AICD Chief Economist

October delivered a surprisingly strong labour market result with employment growing by more than 178,000, although a rise in the participation rate also meant the unemployment rate edged up to seven per cent. Wage growth slumped to a new record low in the September quarter. The RBA minutes from the 3 November meeting added a little more colour to the central bank’s decision earlier this month to cut rates and embark on a program of asset purchases. Payroll jobs numbers rose over the past fortnight, boosted by a strong pickup in Victoria. The weekly consumer confidence index rose for the 11th consecutive time and is now approaching a nine-month high. The ABS provided more survey data on the impact of COVID-19 on households. The signing of the RCEP trade deal should offer new opportunities for regional trade although the ‘deeper’ meaning of the agreement is more ambiguous.

This week’s readings include more thoughts from the RBA, Grattan on the future of gas, the Productivity Commission on mental health and the economy, a new COVID economic recovery index, the case for and against taxing WFH, a discussion on the economics of remote work, a profile of a possible contemporary version of Hari Seldon and a selection of the best economics books from the second half of 2020.

What I’ve been following in Australia . . .

What happened:

The ABS said that employment increased by 178,800 people in October (seasonally adjusted) with full-time employment increasing by 97,000 people and part-time employment increasing by 81,800 people.

Graph 1

Employment grew in all states and territories last month with the sole exception of Tasmania, where employment was flat.

Graph 2

The biggest absolute gains came in Victoria, which saw employment increase by more than 81,000 people, followed by New South Wales, which saw an increase of more than 36,000 (although that state also experienced a decline in full-time employment).

Graph 3

Hours worked in the economy rose 1.2 per cent in October, an increase of 20.6 million hours.

Graph 4

The unemployment rate edged up by 0.1 percentage points to seven per cent, but the underemployment rate decreased by one percentage point to 10.4 per cent, which meant that the underutilisation rate fell by 0.9 percentage points to 17.4 per cent.

Graph 5

The combination of a rise in the unemployment rate alongside a large gain in employment was the product of an increase in the participation rate, which rose by 0.9 percentage points to 65.8 per cent. The employment to population ratio also increased, rising to 61.2 per cent.

Graph 6

The unemployment rate dropped by 0.7 percentage points in New South Wales and eased by 0.1 percentage points in Western Australia but increased in all other states.

Graph 7

Why it matters:

October’s labour market report was significantly stronger than expected. Granted, the unemployment rate did edge up to seven per cent. But this was marginally better than consensus expectations for a 7.1 per cent print. And rather more dramatically, the consensus forecast had been for employment to fall by more than 27,000 over the month. Instead, we got a rise approaching 179,000.

Those expectations of a fall in employment reflected a combination of factors: a run of relatively weak payroll numbers (although the latest data here are more positive – see below), the expectation that the survey period running from 27 September to 10 October would capture only the initial easing of lockdown restrictions in Melbourne announced in late September (and not the more substantial easing announced subsequently) and therefore miss any big employment response, and any potential adverse impact of the modifications to the JobKeeper program which started on 28 September.

In the event, however, October brought a strong increase in employment in Victoria, with the state accounting for 81,600 of the national gain in employment and enjoying a 5.6 per cent increase in hours worked. With the impact of the further easing of restrictions still to come in the data (and supported by the payroll numbers described below), there could be more good news from the state in next month’s report, as employment and hours worked in Victoria remain 4.1 per cent and nine per cent below their March levels, compared to 1.7 per cent and 3.8 per cent for the rest of Australia.

October’s increase in employment means that the level of employment last month was only 1.7 per cent below March of this year.

Graph 8

That still leaves the number of employed more than 223,000 down over the course of the pandemic, however.

Graph 9

Another piece of good news in this set of results was the increase in the number of Australians in the labour market. Both the participation rate and the employment to population ratio jumped over the month, and the total number of people in the labour market has exceeded its March level for the first time since the start of the pandemic.

Graph 10

More evidence of labour market normalisation is visible in the continued decline in the number of people working zero hours for economic reasons. After increasing by almost 700,000 between March and April this year, the number fell by 600,000 between April and July. That initial decline was followed by a 50,000 increase between July and August (with the number of people working zero hours for economic reasons in Victoria almost doubling over this period) and then another small decrease in September. But now there has been another drop of 70,000. Victoria still accounts for half of the people working zero hours for economic reasons as of October and that number looks set to fall further next month.

