Of 3’s, and Other Important Labour Market Numbers

Will an unemployment rate with a 3 in front it, ensure that we also get wage growth with a 3 in front of it? Don’t count on it.

by Jim Stanford, Economist and Director

Prime Minister Scott Morrison set tongues wagging this week with a confident pledge that Australia’s unemployment rate could have “a 3 in front of it” this year. It’s a theme that will loom large in his campaign for reelection later this year.

The unemployment rate was 4.2% in December, so that’s not actually as brave a prediction as might seem: it would only take a .3-point drop to achieve that magical ‘3’. The official unemployment rate often bounces by more than that (in either direction) in any given month, purely due to measurement errors or shifts in recorded labour force participation. So his prediction will likely come true. But is it the economic triumph that he and his political allies will claim?

A lower unemployment rate is obviously better than a higher unemployment rate. But the unemployment rate itself has lost much of its value as an indicator of the state of the labour market. There are large pools of unutilised and underutilised labour in our economy that are not captured by the official unemployment measure.

Equally important, assumptions that a historically low unemployment rate will automatically correct many of the labour market problems that Australia has experienced in recent years are misplaced. Problems like wage stagnation, falling real wages, income inequality and poverty (even among employed people), and the economic exclusion of sectors of society (such as indigenous and immigrant communities, and people with disability) all require more concerted and targeted actions to fix.

Counting the Unemployed

To be officially counted within the ABS’s measure of unemployment, a person has to pass several tests:

1. They cannot have worked at all, even a single hour, in the reference week when ABS conducts its survey.

2. They cannot be on the payroll of an employer (even if they didn’t work), perhaps waiting for a shift or waiting for a new job to start.

3. They must be immediately available for work, and actively seeking it; and that “active” job search must consist of more than simply watching advertisements (but must involve multiple applications and inquiries).

There are millions of Australians who are not optimally working, but do not satisfy all of those conditions. One large group is the underemployed: almost 1 million Australians in December, or 7% of all employed, who wanted to work more hours than they did. Another group is discouraged and “marginally attached” workers who would like to work, and are available to work, but are not actively seeking it — perhaps because they do not believe an adequate job is available. That’s close to another million Australians according to ABS data. Add the 575,000 Australians who met the official standard of “unemployment” in December, and we have a pool of 2.5 million Australians who want and need more work.

The official unemployment rate is poised to fall to the lowest in nearly 50 years. But underemployment is still historically elevated, despite recent reductions as the economy recovers after earlier COVID lockdowns. This chart shows the historic growth of underemployment in Australia (measured as a share of total employment) since the 1980s. at 7%, the current underemployment rate is not “low” at all: it is typical of the experience over the last 30 years.

Post-COVID Recovery and Job Quality

The long-term rise of underemployment in Australia’s economy is closely correlated with the expansion of non-standard or insecure work in various forms: including part-time work, casual jobs, labour hire and contractors, and more recently gig workers. Few full-time workers report they want more work; most underemployed are those in part-time and casual roles, whose schedules (typically irregular) do not provide them with adequate income.

The employment rebound after the COVID lockdowns has been shaped by a rapid resurgence of insecure work. Part-time workers and those in casual jobs lost a disproportionate share of work when the pandemic first hit: partly because they can be discharged easily by employers (without notice or severance), and partly because many were ineligible for government pandemic supports (like JobKeeper). As the economy reopened, however, these insecure jobs came roaring back. Part-time jobs account for over half of all jobs recreated since May 2020 (low point of the pandemic). Almost one-third of employed people in Australia now work part-time, the third highest rate of part-time work in the industrial world (behind only Netherlands and Switzerland).

Meanwhile, casual jobs make up 43% of all new jobs from May 2020, and the share of casual work in total waged employment has bounced back quickly after the lockdowns (reaching 23% by November 2021).

Earnings for part-time and casual workers are much lower than for those in full-time, permanent positions — for obvious reasons. They don’t receive enough hours; their jobs are very insecure; they are reluctant to ask for wage increases (worrying rightly that could jeopardise their future employment); and they are less likely to have the protection and bargaining power of a union.

