Could there finally be a sniff of latent wage growth in the air?
Last week’s stronger than expected jobs figurescertainly showed encouraging signs.
The underutilisation rate — the sum of unemployment and underemployment, or people looking for more work — edged down to 13.4 per cent, a five-year low.
Underutilisation is one of the better guides to slackness in the labour force, and therefore a reasonable leading indicator on wages.
Just what would be a good rate of wage growth is open to question, but to kick off the argument one may as well take the Reserve Bank’s “not-too-hot-not-too-cold” aspiration.
RBA governor Philip Lowe has suggested wage growth starting “with a 3 rather than a 2” would be the shot.
That would help edge inflation up, and allow the RBA to move interest rates up from the current emergency setting.
Wages are currently growing at 2.1 per cent, still well short of the RBA’s ideal.
Wage growth maybe next year
“For wage growth to reach the RBA’s lower bar of 3 per cent, the underutilisation rate would need to fall to 13.2 per cent,” said Paul Dales of Capital Economics.
“The current trend suggests that could happen by early next year.
“Given that the underutilisation rate tends to lead wage growth by about six months, wage growth could then rise to 3 per cent late next year.”
But there are still two significant forces keeping a lid on things, driving employment “slackness” and low wages; Australia’s strong population growth and the high levels of participation in the jobs market.
Alex Joiner, an economist at big superannuation investment manager IFM, makes an interesting comparison between the US and Australian economies.
Dr Joiner says Australia is “out-growing” the seemingly more robust US economy on a number of fronts. Despite this, unemployment remains stubbornly high.
“The Australian economy is going quite well. There are more people in Australia, more people want a job,” Dr Joiner said.
The participation rate is sitting at a record high, largely driven by more women than ever either in work, or looking for work.
Population growth is driving the economy — 1.6 per cent, or around half GDP growth’s 3.4 per cent, is population growth.
Population growth also represents around two-thirds of the boomtime growth in jobs.
Put the potent mix of population growth and a population keen for work together and you get an unemployment rate that stays elevated.
Indeed Australia is very much out of sync with other developed economies on the unemployment front.
It is almost alone in having a much higher rate of unemployment now than a decade ago. Most have lower rates.
In August 2008, Australia’s unemployment was 4 per cent compared to 5.3 per cent now. Over the same period, US unemployment has gone from 6.1 per cent to 3.9 per cent.
The last time the US saw unemployment this low was at the turn of the century. For the UK, it was back in 1975.
Despite unemployment falling to multi-decade lows, wage growth in the US and UK is also still pretty sluggish.
So these days, even full employment is seemingly no guarantee of strong wage growth.
“Australia will need to get unemployment below 5 per cent to get wage growth to pick up,” Dr Joiner said.
The RBA has 5 per cent pencilled in for 2020.
And this where it cuts both ways for the RBA.
If Australia had lower population growth, it would have lower unemployment and higher wages.
That would in turn make easier to get back to the preferred 2-to-3 per cent target band, halt the rapid erosion of household savings and increase consumption.
However, the RBA and Dr Lowe are unabashed supporters of high population growth.
As the population clock ticked over 25 million last Month, Dr Lowe made a strong defence of immigrationbullet-proofing the economy.
“This is an important difference, with Australia’s faster population growth being one of the reasons our economy has experienced higher average growth than many other advanced economies,” Dr Lowe said.
So while the dip in the utilisation rate may indicate the jobs market is finally making some headway in dealing with a growing population, the state of Australia’s crowded roads, public transport, hospitals and schools would tend to indicate public policy still isn’t.