Graph 11

One final feature of the employment data worth noting here is the continued growth in part-time work. The initial impact of the pandemic saw job losses concentrated among part-time workers and this in turn produced a sharp fall in the overall share of part-time work in employment. That decline has since been reversed and the absolute number of part-time workers is now higher than it was in March this year. As a result, the share of part-time work in total employment has climbed to 32.3 per cent, its joint highest level (with January 2017).

Graph 12

What happened:

According to the ABS, the Wage Price Index (WPI) rose by just 0.1 per cent over the September quarter (seasonally adjusted) to be up 1.4 per cent over the year.

Graph 13

The private sector WPI rose 0.1 per cent in quarterly terms and at a 1.2 per cent annual rate while the public sector WPI rose 0.2 per cent over the quarter and 1.8 per cent over the year.

Graph 14

By state, New South Wales and Queensland recorded the highest quarterly rise of 0.6 per cent (original series) – which was nevertheless the lowest September quarterly rise recorded for both states since the commencement of the series. Victoria reported the lowest quarterly rise of 0.2 per cent. In annual terms, South Australia saw the highest increase of 1.8 per cent while Victoria saw the lowest gain of 1.2 per cent.

Graph 15

By industry, the main contributor to wage growth over the quarter was health and social care assistance, where the WPI rose 0.8 per cent over the quarter. The only industry to suffer a quarterly fall in the WPI was administrative and support services (down 0.3 per cent).

In annual terms, the largest gains were in education and training and financial and insurance services (both up 2.4 per cent) while the slowest growth was in accommodation and food services and administration and support services (both up 0.5 per cent).

Graph 16

The ABS also re-introduced the old labour price index (LPI) this quarter. The LPI was last published in Q3:2011 on an FY basis. The WPI survey does not include subsidies which means it does not account for the impact on business labour costs of measures such as the JobKeeper subsidy and payroll tax changes. In contrast, the LPI aims to capture changes in the price of all labour costs including subsidies.

The LPI had recorded a substantial 12.5 per cent fall over the June quarter (and was down 11 per cent over the year) due to the impact of the JobKeeper wage subsidy and the introduction of various waivers to payroll taxes. The September quarter saw the end of payroll tax waivers in a number of jurisdictions, moderate wage rises, and the return of superannuation and leave obligations, all of which pushed labour costs back up again, although these changes were also offset by small increases in the take up of the JobKeeper wage subsidy. Overall, the LPI rose 2.9 per cent in the September quarter but was still down 9.3 per cent over the year.

Why it matters:

The 0.1 per cent quarterly and 1.4 per cent annual actual increases in the WPI in Q3 were both a bit weaker than consensus projections (0.2 per cent and 1.5 per cent, respectively). More notably, both the quarter-on-quarter and annual rates of wage growth marked new record lows, beating the records set in the June quarter. All else equal, weak wage growth is bad news for disposable income and consumer demand and therefore for overall economic growth. But all else isn’t equal as the decline in wage growth is currently being offset by government stimulus payments including tax cuts as well as by record low interest rates (since the household sector taken as a whole is a net debtor).

The ABS pointed out that the September quarter typically sees solid wage growth, with the WPI influenced by a combination of regularly scheduled enterprise agreement increases, end of financial year salary reviews for individual arrangements, and modern awards receiving increases as a result of the Fair Work Commission (FWC) Annual Wage Review. This year, however, the pandemic and a struggling labour market have contributed to a much weaker wage outcome than usual, with fewer end of financial year reviews, delays in enterprise agreement increases and a phased implementation schedule of award increases all dragging on the rate of wage growth in Q3:2020.

