Few will argue that Australia’s labour market has been on fire in 2017.
According to data released by the Australian Bureau of Statistics (ABS), 273,000 Australians have found employment so far this year, taking the increase over the past 12 months to an even larger 371,500.
At 12, the current stretch of uninterrupted monthly employment gains is now the longest dating back to July 1994.
And most of those have been full-time roles, increasing by 316,000 in the 12 months to September, the largest increase over a comparable period dating back to when the ABS’ labour force survey was first established in 1978.
Put bluntly, the recent hiring surge is, or is close, to being unprecedented.
However, for all the remarkable statistics released above, Australia’s unemployment rate has barely budged over the past year, falling by just 0.2 percentage points to 5.5%. While it currently sits at the lowest level since February 2013, and well below the 6% plus levels seen last year, it still remains elevated compared to prior periods.
A combination of improving labour market conditions leading to increased labour market participation, along with strong levels of population growth, has meant that unemployment has remained fairly static even with the surge in employment growth.
With more people entering the labour market, it’s meant it’s taking longer than what would normally be the case to reduce the unemployment rate.
And with labour supply nearly keeping up with demand, it’s also meant that wage pressures, at least for the moment, remain at incredibly low levels, especially for those in the private sector who have seen real wage rates go backwards in real terms when accounting for inflation.
During an otherwise stellar period for labour market strength, wage growth remains the one missing piece of the jigsaw puzzle, keeping a lid on inflationary pressures and the need for higher interest rates.
However, the National Australia Bank (NAB) thinks that missing piece of the puzzle is about to fall into place, boosting the prospect for wage increases and rate hikes from the Reserve Bank of Australia (RBA) next year.
Using data contained in its quarterly Australian business survey, it’s found that an increasing number of firms are reporting difficulties in finding suitably skilled staff, something that has historically led to a reduction in unemployment and wage pressures in the past.
“Of all of last week’s data, what captured our attention was the Difficulty Finding Suitable Labour question out of the NAB Quarterly Business Survey,” says Tapas Strickland, economist at the NAB.
“The survey found firms were finding it the most difficult to find suitable labour since September 2008!
“This is significant.”
The significance that Strickland refers to can be clearly seen in the chart below, overlaying the proportion of firms expressing difficulties finding suitable staff against changes in Australia’s underutilisation rate, a figure that captures both unemployed and underemployed workers.
The latter cohort measures those who are already in employment but who would like to work more hours, hence they’re “underemployed”.
As Strickland notes, there’s a more than reasonable relationship between the two, with changes in the NAB survey tending to lead those in the underutilisation rate.
“The difficulty in finding suitable labour tends to lead total labour underutilisation by two quarters,” he says.
“At such levels, it suggests underutilisation could fall 1 percentage point over the next two quarters. Splitting that evenly between unemployment and underemployment could mean the unemployment rate could be at 5-5.25% by mid-2018.”
And it’s not just the NAB business survey that suggests unemployment is likely to fall in the months ahead should current trends be maintained.
Just look at these three charts from the NAB as evidence.
The first shows the relationship between the ABS’ job vacancies survey and Australia’s unemployment rate.
And the next shows unemployment expectations, as measured by the Westpac-MI consumer sentiment survey, against the unemployment rate.
The third and final chart is similar to the first, overlaying applications per job ad as measure by jobs website Seek against Australia’s official unemployment rate.
No matter which metric you look at, be it the NAB survey or others, all suggest that unemployment levels are likely to fall further in the months ahead, continuing the pattern seen since the middle of last year.
As Strickland notes, should unemployment continue to fall to around 5-5.25% as the lead indicators currently suggest, it should lead to a pickup in wage pressures from the lows seen over the past year.
“An unemployment rate around this rate should give the RBA greater confidence in wages and inflation picking up,” he says.
“Our own models of wages growth suggest labour market slack has been one of the main drivers behind subdued wages growth. The model is already suggestive of wages growth picking up to 0.56% quarter-on-quarter, annualising out to a 2.2% year-on-year pace and up from its current 1.9% pace.
“If unemployment and underemployment also fall, that suggests a further pick up in wages growth.”
Though he admits there’s some uncertainty as to whether past relationships between labour market underutilsation and wage pressures will be maintained, especially given a lack of wage pressures in the likes of the United States, United Kingdom and Japan where unemployment levels are significantly lower than Australia, Strickland remains confident on the outlook for wages.
“While a pick-up in wages growth remains to be seen, this type of modelling supports the view of as slack erodes, wages growth should lift,” he says.
“This would place the RBA in a position to remove some of the stimulus in place and NAB’s forecasts sees the RBA hiking rates twice in the second half of next year.”
Markets will get further clarification on wage pressures with the ABS set to release Australia’s September quarter Wage Price Index on Wednesday, November 15.
A pickup is expected following the large 3.3% increase in Australia’s minimum wage rate that kicked in at the start of July, meaning there’ll be plenty of focus on underlying wage pressures without this one-off outsized increase.