Typically, a rise in unemployment of 0.2%, resulting in 35,590 people being added to those looking for work, would be worrying times. Instead, with an unemployment rate of just 3.7%, small increases in the unemployment rate are reasonably positive for the economy.
Despite the unemployment rate lifting 0.2%, it remains at fifty-year lows, underscoring just how tight the labour market is right now. It could be that freeing up some capacity in the labour market will allow the right people to oscillate to the right jobs, rather than the current situation of anyone being suitable for any particular job, as employer desperation takes over from more rational decision making.
Effectively, this super-tight labour market means the same number of people are needing to do more, to meet the economy’s demand for labour.
This is reflected in the hours worked across the economy. At a macro level, total hours worked rose 0.2% in July to 1.952 billion hours.
This fed into the more personally meaningful indicator that shows per capita hours worked sat at 89.44 hours for the month, almost four hours per month more than the long-term average. Feel like you are working more each month? Fair enough: you are (so long as you are ‘the average’ anyway).
One of the major sensitivities is the extent to which this tight labour market flows through to wages growth.
Private sector wages growth was up 3.6% in the June quarter of 2023, compared with the June quarter of 2022. In terms of real wages growth, this compares to an underlying rate of inflation (using the trimmed mean measure) of 5.8% for the same period.
What that means is that while we have seen good progress on wages compared to previous years, because of inflation, real wages (spending power) have still declined.
Forecasts in the August Statement on Monetary Policy indicate the RBA still expects inflation to continue to fall while wages remaining in the 3.8 to 4.0% range. This combination should see strengthening real wages and therefore, improved spending power, from around June 2024.
Wages growth is important because this is the means by which households cover the increases in the cost of living brought about by interest rate rises and general inflation. It appears the RBA’s forecasts for future wages are underpinned by expectations of a continuation of the tight labour market.
Overall, for the economy, this is pretty good news, because as The Guardian’s Greg Jericho pointed out, the June quarter was the first in the last twelve quarters to see inflation and wages growth both at the same level (0.8%). At least real wages have stopped declining!
One myth appears to have been busted over the recent period. As Jericho reminds us, for years the RBA and others stated with absolute certainty that if unemployment fell below 4.5%, wages would increase and force inflation up. Given wages growth will not even be ‘real’ until mid 2024, there is plenty of catch-up work to do that even a 3.7% unemployment rate is not doing too well at.
As Jericho writes:
“It would seem the mythical non-accelerating inflation rate of unemployment is rather lower than the 4.25% to 4.5% the Reserve Bank has been suggesting is the case.”
The relationship between wages and unemployment is finally shifting upwards with recent quarters moving closer to the historic trend line from 1998 to 2015.
It may be that when we consider wages increases from an economy-wide perspective, we need to reprise Franklin D Roosevelt’s inauguration speech in 1933, during the depths of the Great Depression, when it comes to wages growth, we have nothing to fear, but fear itself’ (and economists).