The result had been expected: the RBA’s November Statement on Monetary Policy had noted that the FWC had only awarded a 1.75 per cent increase to award wages this year. Not only was this lower than in recent years but the increase was delayed for most affected employees from July to November or February. Moreover, this deferred increase affected many employees covered by enterprise bargaining agreements as a growing number of these agreements have pay increases linked to the award wage outcome. In addition, the RBA has found that wage freezes have been widely deployed by businesses: according to the central bank’s liaison program, in the September quarter more than half of reporting firms told the RBA that they either had a wage freeze in place or expected to implement one in the year ahead.

The public sector has not been immune, either. The rate of public sector wage growth hit a record low in Q3, with wage deferrals and wage caps being applied at both the Commonwealth and State levels.

What happened:

The RBA published the minutes from the 3 November Monetary Policy Meeting of the Reserve Bank Board.

The discussion at November’s meeting noted that economic conditions in Australia had improved somewhat, and that, ‘since the onset of the pandemic, consumption, business investment and labour market outcomes had generally been better than initially feared, with significant policy support a key factor during and after the intensive period of lockdowns.’ Similarly, in the case of the labour market, ‘conditions in the September quarter had improved and outcomes had been better than expected.’ Despite this positive news, however, the board remained cautious about economic prospects:

Nevertheless, the recovery was still expected to be protracted and the outlook remained dependent on successful containment of the virus. It would take some time for output to reach its pre-pandemic level, and it had become increasingly clear that an extended period of high unemployment was in prospect. The high unemployment rate and excess capacity across the economy more broadly were expected to result in subdued wages growth and inflation over coming years…The Board discussed the outlook for the economy and concluded that, despite somewhat better recent outcomes in Australia, the recovery was expected to be protracted and uneven. The outlook implied a large shortfall in activity and employment from levels that would be consistent with full employment.

Based on these considerations, the board decided to deploy its latest package of policy measures, including cuts to the cash rate, the TFF rate and the target for three-year yields as well as the introduction of a $100 billion program of bond purchases. Interestingly, the board discussion did canvass the alternative idea of shifting the yield curve control (YCC) target:

Members discussed the merits of targeting a bond yield around 5 years but decided against this and to continue with the 3-year yield target. Members judged that a yield target is most effective when its maturity is consistent with the Board's forward guidance on the cash rate. The Board expects the cash rate to remain at its current level for at least 3 years, but beyond that members have less confidence about the path of interest rates.

The discussion also covered the case for waiting before introducing further easing measures, noting:

Members considered whether to implement the package at this time or to wait for further information. The Board concluded that it was the appropriate time to implement the package, as it had become clearer that unemployment would remain high and inflation subdued for an extended period, and that further information in coming months was unlikely to change that assessment…The package would add to the substantial monetary stimulus already provided earlier in the year and would complement the significant steps taken by the Australian Government, including in the recent Budget… It was also likely that having the various arms of policy all taking steps in the same direction would deliver a greater impact than the sum of the individual parts…especially so during a period in which the economy is opening up and people are more willing and able to spend.

Finally, the meeting also considered two objections to further rate cuts: first, the adverse consequences for those reliant on interest income, with the minutes noting that the discussion ‘acknowledged the difficulties that low interest rates generate for these households’, but set this negative effect against what it judged were the positive effects on aggregate of lower rates; secondly, the risks created by investors searching for yield in a low rate environment, where the minutes record that the meeting concluded that, on balance, ‘there were greater financial stability benefits from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets.’

Why it matters:

The minutes mainly cover the same ground as Governor Lowe’s speech on 3 November, while the November Statement on Monetary Policy had already provided a detailed update on the RBA’s new forecasts for the economy, although the additional colour on the board’s thinking around the YCC target and the debate over whether to wait or act this month was interesting. See also this week’s readings (below) for a quick take on Governor Lowe’s latest speech.

What happened:

The ABS reported that between the week ending 14 March and the week ending 31 October 2020 the number of payroll jobs fell by three per cent while total wages paid decreased by 4.3 per cent, based on its experimental weekly estimates of payroll jobs and wages, sourced from Single Touch Payroll (STP) data. By 31 October 2020, the ABS estimates that there were approximately 330,000 fewer payroll jobs in STP-enabled businesses than on 14 March.

For the most recent developments covered by the data, between the week ending 17 October and the week ending 31 October, the number of payroll jobs increased by 0.5 per cent, compared to a decrease of 0.1 per cent over the previous fortnight.

