Employment remains robust but unemployment and wages are unmoved: Justin Smirk

EXPERT OBSERVER

The July Labour Force Survey was a robust update on employment (+41.1k) but with participation hitting a new record high at the same time, unemployment remained sticky at 5.2%. Given this strength in participation, even if employment growth continued to outperform expectations from here, it is hard to see unemployment getting down to 5% any time soon, let alone getting down to the RBA’s natural rate of 4.5%.

This matters for wages, even more so given that the underemployment rate (those who are working who desire and are able to work more hours) didn’t improve as much as unemployment did through 2018. Underemployment was trending higher earlier this year compared to unemployment until the surprise drop in June. But in July, underemployment bumped higher to 8.4%, still better than 8.6% in May but this lift did lock in a trend drift higher.

Given rising participation and rising underemployment, we were not surprised to see another soft wages update from the June quarter Wage Price Index (WPI). In the June quarter the WPI lifted 0.6% vs market expectations for a 0.5% rise and up slightly from the 0.5% rise in the March quarter. This held the annual rate flat at 2.3%yr which is a modest lift from the low of 1.9% in 2017 but can hardly be described as a breakneck pace.

The June quarter wage print was 0.61% at two decimal places with a 0.54% rise in private sector wage rates and a very solid 0.82% rise in public sector wages, the largest quarterly rise in public sector wages since Q1 2014. But this followed the smallest quarterly rise in public sector wages since March 2000 of 0.45% in the March quarter, highlighting greater than normal volatility in this series.

The ABS noted that in the June survey, the most significant contribution to wage growth in the public sector component came from health care and social assistance, with Victoria reporting a number of large increases as employees there had their pay adjusted to ensure wage parity with other states.

Victorian public sector wages grew 1.5%, there was a more average rise in Queensland of 0.5% while NSW reported a below average increase of 0.2%. In the year to June, public sector wages have been growing at 2.6%yr.

Contrast the lift in public wages against the flattening pace in private sector wages. Private sector wages printed a rise of 0.54% in each of the last two quarters seeing the annual pace ease back to 2.3%yr from 2.4%yr in March which was the fastest pace since December 2014.

Overall, we have to admit the pace of growth in private sector wages has been very disappointing. We have found that private sector wages have a good relationship with underutilisation (unemployment plus underutilisation) with a lag of around two quarters.

Which then leads to an ongoing conundrum: why are wages growing so slowly in NSW, the state that previously had underutilsation that was well below the national average (thus the tightest labour market) since the second half of 2015?

Contrast this with WA, the state that has had the highest rate of underutilisation and is now experiencing well below average wage outcomes. Yet wages in the state of Victoria have been more responsive to changes in labour market conditions.

The recent modest acceleration in the pace of wages growth in Victoria to 2.9% maps nicely against the decline in underutilisation from late 2016 to early 2018. Since the second half of 2018 underutilisation has started to drift higher again suggesting the acceleration in wage inflation should moderate in Victoria (excluding any effect from public sector wage equalisation) as we move through 2019.

It is a puzzle as to why NSW wages have underperformed the tightness in labour market conditions, so we can't be confident how far labour market tightness in Victoria will lift wages. We also have to take care when considering how much of the Victorian pressure on wages will be passed onto other states.

Read the full report: 'Australian July Labour Force' (PDF 179kb)

JUSTIN SMIRK is ‎a senior economist for Westpac