Unemployment ticked up in April 2019, moving to 5.2%, with Underemployment shifting to 8.6%. The latest data came just as the RBA’s leadership commenced a discussion about a new ‘natural’ full employment rate. One that is perhaps lower than the nominal 5% we have been operating to.
On topic, RBA Assistant Governor, Luci Ellis used a mid-June speech to re-assert the RBA’s obligations: to pursue target inflation between 2 and 3 per cent and to pursue ‘full employment’.
We place ‘full employment’ in parentheses because Ellis was effectively exploring what full employment really means, whether it is changing and what the implications of that are.
Ellis defined it this way::
“The rate of unemployment consistent with ‘full employment’ was the ‘non-accelerating inflation’ rate of unemployment, or ‘NAIRU’.”
NAIRU is an important principle because it is only when unemployment falls below it that wages should start to grow at a relatively faster rate, sufficient to force inflation up.
So of late we have been hearing the RBA talk up the need for wages increases because they will assist price inflation and therefore economic growth. Fair enough, but why have private sector wages been so stubborn, in an economy where unemployment is pulling into that nominal 5% full employment point?
Ellis effectively says that the factors (behaviours of employers and workers in the economy) impacting on economies may be leading to the NAIRU being lower than was previously the case. The chart below is a good example.
Next, Ellis goes on to describe the behaviours observed and applied to the RBA’s NAIRU model, saying pretty definitively:
“We have therefore gradually revised down the estimate of the prevailing NAIRU from 5¼ per cent a few years ago to 4½ per cent now.”
Lets drill into this more. The RBA model has been adjusted because the behavior the RBA has observed over the last five years is lower wages growth than anticipated at different unemployment rates.
The result is an output that is a two-thirds chance the NAIRU is between 4 and 5 per cent, as the chart below shows.
The implication for the Australian economy is relatively clear, in our mind. Before there will be behavioural change that leads towards higher wages growth, Australia’s unemployment rate needs to move significantly lower. Shifting it down from 5.2% to 4.5% is no mean feat!
As we hone in on the ‘recession debate’, the low wages growth factor may stand out more than any other. Citi’s Josh Williamson pointed out that household income was falling below company profits as a share of GDP. He told the ABC:
“GDP benefits [are] still accruing to owners of capital, not workers,”
“On the other hand, wages as a share of GDP eased slightly to 51.8 per cent, close to a multi-decade low.”
As a contribution to the same debate, IFM’s chief economist Alex Joiner weighed in to discuss the challenges of productivity. In GDP terms, this is measured on the gross value added for each hour worked basis. Over the year-ended March, the GVA is down 0.9% and has fallen for six of the last nine quarters. Joiner argues that is suppressing wages growth and ‘hurting both the broader economy and suppressing wage growth.’
He called for more effort on:
“Reducing regulatory barriers, meaningful and fair tax reforms, encouraging investment in technology and investing in skills and education…”
The outcome from Joiner’s perspective is to:
“…produce more and get greater productivity in the workplace, [because] it will lead to workers accessing higher wage growth.”
In a slowing economy, that is why the RBA Governor, Philip Lowe focused some attention onto infrastructure expenditure by governments. In a recent speech he advocated for more infrastructure expenditure, saying:
“I think now’s the right time to do it — we’ve got the capacity in the economy and the labour force, and it adds to the supply capacity of the economy, so it increases the productive capacity of the economy over time.”
Keep in mind that government infrastructure expenditure is already a key driver of GDP growth and you might get the impression that the RBA Governor thinks government is going to have to do even more of the heavy lifting in the economy in coming months and years.
