Australia’s labour market – at least based on the official ABS data – had a barnstorming year in 2015. Employment surged by over 300,000, the second-largest annual increase since 2000, leaving the national unemployment rate at 5.76%, a level last seen in October 2013.
Despite the stellar – but to some questionable – strength of the data, Australian wages growth has gone cold over the same period, falling to the lowest level in the year to September since the early 1990s recession.
According to Justin Fabo, senior economist at the ANZ, while “moderate” labour market slack – simply the amount of available workers to current demand – has contributed to the slowdown, recent strength in the ABS data, courtesy of the enormous level of jobs growth seen over the past 12 months may be understating the true level of slack within Australia’s labour market, leading to stalling wages growth.
The chart below, supplied by ANZ, measures the relationship between annual wages growth against the level of Australian unemployment.
As it demonstrates, there’s a clear inverse relationship between the unemployment rate and wages growth. As one goes up the other tends to move lower, and vice versus.
However, the trend relationship seen between 1998-2008 has changed in the post-GFC period, with wages growth significantly below historic norms given the current level of unemployment.
“That relationship appears to have changed, however, in recent years as indicated by the greater steepness of the lines of best fit. That is, wages growth has typically been lower recently for a given jobless rate,” says Fabo.
“It is entirely possible, therefore, that the weakness in wages growth is telling us that the unemployment rate has been underestimating spare capacity in the labour market.”
In other words, the data is potentially misrepresenting the current strength of labour market conditions.
Along with falling terms of trade, heightened unemployment expectations and a subdued outlook for inflation, it helps to explain why wages growth currently sits at levels not seen in the past quarter of a century.
Looking ahead, Fabo doesn’t hold out much hope for a return to trend wage growth, or higher, in the period ahead, particularly given weak wages growth in the US and UK, two economies that currently have unemployment rates nearing full employment.
“An important question then arises: as downward pressure on nominal growth wanes as commodity prices eventually stop falling, will wages growth increase towards rates more consistent with those historically for a given unemployment rate, asks Fabo. “Our view is that this does not appear to be a risk for the foreseeable future.”
“In Australia, a return to strong rates of wages growth looks to be some way off.”
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