The current low level of unemployment is a superb real-world test for Australia’s labour market. If we can’t get strong wages growth now, then it will be impossible to avoid acknowledging the system is broken, and the government’s job summit in September is the perfect time to begin fixing it.
The 3.5% rate of unemployment in May is quite stunning. Yes, it does seem a little bit too good to be true. The Bureau of Statistics estimates, for example, that the total number of unemployed across Australia fell a massive 10% in one month.
The unemployment rate generally only moves up or down about 0.1% points a month; in May it fell 0.4% points from 3.9%. At the very least it is an unusual shift – especially when we also are seeing almost double the usual amount of people taking time off for sickness:
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But total employment is very solid – we are now almost back to the pre-pandemic trend level:
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Even if we use the more expansive measure of underutilisation, which counts both unemployed and underemployed, we are still at 40-year lows:
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The last time underutilisation was below the current level of 9.6% was in April 1982, back when just 44.7% of all women were in the labour force compared with 62.5% now, and 94% of men worked full-time compared with 81% now.
So all in all pretty good news. And it might suggest that the jobs summit in early September is going to be rather easy – unemployment is low, well done, carry on.
Except …
Another difference between now and 1982 is that then inflation was around 12% while average weekly earnings that year grew 15%.
By contrast inflation is currently around 6% and average weekly earnings grew just 3.8% in 2021 and wage growth is just 2.4%.
No one is arguing for 15% wages growth (or indeed 12% inflation) but it remains rather striking that while we are celebrating unemployment figures not seen since the mid-1970s, we are experiencing wage growth we haven’t seen this high since ... oh, 2019.
The current circumstances allow us to put to the test a few economic theories.
In March, 2.9% of all jobs were vacant – nearly double the 1.6% that were vacant in March 2020 before the pandemic hit. And yet wages growth in March of 2.4% was just 0.3% points higher than the 2.1% growth two years earlier.
By all accounts, wages growth should be skyrocketing. There should be a wages breakout due to the demand for workers. If not now, when?
Wages are supposed to respond to lower unemployment and higher vacancies.
And to an extent they still do, just at a lower level than in the past:
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The shift is so entrenched now that even during the wildness of the pandemic with huge absences and massive economic upheavals, the 2016-20 trend has remained solid.
It means that 3.5% unemployment should deliver around 3.75% wages growth – or nearly a third lower than the 4% growth we had in March 2008 when unemployment was last below 4%.
A big reason for the shift is the increase in part-time work, and thus we should perhaps use the underutilisation measure referred to earlier.
And here we see a problem.
While the relationship between unemployment and wages shifted from 2012 to 2016, the relationship between wages and this broader measure remained solid. Until now:
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Now we are possibly seeing another shift. Since June 2020 the underutilisation rate has collapsed from 19.7% to 10.2% in March, but wages growth has barely shifted.
In March, wages growth was nearly half the 4.2% growth that we had back in 2007 when underutilisation was last around the current level.
If the “invisible hand” of the free market is going to work like it should then we should see a very strong increase in wages growth – up to above 4% in the next three to six months.
If not, something is very much amiss.
One reason of course is that while the labour market might be free, it is not fair.
The jobs summit for example has as its first item the task of “keeping unemployment low, boosting productivity and incomes”.
Boosting productivity is supposedly the key to increasing wages. Real wages should grow in line with productivity and if they do, they are not inherently inflationary.
The problem is that this lovely theoretical relationship does not exist in practice.
Over the past 24 years, only seven times have real wages grown faster than productivity and four of those years this happened only because productivity actually fell:
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The benefits of productivity improvements have very much been going to company profits.
It is why my colleagues at The Australia Institute this week revealed that inflation in the GDP figures is being driven more by profit growth rather than labour costs:
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Wages do drive inflation, but the suggestion that rising wages are the major driver of our current high level of inflation or the biggest concern going forwards is an argument without evidence.
The jobs summit is a chance to address the reality that the labour market is not working as it should. Wages are not responding as they once did to lower underutilisation and the hope for productivity driving wages growth will only occur if the labour market truly becomes fair.