For example, this table shows the median hourly and weekly earnings for casual workers in Australia in 2020. Despite the supposed payment of casual loading, hourly wages for casual workers were about one-quarter lower than for permanent staff. And weekly earnings were half of those for permanent staff. Similar earnings disadvantages apply to part-time workers. One prominent economist was quoted on ABC Radio this week suggesting that Australia’s industrial relations system leads to “people who are employed, even if casually, being paid a decent wage.” Real data on the very low earnings for those in non-standard or insecure work suggest otherwise.

Even before the pandemic, insecure work had become an endemic and dominant feature of Australia’s labour market. As illustrated in this figure, over half of working Australians experienced at least one dimension of precarity in their jobs: part-time, casual, self-employed (including marginal own-account roles), and gig jobs. The dominance of insecure jobs in the post-lockdown employment recovery prove that this problem is not going away of its own accord.

Unemployment and Wages

There’s another important labour market number that should have a 3 in front it — or even a 4. And that is the annual rate of nominal wage growth. For almost a decade now, Australia’s wage growth has stagnated far below normal benchmarks. Annual wage growth since 2013 has averaged barely 2% per year — barely half the traditional pace. Real wages have hardly grown at all during this time, despite rising labour productivity and strong business profits.

Wage growth at these levels is incompatible with several key macroeconomic objectives: including achieving the RBA’s inflation target (of 2.5%), and stabilizing and rebuilding the share of GDP allocated to labour compensation (which reached an all-time record low during the pandemic).

Even RBA Governor Philip Lowe acknowledges nominal wage growth must be much faster, to meet his bank’s inflation target. After adjusting for ongoing labour productivity growth (which has averaged 1% per year or more in the long run), nominal wages should grow at 3.5% per year or more to ensure that unit labour costs are growing in line with the RBA target. “Unless labour productivity growth is very weak, it is likely that wages will need to be growing at 3 point something per cent to sustain inflation around the middle of the target band,” Lowe said in November 2021 (in a speech to the Business Economists of Australia).

Will an unemployment rate with a 3 in front it, ensure that we also get wage growth with a 3 in front of it? Don’t count on it. The traditional relationship between unemployment and wage growth has largely broken down in Australia. Wage growth hit historic lows in the late 2010s despite unemployment rates that were relatively low by historic standards. Government leaders urged Australians to simply wait for market forces to work their magic: but the long-promised acceleration in wages did not occur when unemployment fell below 6%, nor when it fell below 5%. It won’t automatically happen if unemployment falls below 4%, either.

Wages are not the automatic outcome of supply and demand forces. Unemployment rates are relevant (mostly because of how they affect the bargaining power of workers, rather than through assumed competitive “market-clearing” pressures). But structural and institutional factors are more important. These include:

· Minimum wages, which directly and indirectly influence wage growth for over one-third of Australian workers.

· Collective bargaining, through which workers can try to equalise the inherent imbalance in bargaining power between employers and individual workers.

· Job security, which empowers workers to expect better wages and conditions.

· Public sector wage policies, which directly regulate wage growth for 15% of Australian workers, and seet a powerful signal to the rest of the labour market.

· Other factors like cost of living, expectations, norms, and culture.

Many of these forces have turned decisively against wage growth in recent years. The erosion of collective bargaining has been particularly damaging to wages: the share of workers covered by current collective agreements has plunged by almost half since 2013, to barely 15% today (counting agreements registered under the federal IR system). Public sector pay freezes and caps have also restrained wage growth, regardless of the unemployment rate. Minimum wage increases have been important in providing a floor to wages during this historically weak period of wage growth, but the effectiveness of minimum wages has also been eroded in recent years (with minimum wages now equaling just 53% of median wages today, compared to 65% three decades ago).

The federal government has optimistically predicted a rapid rebound in wage growth in every budget it has tabled since 2014. For 8 years in a row, it has been wrong. That record will not suddenly change because the unemployment rate happens to fall below some arbitrary threshold.

In order to fix the pervasive problems of insecure work, underutilisation, and falling real wages, we need to directly target those problems with pro-active policy interventions: to lift wages, to improve the quality of work, and to provide workers with the real bargaining power to demand and win something better. That means stronger minimum wages and Award conditions, repairing Australia’s broken collective bargaining system, addressing the scourge of insecure jobs, and relaxing the needless wage austerity that has been imposed on Australia’s public servants.