It's tough times ahead for Australia's labour market

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Labour market slack while falling in most developed markets remains elevated in Australia and that will keep the lid on wages growth, according to UBS.

Australia’s employment underutilisation is at a 20-year high, and not trending lower as the case in
the US, Europe or Japan. Similarly, Australia’s unemployment rate has changed little over the past 18 months, UBS economists led by Scott Haslem and Jim Xu said in a note.

Labour slack and wages are another indicator of the emerging divergence between Australia and other developed markets. Australia is facing several hurdles after the end of mining investment boom and as the housing market soars to bubble territory.

“In Australia’s case, this labour market slack has been continuing to add downward pressure to wages growth,” the economists said. “With Australian wage growth to remain relatively subdued for now, it supports our low inflation thesis for Australia.”

This chart from UBS captures the labour market divergence between Australia and the other developed economies.

Wages grew by 0.5% during the March quarter, leaving the year-on-year increase at 1.9%. With consumer price inflation currently running at 2.1%, it means that real wage growth went backwards for the first time since the June quarter 2014.

Australia’s inflation rate will not reach the Reserve Bank of Australia’s core consumer price increase target of 2-3% before the first half of 2018.

That would mean the central bank is unlikely to start raising rates until late 2018.

That compares with consensus expectations for at least two more rate increases by the US Federal Reserve this year. The Fed funds forecast from UBS stands at 2.00-2.25% for end of 2018 above the RBA cash rate forecast of 1.75%. The last time US interest rates exceeded Australian interest rates was in the early 2000s.

Measures of unemployment are also improving in other developed markets, UBS said.

“In Some key developed market economies, we’re now seeing measures of underemployment falling, signalling less slack in jobs markets, which may support modestly better wage growth over the coming few years,” the economists said.

In the US, the unemployment rate has been falling rapidly and a measure of labour underutilisation has recently roughly returned to its pre-global crisis level of a decade ago.

In Europe, a similar gauge which has been very high at 21% through much of 2013 and 2014 has been falling steadily to a five-year low of 18%.

In Japan, an increasingly tight labour market is also supporting modest wages growth, they said.

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