While Australia’s unemployment rate is trending lower, the nation’s underemployment rate — which includes the unemployed and people in employment looking to work more hours — remains elevated, and it’s placing downward pressure on both wage growth and inflation.
That’s the view of ANZ’s economists, who suggest underemployment in Australia is now “widespread”.
“Our analysis also shows that a high level of underemployment – which captures those workers who want to work more hours – is also weighing on wage growth,” wrote the bank in a Friday research note.
“Underemployment is widespread and has been slow to respond to the pick-up in the non-mining economy.
“For example, the unemployment rate has fallen from a peak of 6.3% in Q3 2015 to 5.8% in Q2 2016, while the underemployment rate has remained unusually high, down only 0.1pp from 8.5% to 8.4% over the same period,” it adds.
The chart below, supplied by the bank, shows the divergence between Australia’s unemployment and underemployment rates over the the past 15 years, particularly in the past year.
ANZ believes that the elevated underemployment rate is partially reflects demographic change and a shift in growth towards services, suggesting that it “will restrain the eventual recovery in wages even as underemployment edges lower”.
“Although there is tentative evidence that wages growth may be bottoming, we see a risk that inflation stays low for longer given lower inflation expectations may feed back into labour costs and hence inflation,” it says.
While the bank is forecasting that the RBA will keep interest rates steady over the next year, putting it in the minority, it suggests there’s “a clear risk of further rate cuts given that the RBA still expects underlying inflation to stay low for an extended period.”
The Australian Bureau of Statistics will release Australia’s June quarter wage price index on August 17. That will be followed one day later by Australia’s July jobs report.
The markets, and the RBA, will be watching both releases closely.