Record high underemployment in Australia

The latest unemployment figures for Australia show a number of worrying indicators.

• A rise in unemployment overall (to 5.9% of the workforce)
• A record high in underemployment (1.1 million people are employed but want to work longer hours)
• Falling numbers of full-time jobs 

This all helps explain why wages growth in Australia is also at record lows. There is simply too much supply in the labour market for wages to rise. This may be because of a number of reasons, for example, an increasing workforce (immigration and more young people joining the market than older ones leaving it), or lower demand for goods and services made by Australians leading to less demand for workers. 

The prospect of falling Aggregate Demand (AD) is clearly a possibility. At present the rise in commodity prices is helping to boost exports, assisting modest AD growth, but isn't really employing any more people (because its the value not the volume of exports which is rising).

This is going to present difficult policy options for the Government (budgetary/fiscal policy) and the Reserve Bank of Australia on interest rates.

The Guardian covers the story here

Australian wages growth at record low

The growth in wages in Australia is about half the rate it was four years ago at 1.9%. In a stark contrast to the period of the 1970's and 1980's this is a cause for concern.

During the 1970's Prices and Incomes policies, where governments tried to limit pay rises to control inflation, subdued wages growth would be the cause for celebration. This is because firms costs are closely linked to the prices they charge as wages make up a significant proportion of those costs. Therefore the low rise in wages indicates that inflation in Australia is likely to stay low for now.

In fact inflation is so low that it is a significant cause for concern. It indicates a low level of Aggregate Demand (AD) growth, which is threatening Australia's overall economic growth.

The cause of this low wage growth has several roots. One is the end of the mining investment boom of course and the adjustment of the economy to non-mining sectors. However usually low wages growth is associated with rising unemployment (the Phillips Curve relationship) and in Australia unemployment has been trending downwards.

As noted in several other posts the unemployment figures are misleading. In fact there is growing part-time work and underemployment. In addition the participation rate is falling as people leave the labour market. This is making the unemployment rate look lower as it is calculated using the formula:

Unemployed

                   Employed + Unemployed     x 100

As those not participating in the labour market are counted as neither employed or unemployed the falling participation rate leads to a lower recorded unemployment rate (i.e. they would be unemployed if looking for work).

The ABC provides an excellent commentary with data on this story below.

The ABC story is here

This is an excellent subject for IA's in macro. Note the ABC article has too much analysis to be a good base article, but there should be plenty of articles out there that deal with the story without spoiling the chance to analyse what is going on.

Wage growth means that inflation is likely to be weaker

The causes of inflation are complex. They can be boiled don to demand-pull and cost-push forces, but in reality the forces that drive the inflation rate are complex and numerous variables feedback to influence others. The Monetary Policy Committee of the Bank of England monitor over 1500 different statistics to reach their judgement on the path of future inflation.

One variable that is important is wages growth. Wages feed through into inflation because they affect the cost of production. If wages are rising more slowly then it is fair to assume that the upward pressure on prices will be reduced. This would be classified as lower 'cost-push' pressure on inflation.

However lower wages growth is quite probably associated with low demand pressures. There isn't enough Aggregate Demand for firms to be competing for scarce labour resources. When there is high Aggregate Demand labour shortages cause wages to be bid up faster.

Australian wages growth is now the lowest it has been for twenty years. This suggests low inflationary pressure and the article below suggests that this means the Reserve Bank of Australia will cut interest rates again soon.

It would be a mistake to say this is low cost-push' inflationary pressure alone, because the problem begins on the demand side of the economy.

The Guardian article is here

This article is relevant to IB and VCE economics. VCE students need to know the demand and supply side influences on the Australian economy and how these are affecting the macroeconomic goals of the economy. IB students also need to understand the process of inflation and its various influences.