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Unemployment is down but wages are still not moving

In January, Australia’s unemployment rate was steady at 4.2%, while pandemic impacts continued as the nation worked an average 8.8 hours less, with a big increase in those working zero hours due to illness or being furloughed. Despite the low rate, wages growth remains behind the inflation rate, meaning real wages continue to decline.

First up, the chart here shows seasonally adjusted employment at record levels, with 13.255 million people in work in January 2022 and the Participation Rate – those in work or actively seeking it – pushing out to a very high 66.2%. That is good news!

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Part time work did lift at the expense of full-time work, but that was at the margin and is probably just a blip.

Second, we can see below that the unemployment rate has more or less continually declined to its current 4.2%, albeit the number of unemployed people rose slightly in January. Again, that seems ‘within bounds’ of expectation.

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As readers know, we have long opined that the more important measure is not headline unemployment, but rather underemployment and the related labour underutilisation rate.

Underemployment, shown below, is the condition experienced when a person has a job but would like or needs more hours. For instance, because they are furloughed, they are on zero hours as has occurred across much of summer thanks to the Omicron variant.

Underemployment lifted marginally in January to encompass 924,900 people, a modest rise of 8,000 from the prior month and a pretty good result, all things considered. Combine that with the number of unemployed people (580,000) and the 1.504 million people whose labour is underutilised accounts for 10.9% of the total workforce capability.

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Underutilisation is difficult to shift below about 8% historically, which means there is a little way to move to fully utilise our best natural resource.

Just as with labour underutilisation, as the unemployment rate lowers, the opportunities for unemployment to fall further become more difficult to achieve, so despite the obvious labour pressures in the economy, movements may be small or negligible for some time to come.

Unsurprising in light of the above, in January, average hours worked fell 8.8% due to the impact of the pandemic, with many people working zero hours due to illness or being furloughed as close contacts and so on. This is shown in the chart below.

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As the pre-pandemic data in the chart shows, hours worked should be a stable measure – and for a long time that was the case. However, as the chart here shows, against an historic average of 85.69 hours per month, the average in January 2022 was sharply lower at 79.38 hours.

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These are the types of numbers that mean some people are desperate for work of any type and for some form of income. They may be out of sight to many, but the plight of the individual can easily be the curse of the collective. That may have materialised already, as the wages data shows.

The expectation of policy makers is that record low unemployment rate will feed into increasing wages growth. The release of the Wage Price Index suggests while wages increased by 0.7% in the December quarter and by 2.3% for the year, this is still behind the increase in CPI (3.5%) resulting in a decline in real wages or spending power.

Here we can see annual wages growth which shows the private sector outstripping the public sector for the first sustained period in more than two decades. However, private sector growth of 2.4% per annum is still below the current inflation rate and is essentially seeing real wages decline at about the same rate as much of the last decade.

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The relationship between wages and unemployment was discussed by Greg Jericho in The Guardian, showing the link between wages and unemployment (traditionally known as the Phillips Curve).

Historically unemployment of 4-4.5% was associated with wage rises of 4+%. However, in recent years the nexus between unemployment and wages appears to have shifted lower with recent unemployment rates of say 4.5 to 5.5% associated with wage increases of only 2.0 to 2.5%.

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Wage growth is an important policy outcome. The Reserve Bank of Australia wants to see sustained growth in wages while inflation stays around the 2.0 to 3.0% per annum. In simple terms wage rises ahead of inflation provided the policy headroom to start moving interest rates from historic lows.

The link between wage rises and the RBA moving on interest rate rises is also discussed in an assessment of comments by Philip Lowe, RBA Governor and market economists by Ronald Mizen in the Australian Financial Review:

“Dr Lowe has indicated the central bank wants to see wages growth at 3% or more before being comfortable that underlying inflation, which is currently 2.6% is sustainably within its 2-3% target band”.

Interest rate rises are inevitable. To absorb the impact of them, the RBA needs to see wages growth consistently above the rate of inflation.

Even the optimistic forecasts from the RBA contained in the February 2022 Statement of Monetary Policy suggest this is still some time away. The June 2023 Wage Price Index is forecast to hit 3.0% and CPI at 2.75%. Even if that target is met – for the last decade most of these targets have been missed – that will be one quarter of real wages growth, and that is a long way off from being ‘sustainable’.

If this situation is to change – and it needs to for an economy whose growth is predicated on consumption growth fuelled by households and their incomes – then this final factor must be addressed: the share of wages as a proportion of total factor income needs to increase.

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This is urgent business, in part because the declines since the peak in 1973 (that’s almost 50 years ago) have been continuous. The reality is that wages as a share of total factor income drives individual, household and national wealth creation – and that is a topic in which all are invested.

While it may be urgent to address these matters, there seem plenty of ‘beliefs’ and ‘wished’, but very few concrete actions that in a low unemployment environment will deliver very necessary average wage increases.

Posted Date: March 3, 2022

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