Wage growth in Australia remains weak.
As an important input into inflationary pressures, it also helps to explain why Australian interest rates have been left unchanged for well over a year — a trend that looks set to continue for some time yet based on recent data and commentary from the Reserve Bank of Australia (RBA).
Here are four charts from Australia’s January jobs report that help explain the link between unemployment, wage growth and interest rates.
The first comes courtesy of the National Australia Bank (NAB), showing the monthly growth in Australian employment in trend terms.
Should labour force participation — the proportion of Australia’s working age population either in or actively seeking work — hold at current levels, unemployment will remain steady if 20,440 jobs are created on average each and every month.
Currently, employment is growing at 23,007 in trend terms every month, meaning unemployment is slowly moving lower.
However, crucially, at 5.5%, unemployment still sits well above the 5.0% level or lower that has generally translated to wage and inflationary pressures in the past.
As seen in this next chart from UBS, record-breaking jobs growth in 2017 did nothing to help boost wage pressures which continued to sit near-record lows during the year.
Yes, employment soared by over 400,000 over the year, but the amount of available workers grew nearly as fast, keeping unemployment stuck in the mid-5% region.
And along with plenty of job seekers without employment, there’s also a significant proportion of underemployed Australians in the labour market right now, meaning that they have a job but they’re not working as much as they would like.
Adding unemployed and underemployed Australians into the same group, Australia’s underutilisation rate still remains at a relatively elevated level of close to 14%, indicating that there’s still a lot of Australians who are not working to their full potential.
As seen in this next chart — also from UBS — elevated levels of underutilisation goes someway to explain why Australian wage and inflationary pressures remain so weak.
It plots the relationship between Australia’s underutilisation rate and annual change in Australia’s underlying consumer price index, looking at the trend seen before and after the global financial crisis.
In recent years, underutilisation remains elevated, wage pressures have been weak and underlying inflation has remained entrenched below the RBA’s medium-term 2-3% target.
This final chart from AMP shows why making progress on reducing labour market underutilisation will likely be crucial in determining if and when the RBA begins to lift interest rates.
It simply shows Australia’s underutilisation rate compared to that in the US.
Following a surge after the GFC, it’s fallen steadily in the US, helping to bolster confidence that wage and inflationary pressures will start to build.
Over the same period, underutilisation in Australia has actually risen.
Labour market slack is reducing in the US but has increased in Australia.
That explains why the US Federal Reserve has been lifting interest rates since late 2015 while the RBA has been cutting them to record low levels over the same period.
It also underlines the point that changes in Australia’s underutilisation rate will go a long way to not only determining when wage growth starts to lift, and, in response, when interest rates will do the same.
We’ll get updated data on wages and underutilisation over the next month, but on current trends it’s hard to see anything but a continuation of the status quo for wages, inflation and interest rates for the foreseeable future.
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