Graph 17

By state, between the week ending 17 October and the week ending 31 October, the number of payroll jobs rose by one per cent in Victoria and 0.4 per cent in Western Australia, South Australia, New South Wales and the Northern Territory, by 0.3 per cent in the Australian Capital Territory and by 0.1 per cent in Queensland. Only Tasmania suffered a fall over the latest fortnight of data, with jobs down by 0.1 per cent.

Graph 18

Graph 19

By industry, the largest losses of jobs over the period since the week ending 14 March are in accommodation and food services (down 15.5 per cent), arts and recreation services (down 12.8 per cent) and information, media and telecommunications (down 8.5 per cent). Only three industries, led by financial and insurance services, have added jobs over the pandemic period.

Graph 20

For the most recent two weeks of data, the number of payroll in jobs in education and training rose by 3.1 per cent, in retail trade by 2.7 per cent and in financial and insurance services by 1.2 per cent while job numbers declined by 1.6 per cent in arts and recreational services.

Graph 21

Why it matters:

After a run of disappointing results from the payroll jobs numbers in recent weeks, the latest set of fortnightly data brought better news, driven in particular by a substantial one per cent gain in Victoria but also supported by positive job numbers across all other states and territories with the exception of Tasmania.

Graph 22

Over the month of October as a whole, job numbers have risen by 0.3 per cent nationally, led by a 1.3 per cent rise in Victoria along with more modest gains in South Australia, the Australian Capital Territory and Western Australia. The easing of lockdowns in Victoria is clearly helping with the overall labour market picture, with the decline in job numbers seen during the period from mid-September to early October being unwound in the latter part of the month.

Even so, the payroll job index is still below its 19 September level.

What happened:

The ANZ-Roy Morgan weekly index of consumer confidence rose 3.4 per cent to an index level of 106.5 for 14/15 November.

 

Graph 23

There were significant gains for four of the five subindices over the week, with the measures for current and future economic and financial conditions all up, including a more than eight per cent rise for current economic conditions. The only fall was a marginal 0.2 per cent decline in ‘time to buy a major household item’, which had jumped by ten per cent the week before.

Why it matters:

The rise in consumer confidence continues – the index has now increased for eleven consecutive weeks and is now at its highest for nearly nine months, since February 22/23, 2020. Last week’s positive news about vaccine development is likely to have provided further momentum to the recovery in sentiment.

What happened:

The ABS published the latest in its series of Household surveys on the impact of COVID-19, this one covering October. Findings included:

  • Just 46 per cent of Australians said they intended to travel for holidays between November this year and February next year. That compares to the 77 per cent who would normally travel at this time of year.
  • Reasons for not intending to travel included COVID-19 travel restrictions (44 per cent), concerns about the risk of COVID-19 (30 per cent) and too much uncertainty (23 per cent).
  • 14 per cent of Australians reported their household made one or more changes to financial arrangements due to COVID-19. That included 14 per cent of those living in a home owned with a mortgage saying that they had had their mortgage repayment deferred or reduced (includes mortgages on a current dwelling or an investment property), eight per cent of those living in a rented home reporting that they had had their rent payment for the dwelling deferred or reduced, and five per cent of all respondents saying that they had had a bill or rate payment deferred or reduced.
  • 12 per cent of Australians with superannuation reported they had applied for early access to their superannuation, of which 97 per cent said they had received the money at the time of the ABS interview.
  • 41 per cent of Australians with a job reported working from home one or more times a week in the last four weeks, with that share varying from 50 per cent in Victoria to 44 per cent in New South Wales and 34 per cent in the rest of Australia.

Why it matters:

These regular ABS surveys continue to provide useful data on how the pandemic is influencing household behaviour.

. . . and what I’ve been following in the global economy

What happened:

Australia, along with 14 other regional economies, signed The Regional Comprehensive Economic Partnership (RCEP) on 15 November. RCEP negotiations were launched in November 2012 between the ten members of the Association of Southeast Asian Nations (ASEAN) and ASEAN’s free trade agreement partners (Australia, China, India, Japan, New Zealand and Republic of Korea). In November 2019, India indicated it had several issues preventing it from joining RCEP and New Delhi has subsequently said it is not in a position to sign the agreement, but the other 15 nations have now concluded what has been touted as the world’s largest trade deal, covering nearly 30 per cent of both world GDP and the global population.

