- Economists believe Australia’s May jobs report was a “mixed bag”.
- Most suggest the sharp drop in headline unemployment masked some weak undercurrents in the report.
- None believe the report points to a large lift in wage pressures, nor any implications for monetary policy settings from the RBA.
Australia’s May jobs report had something for the optimists and pessimists alike.
On one hand, unemployment tumbled to a six-month low of 5.4%, something that will no doubt please policymakers at the Reserve Bank of Australia (RBA) who believe this is the single-most important indicator on the state of the Australian labour market.
It also brings unemployment closer to the 5% level where the RBA estimates that wage pressures are likely to build.
However, apart from the steep drop in unemployment, the factors that led to its decline were far less impressive.
Yes, employment increased by 12,000 over the month, but that was still below the modest 19,000 increase expected by economists. April’s jobs figure was also revised down to show an increase of 18,400.
But the main factor driving the decline in unemployment was that people left the labour market, bucking the trend seen in recent months.
The size of Australia’s labour force — measuring those people in employment or activity looking for work — fell by 14,800.
As such, the labour force participation rate — the proportion of working age Australians employed or actively looking for work — fell from an upwardly-revised 65.7% to 65.5%.
Total hours worked also tumbled over the month, reflecting a steep drop in full-time in full-time employment.
And while the unemployment rate fell, Australia’s labour force underemployment rate — measuring those workers with a job but who would like to work more hours — increased by 0.1 percentage points to 8.5% in seasonally adjusted terms.
Combined with unemployed workers, that left Australia’s underutilisation rate steady at 13.9%.
That suggests there has been little progress in lowering the number of underutilised workers, taking the gloss off the fall in headline unemployment figure.
With the proportion of underutilised workers still elevated, that suggests that wage pressures are unlikely to pickup anytime soon.
As we said at the top, the May report had something for everyone.
Financial markets weren’t overly convinced by the drop in unemployment seen last month. Let’s see what economists have made of the report, starting with the CBA’s Gareth Aird.
Gareth Aird, Commonwealth Bank
The employment report was a mixed bag. Overall, we would describe it as soft to lukewarm.
The pace of jobs growth has eased. The average of the last three monthly prints indicates growth in headcount is running at 11,000 a month. This is quite a bit weaker than the red hot pace of jobs growth in 2017 where the monthly lift in headcount averaged 34,000. Annual employment growth has slowed to 2.5%.
Broadly speaking, the unemployment rate has been steady at 5.5% over the past nine months. The underemployment rate rose by 0.1ppt to 8.5% and the underutilisation rate (unemployment + underemployment) was flat at 13.9%. From a wages perspective, the news isn’t good. We haven’t made any inroads in terms of the level of spare capacity in the labour market over the past nine months. And given that a fall in labour market slack is required for wages growth to lift, it looks like we will be waiting for a while yet before we see any meaningful lift in employee pay packets.
From a rates perspective, there’s nothing in today’s figures to change our thinking and the RBA’s that a rate hike is still a fair way off. If anything, the slowdown in the pace of jobs growth might become a concern if it carries on for too much longer.
Ben Jarman, JP Morgan
We have been expecting the labour market data to pick up a bit relative to Q1’s sluggish numbers, which seemed a little too soft relative to potential and actual GDP growth. But we thought this would happen more through employment than through tightening in capacity measures.
Today’s fall in the unemployment rate therefore represents a better-than-expected number, albeit tempered by the other survey details.
The unemployment rate has been moving sideways for the last year, in a tight 5.4-5.6% range. Given that GDP growth remains below trend, it is likely that unemployment stays quite sticky around this leve. This would prevent a recovery in wages and inflation, and make the household real debt burden difficult to unload, but is still not high enough to force the RBA into rate cut territory.
For now, officials will be heartened somewhat by the drop in the unemployment reading today. This comes at an important time, in offsetting some of the mounting concerns about the household sector.
Kate Hickie, Capital Economics
All of the new jobs created in May were part-time, which explains the 1.5% fall in average hours worked per employee. In fact, since the start of the year all net new jobs have been part-time. That’s a break from last year’s trend where the majority of new jobs were full-time.
Admittedly, the unemployment rate did fall from 5.6% in April to 5.4% in May. It is worth noting that the fall in the unemployment rate only occurred because of a 14,800 decline in the labour force.
The quarterly update of the underutilisation rate, which is a broader measure of spare capacity that includes those who are employed but who would like to work more, revealed that it held steady at 13.9% in May. That is still comfortably below the recent peak of 14.7% reached in February 2017. But it is some way above the average of the past decade of 13.3%. In other words, there is still plenty of slack in the labour market that is likely to keep a lid on wage growth.
