, the deterioration of skills development that contributes to and the pressure that places on productivity and therefore the unit value of labour is a more pressing issue than the marginal downwards pressure on wages applied by a migration program.
Certainly, the Government was on the front foot after Governor Lowe’s speech. As Ronald Mizen reported in the AFR, leading Government agencies advised there was plenty of evidence that this relationship between migration and wages is quite limited. What was telling was that all the measures were economy wide. If the analysis focussed on wages only in the sectors where temporary foreign labour predominates (fruit picking springs to mind), we are willing to bet the data would demonstrate migration does impact wages.
Overall, as the unemployment rate falls and surplus labour contracts, there should be upwards pressure on wages. That will be welcome in an economy that needs more than just net overseas migration to grow over coming decades.
We should not forget that pre-pandemic, Australia’s growth was muted, despite the ongoing migration program. One driver for that, despite relatively low unemployment, was the erosion of spending power that had occurred for the bulk of the population, due to the absence of wages increases.
As the RBA pursues an unemployment target that now seems more likely pitched to 4.5% than 5.0%, it is the likely wages growth that will return the nation to something like stable and solid economic growth.