The other 14 RCEP countries also include nine of Australia´s top 15 trading partners and as of last year accounted for 58 per cent of Australia’s total two-way trade, and 67 per cent of our exports. Canberra has said that it will work towards ratification of the RCEP Agreement in 2021.

Why it matters:

The big picture significance of RCEP appears to vary according to the analyst. So, on one reading it’s a symbol both of the rise of Asia as a cohesive trading bloc and of the relative decline of US influence in the region; on another, it’s a sign that China is unable to drive deep economic integration; or perhaps RCEP is evidence of the return of a world of self-contained trading blocs dominated by competing empires; or it’s a regional insurance policy against a further outbreak of the US-China trade war; or it shines a light on India’s reluctance to fully engage with international trade. The ‘true’ meaning of RCEP, like beauty, is in the eye of the beholder, it seems.

The more concrete benefits from the trade agreement are led by the introduction of a single set of rules and procedures for accessing preferential tariffs across all the participating markets, replacing the overlapping measures associated with existing bilateral trade agreements. That should also help promote regional supply chains via agreements on rules of origin. In that sense, RCEP is an effort to solve the famous noodle bowl (the region’s version of the spaghetti bowl) problem created by the proliferation of multiple, overlapping preferential trade agreements. That could deliver some significant economic gains, especially to larger members such as China, Japan and South Korea, although modelling suggests that the gains to Australia are relatively modest. The deal is also intended to support increased trade in services across the region, help reduce non-tariff barriers, support new rules on e-commerce and promote regional supply chains through agreements on rules of origin (ROOs).

To date, a common criticism of RCEP is that since it only covers existing trading partners and since it offers relatively little in terms of the depth of economic integration (the FT’s Alan Beattie has described it as ‘a child’s paddling pool the width of an ocean: very broad but rather shallow’), the scope for significant new trade creation is relatively modest, particularly for a country like Australia, which is perhaps one reason why so much attention has focussed on the symbolism of the deal. Grand claims about RCEP providing better market access for Australian exporters or creating big new opportunities for us to diversify our trade away from

China should also be treated with caution. It turns out that the previous existence of a bilateral FTA with China hasn’t delivered much protection to Australian exporters from Beijing’s geo-economic efforts to squeeze bilateral trade, for example, just as previous trade agreements with ASEAN have yet to deliver the large gains in economic engagement with Southeast Asia that have been hoped for. And India – another long-term Australian target for improved market access – wasn’t even prepared to sign up to RCEP in the end. None of which is to deny the real benefits noted above or indeed the commendable achievement of delivering arguably the world’s biggest trade agreement at a time when international economic integration is widely held to be going backwards. But we shouldn’t oversell the likely benefits, either.

What I’ve been reading . . .

RBA Governor Philip Lowe gave a speech on Covid, Our Changing Economy and Monetary Policy. One key theme of the speech was the lasting impact that the pandemic will have on the Australian economy, with the governor nominating five issues: (1) an extended period of higher unemployment; (2) a sharp decline in population growth; (3) complex changes to the property market; (4) a likely increase in overall risk aversion, albeit possibly combined with some increased risk-taking as a consequence of a search for yield; and (5) the shift to a more digital economy with some potential productivity payoffs. A second theme was the changed policy environment, where in the case of monetary policy, Lowe highlighted four developments: (1) the change in the RBA’s forward guidance with its new focus on actual rather than forecast outcomes; (2) the shift in the weight the RBA gives to jobs relative to inflation in its communications; (3) what the governor described as ‘a strengthening in the gravitational pull of low global interest rates’ which, via pressure on the exchange rate, has pushed the RBA to follow other central banks down to (near) zero policy rate; and (4) a return to a world in which quantities (e.g. of assets purchased) matter as well as prices.

Also from the RBA, Christopher Kent Assistant Governor (Financial Markets), spoke this week on new benchmarks.

