- Australia’s unemployment rate may still have to fall by another 1.5% before there’s a meaningful rise in wages, Capital Economics says.
- That’s because the natural rate of unemployment — the rate at which inflation remains steady — may be lower than current forecasts.
- Economist Kate Hickie cited shifts in demographics, education and technology which are driving the natural rate of unemployment lower.
- Hickie expects wage growth to stay low and as a result, inflation will climb at a slower rate than the RBA expects.
If you’re looking for clues on the outlook for Australian wage growth, keep a close eye on the unemployment rate, Capital Economics (CE) says.
And unfortunately for Aussie workers, CE economist Kate Hickie says unemployment will have to fall significantly further before there’s a meaningful rise in wage growth.
“The unemployment rate may need to fall from 5.5% currently to around 4.0% before wage growth rises significantly,” Hickie said.
“This is partly due to the existing excess capacity not captured by the unemployment rate, but also as the natural rate of unemployment may be notably lower than most estimates of 5.0%.”
The excess capacity in Australia’s labour market is a reference to Australia’s high underemployment rate — a measure of those who are in jobs but would like to work more hours.
Although Australia’s economy is adding jobs at a record clip, the underemployment rate remains relatively elevated at 8.7%.
And the “natural rate” that Hickie refers to is also known as the non-accelerating inflation rate of unemployment (NAIRU).
As its name suggests, NAIRU is a level where unemployment generally leads to stable inflationary pressures. If the unemployment rate drops lower than that, it can put upward pressure on inflation.
The RBA’s current estimate of the natural unemployment rate is 5%. So by that measure, unemployment still needs to fall from its current level before inflation pressures start to climb — which would likely be driven by rising wage growth.
But Hickie thinks the natural rate may be quite a bit lower than that — more like 4% — and cited shifts in demographics, education and technology as the basis of her view.
Hickie conceded the natural rate is a “theoretical concept”, which makes it “notoriously difficult to estimate” — sentiments echoed by the RBA’s assistant governor of economics, Luci Ellis, in a speech last week.
“For example, while the RBA’s central estimate is 5.0%, it can only say with 90% confidence that it is somewhere between 3.3% and 6.6%,” Hickie said.
As a result, the RBA often makes revisions to where the natural rate should sit — and it’s usually revised down.
In view of that, Hickie outlined some reasons why that natural rate of unemployment may actually be closer to 4%, and could still be falling.
“The two changes we believe are particularly important are the end of the investment phase of the mining boom and the rise in the so-called ‘gig economy’,” Hickie said.
Hickie described these as “structural” changes, which are actually competing forces.
Since the mining boom peaked in 2012 the sector has shed around 60,000 jobs, leaving a pool of workers without jobs who may only have mining-specific skills.
That should put upward pressure on the natural rate of unemployment, but Hickie said any its impact has been more than offset by other factors — starting with the gig economy (e.g. Uber drivers).
“Growth in the so called gig economy has probably exerted a downward influence on the natural rate of unemployment, as barriers to finding jobs in this area tend to be lower than for full-time employment,” Hickie said.
Hickie also said the increased number of baby boomers still working puts downward pressure on the natural rate, because older workers usually have a lower rate of unemployment.
Another key shift is sharp rise in tertiary educated job hunters — from 28% of those aged 25-64 in 2000 to almost 45%.
“This is significant given that people with higher levels of education tend to be more employable and have the skills to better adapt to changes in the labour market,” Hickie said.
And citing the influence of technology, Hickie said the internet has made it easier to match employees with potential workers, and also makes it easier for employees to work remotely.
Both factors add labour market flexibility which contributes to a lower natural rate of unemployment.
As a result, Hickie said Australia’s current unemployment rate of 5.5% still has a way to fall before wages start to climb.
Yesterday’s wage data for the September quarter showed annual wage growth remains near historic lows at just 2%.
“But we doubt wage growth will return to its pre-crisis average of around 3.5% anytime soon,” Hickie said.
“This is a key reason why we expect underlying inflation to remain lower for longer than the RBA currently expects.”
“As a result, why we expect that the RBA will keep interest rates on hold at 1.5% throughout 2018 and for a good chunk of 2019 too.”