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Here's why the recent surge in Australian employment is unlikely to last

Ian Waldie/Getty Images

Despite Australia’s economy growing below trend in recent years, employment growth has not only remained in positive territory but accelerated over the past 12 months.

According to the ABS total employment grew by 233,981 in the year to May, the largest increase recorded since April 2011. Expressed as a percentage employment increased 2.03% from May 2014, the quickest acceleration since May 2011.

The chart below, created using data from the ABS, reveals the acceleration in employment growth seen in the past 12 months.

It’s quite a feat in the face of subdued economic growth, and has got many analysts questioning whether the level of employment growth can be sustained, or will accelerate, in the second half of 2015.

ANZ senior economist Justin Fabo has certainly taken note and, in an excellent research report released earlier today, came up with his own forecast.

While some may disagree, Fabo believes employment growth is unlikely to remain solid should the economy maintain sluggish levels of growth.

Here’s his assessment:

“Our central case is ‘no’. Lags suggest that the slowing in GDP growth over the past year will soon catch up with jobs growth, even if modest real wages growth provides some offset. Further, despite the support to growth in employment from weaker real wages growth in some industries, sluggish growth in overall household income will remain a significant headwind to household spending, non-mining business investment (55% of GDP) and ultimately jobs generation.”

In essence, what Fabo is trying to say is that while employment is growing, tepid growth in household incomes will likely weigh on consumption, leading to weak business investment and, as a consequence of the two, slower employment growth.

So why is household income growth likely to remain subdued despite the recent acceleration in employment growth? According to Fabo, it’s because the jobs that have been created are significantly lower-paying than those that have been lost.

Here’s his assessment:

“As we have stressed previously, the composition of jobs growth is much less supportive of household income growth. Indeed, despite the pick-up in aggregate jobs growth over the past year, household income has grown very modestly. Our estimates suggest that possibly half of the slowing in aggregate household income growth has come from the mining sector. On average, the household income loss for each job reduction in the mining sector is equivalent to nearly six jobs in the hospitality industry. A significant number of job losses are yet to occur as a result of the wind down of mining investment.”

The chart below shows the disparity that exists between the average wage for mining sector workers compared to those in other sectors.

Despite the slowdown in Australia’s mining sector, the chasm that exists between the salaries of mining workers compared to other industries remains vast.

While direct mining sector employment only equates to a small fraction of total employment, around 2%, given the likelihood of continued job losses in the sector in the years ahead, it’s clear that their incomes, rather than actual numbers, will be difficult to replace. This, in turn, will do little to assist below-trend economic growth.

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