Two pieces from The Conversation on interest rates: John Quiggin on why zero interest rates are here to stay and Harry Scheule reviews some of the implications of negative interest rates.

The Grattan Institute has a new report out on the future of natural gas. While Grattan thinks that gas will have an important role as a ‘backstop’ in power generation, the report is sceptical about other claims made about the fuel’s role as a future energy source.

The CSIRO has published its latest State of the Climate Report.

Taylor Fry maps the financial impact of COVID-19 on Australians.

Research conducted for the Victorian Council of Social Services (VCOSS) describes the shifting pattern of poverty in Australia over the course of the pandemic and changing government policies.

This week’s NSW budget pushed the case for tax reform, setting out a proposal to reform property taxation via a gradual replacement of stamp duty with land tax. Stamp duty is a notoriously inefficient tax and economists have long argued for its replacement with an economically more efficient land tax, but the political obstacles have meant that to date only the ACT has been prepared to grasp the nettle. NSW is apparently taking advantage of the times to deliver some productivity-enhancing reform.

The Productivity Commission’s new report on mental health starts from the proposition that ‘mental health is a key driver of economic participation and productivity in Australia, and hence has the potential to impact incomes and living standards and social engagement and connectedness.’ The Commission estimates that reform of the mental health system would produce large benefits in the form of substantial improvements in people’s quality of life (an improvement of 84,000 quality-adjusted life years) — valued at up to $18 billion annually – along with an additional economic benefit of up to $1.3 billion a year due to increased economic participation.

Introducing the COVID Economic Recovery Index. More detail here. Finland gets top spot, followed by Norway and Germany. Australia is in a very decent fifth place out of the 122 countries ranked on a combination of absorptive capacity, economic resilience and health resilience.

This VoxEU column argues that while manufacturing and distribution of vaccines will present policymakers with some challenges, the bigger challenge may involve getting people to actually take them. Problematically, there is some evidence that suggests that vaccine scepticism is greatest among individuals who have experienced a pandemic at first hand (in their country of residence) and specifically when they are in their ‘impressionable years’ of 18 to 25.

The Economist magazine on the sometimes testy relationship between economists and epidemiologists. (See also the link in last week’s reading to the JEP symposium on economics and epidemiology.)

Bloomberg Businessweek presents an economist’s guide to the world in 2050: A more Asian-centric global economy that is also set to be marked by less economic and political freedom.

Also from Bloomberg, Noah Smith introduces the economists on Joe Biden’s transition team.

Anatole Kaletsky thinks that the conventional wisdom that a Biden presidency will be doomed to inescapable gridlock could be wrong.

The Atlantic profiles Peter Turchin, prophet of an Age of Discord that he thinks is being driven by ‘elite overproduction’, falling general living standards and looming state insolvency.

Recently, economists at Deutsche Bank proposed (pdf) a WFH tax. Here are some counterarguments.

Related, Adam Ozimek, Chief Economist for the global remote freelancing platform Upwork in conversation with Macromusing’s David Beckworth on the future of remote work in the pandemic era. Ozimek is an optimist on the productivity implications of remote working. For audio and links to some of the cited papers, see here.

Martin Wolf lists his best economics books from the second half of this year. I have to confess that I haven’t read any of these yet, although I have read several earlier versions of the broad Goodhart and Pradhan thesis, including this working paper from the BIS which sets out their arguments around demographics. I’ve previously linked to this LSE podcast with Collier and Kay and you can hear Brett Christophers interviewed on his new book here by Mark Blyth.

Also from Wolf, why inflation may be coming back (also available here). Wolf’s column draws on the Goodhart and Pradhan thesis of a global ‘regime shift’, which argues that the old regime was characterised by the international economic integration of the former Communist bloc led by China, the birth of the WTO, the expansion of global supply chains and a demographic sweet spot that saw growth in the workforce outpace population growth. The outcomes of these factors were a higher profit share, lower labour share, the global savings glut, falling global inequality coupled with rising national inequality and low inflation. Now, they argue, the China integration boom is done, globalisation is in retreat, and demographic headwinds are rising, which together will unwind the results of the previous regime. Wolf isn’t sure they are right but does accept that ‘big changes are in process’.