Overall, even if the pace of job creation picks up again in the coming months, this excess slack and other structural forces are likely to prevent wage growth from increasing much above its current rate of 2.1% this year. In fact, we suspect it will remain below 2.5% throughout this year and next.
Justin Smirk, Westpac
Given such a soft update it may be somewhat surprising to report the unemployment rate falling two points to 5.4%. Driving the change in unemployment was a 14,800 decline in the labour force with the participation rate falling to 65.47% from 65.62% which was not too far off the recent high of 65.75%.
So despite the fall in unemployment, this is a soft update due to a smaller than expected increase in employment, falling hours worked and the recognition that the lower unemployment rate was due to workers exiting the labour market rather than any underlying strength in labour demand. In addition the quarterly seasonally update of the underemployment rate lifted to 8.48% in May from 8.36% in February.
Jack Chambers, ANZ
On a good note, the unemployment rate fell more than expected to 5.4% in May. Other details in the report were somewhat disappointing, however. Total employment rose a less-than-expected 12,000 and April’s increase was revised down a touch. Total hours worked decreased in May as full-time employment decreased by 20,600. Consistent with this was a 0.1ppt rise in the underemployment rate in the three months to May to 8.5%.
Overall looking past the month-to-month volatility in the figures, the report is consistent with the view that while underutilisation in the labour market is falling, this is a very gradual process, which means that improvements in wage growth will also be gradual.
New information on leading indicators for the labour market has been mixed of late. ANZ Job Ads improved in May after previous weakness. Business conditions, while still high by historical standards, fell in May. Overall, though, the ANZ labour market indicator continues to suggest further improvements in the next few months.
Kaixin Owyong, NAB
The unemployment has dropped back a touch and is now sitting at 5.4%, a rate that was last seen in November last year. The lower unemployment rate is more in line with the RBA (and NAB) expectations of a decline in the unemployment rate, and a number of labour market indicators. Nevertheless, it’s only a small step in the right direction, and the welcome news of a lower unemployment rate came with a softer employment picture.
The lower unemployment rate could be a sign that the rise over the past few months was a blip in the data and is now being reversed. Certainly, the range of labour market indicators has been pointing to a tightening market. While it is only one print from the ever-volatile labour force data, the RBA will likely welcome the move, on balance, as a step closer to full employment.
The RBA will need to see further progress towards full employment — and rising wages — before it lifts rates.
George Tharenou, UBS
Despite the strong pace of jobs growth it appears there is still too much excess slack in the labour market to generate a meaningful acceleration in wages growth. Assuming the recent 20,000 per month pace of jobs growth is maintained, the unemployment rate could decline very gradually. However, given rising labour supply thanks to booming population and rising participation, and a still elevated underutilisation rate, this seems unlikely to generate much acceleration in wages.
Governor Lowe’s comments yesterday that “wages growth of 2% and reasonable labour productivity growth are unlikely to make for 2.5% inflation on a sustained basis” and that “a return, over time, to a world where wage increases started with a 3 rather than a 2 is both possible & desirable” suggest that not only does the RBA think higher wages are required to reach their inflation target but that they would likely need to see wages growth closer to 3% than 2% to hike.
Diana Mousina, AMP Capital
The May labour force data was messy for May. Despite the mixed picture, the overall story for the Australian labour force is unchanged — employment growth is slowing from its highs in late 2017, but employment growth is still expected to hold up at just over 2% based on leading indicators like job advertisements and business hiring intentions which is good news for households.
Solid employment growth should bring the unemployment rate a little lower — probably to around 5.25% over the next year.
While the labour market is holding up well, it remains difficult to see a substantial lift in wage outcomes in the current economic environment which is a constraint on inflation. The low inflation environment and plenty of risks around housing will keep the Reserve Bank cautious and we don’t expect to see a rate rise happening until 2020.
Callam Pickering, Indeed
The economy still has a long way to go before we can safely say that our labour market and economy is in a healthy place. While economic growth was strong in the March quarter, something remains rotten in the labour market. Wage growth continues to disappoint and is showing little sign of recovery. This will continue to weigh on household spending and house prices and hamper the recovery.
From a Reserve Bank perspective, there is clearly no appetite for tighter policy right now. These data do nothing to change. Such a high degree of labour market slack is not conducive to higher wages or inflation and until that changes the RBA won’t be in any hurry to hike. Increasingly we consider it unlikely that rates will be hiked before 2020.