The Economist - A hidden malaise

Stephen Walters examines the employment rate of Australia’s labour market and finds potential discontent bubbling beneath the surface.

At face value, conditions in Australia’s labour market look decent enough. Last year, jobs growth nationally was close to 1.6 per cent, only just below the long-term average, and the jobless rate has now been below 6 per cent for 16 consecutive months. Hours worked across the workforce have also been rising, and the participation of people either in a job or looking for work is close to the highest rate ever.

But these high level labour market statistics mask underlying problems. Wages growth is at its weakest in two decades, and there are significant variations in employment conditions by region. The jobless rate is soaring in the formerly booming resource states, but falling in the former “rust belt” states in the south-east.

Combined, these dynamics help to explain why many households are unusually cautious in their spending patterns; their income is under sustained pressure. Households make up the lion’s share of national gross domestic product, so compression of labour income is an uncomfortable handbrake on national economic growth. Households can boost their spending by running down their savings rate for only so long.

First, though, the good news. Australia has generated more than 700,000 additional jobs in net terms over the last five years, an average monthly gain of nearly 12,000 positions. For much of the latter part of this period, the unemployment rate was falling, having previously been below 5 per cent during the glory days of the commodity price boom back in 2011. The national jobless rate, in fact, dipped to a three-year low of 5.6 per cent as recently as last October.

But, almost two thirds of these jobs created since 2012 have been part-time – traditionally, such jobs made up only one-quarter of total positions. This shift partly reflects changing demographic patterns – many people choose to work fewer hours, but in multiple jobs. It also reflects what some describe as the troubling casualisation of the workforce.

The shift towards more part-time workers is a key driver of the pressure on household income. Wages growth is below inflation, which itself is low, a decline that reflects the persistence of considerable spare capacity in the labour market. In fact, for the first time since 2012, household income from employment actually fell in the most recent quarter.

There is a tight historical relationship between firms’ hiring and investment activities. The latter has been unusually weak since the end of the global financial crisis, particularly in sectors outside mining. The elevated level of uncertainty may explain many employers’ preference to engage mainly part-time workers. Many also are reluctant to commit to multi-year investment spending.

The shifting tectonic plates of the labour market have seen a sustained rise in what is known as underemployment – the pool of people gainfully employed, but seeking more hours of work, whether in their existing job or elsewhere. The underemployment rate breached 9 per cent for the first time in 2016 having been below 7 per cent a decade earlier. Adding this pool to those out of work yields an under-utilisation rate of labour of nearly 15 per cent, close to a record high.

So, what can we do to address this malaise? On supply, we should ensure that our education facilities continue to turn out graduates who are job-ready. There should also be a renewed focus on later-in-life training to boost workforce flexibility, and a re-examination of the interaction between the tax system and the high cost of child care, which can be an impediment for many parents returning to work.

On the demand side, tax reform could help here, too, particularly via a lower rate of company tax. Boosting firms’ after-tax returns should result in stronger demand for labour, as well as more investment. Above all else, expanding the economy at a rate above potential is the best remedy.

Further industrial relations reform and streamlining regulations around employment would help, too. But the prospects of getting meaningful change through the Federal Parliament are slim. The decision by Fair Work Australia to lower Sunday penalty rates could help lift demand for labour, but the changes will simultaneously cut the take-home pay of those already employed, particularly those working in hospitality. The reform may simply be a case of robbing gainfully employed Peter to pay underemployed Paul.