- Australian unemployment currently sits at 5.5%, above the level where wage growth usually picks up.
- Annual growth in hourly pay currently sits well below the levels seen when unemployment was at 5.5% in the past.
- This suggests unemployment may have to fall significantly further before workers will be receive a decent pay increase.
Australia’s unemployment rate currently sits at 5.5%, above the 5% level many estimate to be Australia’s non-accelerating inflation rate of unemployment, or NAIRU for short.
This level is seen as the point in which wage pressures should start to build as worker shortages increase.
However, something odd is happening at present.
Even with unemployment sitting at 5.5%, wage growth would normally be faster than what it currently is.
This chart from JP Morgan shows the unusually low wage outcomes seen in recent years, plotting annual growth in hourly pay rates against Australian unemployment, known as the Phillips Curve.
As highlighted by JP Morgan, even with the gradual improvement seen in unemployment in recent years, wage growth still remains well below the levels seen in the past when unemployment was at similar levels.
At 5.5%, the curve suggests annual wage growth should be somewhere just below 3.5%, not the 2.07% level it sits at today.
“[This is] consistent with the view that although the cyclical low in the annual rate has most likely past, wage growth is still considerably weaker than the historical relationship with unemployment would suggest,” said Tom Kennedy, economist at JP Morgan.
“The weakness in the wage data is particularly striking given the strength of labour demand over the past year. Indeed, the economy added 415000 new jobs in 2017, the strongest year of outright job creation since records began in the late-1970s and in the top-five when scaled by the size of the labour force.”
Kennedy says a major reason unemployment hasn’t fallen further is a sharp increase in the number of available workers, due in part to stronger immigration and more Australians not previously in the labour force looking for work.
“The conflicting wage and employment growth outcomes can be squared by factoring in the strength of the supply side, evident by the rise in the participation rate,” he says.
“These supply and demand dynamics mean the unemployment rate has been relatively unchanged at 5.5% in recent history, comfortably above our estimate of NAIRU (5%) and an indication that slack remains across the labour market.”
While Kennedy, like the RBA, estimates Australia’s NAIRU level sits at 5%, given recent wage outcomes, even with a small improvement in unemployment, some believe Australia’s NAIRU level could be substantially lower.
That means that rather than wage growth picking up when unemployment falls to 5%, it could require unemployment to fall below this level before wage pressures begin to build.
RBA Deputy Governor Guy Debelle touched upon this subject in a speech earlier this week, telling the CFO Forum in Sydney that “the experience of other countries with labour markets closer to full capacity than Australia’s is that wages growth may remain lower than historical experience would suggest.”
“There is a risk that it may take a lower unemployment rate than we currently expect to generate a sustained move higher than the 2% focal point evident in many wage outcomes today,” he said.
While we won’t know the answer to where Australia’s NAIRU level is until wage pressures accelerate, if it is lower than many currently estimate, it could be quite some time yet until workers enjoy a decent pay rise.
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