Wages growth is disappointing across the advanced economies, despite seemingly low unemployment rates. This is partly because labour underemployment is elevated.
Concern about the rise of non-standard work (like 'gig' employment) and its risks for job quality and wages growth are overstated. Non-standard employment still remains a small share of the labour market.
Fear of machines taking all human jobs is also misplaced. Around 14% of jobs in the OECD are at a high risk of automation and most of these are in middle-skill routine roles. In Australia, it is closer to 7%.
Increased flexibility in the labour market and improved technology are longer-run drivers keeping a lid on wages growth. But for now, the more important driver for lifting wages is increasing GDP growth.
Employment growth has been solid across the advanced economies over recent years and unemployment rates have been trending down. But, the associated lift in wages growth has been largely absent. Low wages growth against seemingly booming corporate profits and rising asset prices in advanced economies have led to the sense of a disgruntled workforce. Job security fears continue to lift on reports of technology decreasing the quality of jobs and replacing humans, signs of rising non-standard work with more “gig” employment and protests against “zero hour” (or casual) contracts in the UK. Rising job security fears can hold back consumer spending and also wages growth and lead governments to pursue policies (like tariffs) that protect local industries and jobs.
Is the nature of traditional work changing and what are the longer-run impacts of these adjustments? We explore these labour market issues in this Econosights.
Strong employment versus rising underemployment
In our view, disappointing wages growth across advanced economies against solid employment rate and falling unemployment rates comes down to two factors:
- there is spare capacity in the labour market which is hidden in lower unemployment rates but elevated underemployment
- the low inflation environment is keeping a lid on wages growth through lowering inflation expectations.
One upside from low wages growth is that it may have allowed employment growth to remain elevated.
Global central banks are now paying more attention to underemployment which is a measure of workers who would like to work more hours. Labour market underutilisation is underemployment plus the unemployment rate and gives the best guide to labour market spare capacity (see chart below). Underutilisation has decreased significantly in the US and is around record lows but is still quite elevated (compared to history) in Australia and Europe.
Declining labour underutilisation, either through falls in unemployment or underemployment is necessary to lift wages growth.
Some have suggested that spare capacity in the labour market is leading to employees taking on additional, non-standard work, particularly as wages growth has disappointed.
The rise of non-standard work
The rise of non-standard work (especially in the “gig” economy) is spoken about a lot these days. The concern around increasing non-standard work is that it may be a sign of a weakening labour market as employers abandon traditional permanent jobs which could lead to future large-scale unemployment in a downturn. Or it may be a sign of worsening employee conditions and rising inequality as non-standard workers often have fewer employee rights and potentially lower wages, i.e. lower quality jobs.
The gig economy is just a modern term for freelance employment. Jobs in the gig economy are task-based jobs done for many “employers” (for example Uber or Airtasker). Gig based work still remains a small share of the labour market.
We look at the share of self-employment and secondary jobs as signs of gig employment. In the US, self-employment makes up around 6% of total jobs and is trending down (see chart below). Those with a secondary job in the US remains fairly stable as a share of employment (at around 4%). In Australia, the number of people with a secondary job has been steadily rising over the past five years but it’s still only around 8% of employment.
Other types of non-standard work refer to any work agreements that are outside of traditional permanent contracts, based on a specified hours per week including short-term contracts. Temporary and casual work and are also important to track for signs of shifting work environments. There are also few signs of a rise in non-standard work. In Australia, casual employment has remained unchanged at around 20% of all employees over the past 20 years. US temporary employment has risen over the past 30 years, but is only around 2% of total employment.
Technological improvements increase labour flexibility and will allow more jobs to be created in non-standard jobs over the next decade but this is unlikely to displace traditional employment.
Increasing job flexibility also has implications for government around employee superannuation savings and building transport infrastructure as well as for the private sector in terms of demand for office space – but that is a separate issue!
Jobs and automation
Fears of large-scale near-term unemployment caused by automation of human jobs is misplaced. Technological improvements mean that some routine manual and cognitive jobs typically done by humans are now being replaced or improved by machines. But, the pace of this change is slow-moving and new jobs will be created as others become obsolete.
Middle-skill jobs are more susceptible to displacement by technology because these jobs tend to be routine-based manual or cognitive tasks (e.g. routine manual jobs include construction, transportation and production jobs and routine cognitive jobs include sales and office occupations), which means they can be learned and replicated by machines. High-skill jobs tend to be harder to replace by machines because they are non-routine and cognitive based (e.g. management and professional jobs), which requires human judgement and expertise. At the other end of the spectrum, low-skill jobs are usually non-routine manual tasks (e.g. service-based jobs that are related to assisting others like cleaning and gardening), which are also difficult to replace by a machine and are likely to grow in importance from a growing middle-class and ageing populations.
In Australia, the decline in routine manual and cognitive jobs has already been happening over the past three decades (and this trend is expected to continue), as evident in the chart below, so it is nothing new.
The OECD’s latest estimates (in 2018) indicate that around 14% of jobs (in the OECD) are at a high risk of automation. But there are wide variations across the various countries (see chart below). The workforce’s that are more at risk tend to have a low-educated workforce, a weak tradeable services sector and have a low urbanisation rate. In Australia, around 7% of jobs are at a high risk of automation and will be displaced and in the US its slightly higher at 10%. But, the OECD also estimate that around 32% of jobs (across the OECD) will face a significant moderation and the nature of these jobs will need to be adjusted.
The role for governments around managing the impact of technology on employment includes access to high-quality education and training programs, appropriate school and university curriculum’s and ensuring that funding is targeted towards areas with a low risk of automation
Implications for investors
Investors should be less concerned about rising non-standard work or automation as key drivers of low wages growth and instead focused on labour underutilisation.
GDP growth has disappointed over the past six months, as growth weakened in Europe, China and Australia. Indicators of global growth remain soft – global manufacturing PMI’s are still falling, global trade volumes are declining and inflation is low (and even weakening in some countries). Trade war risks are not helping business confidence and business investment. Central banks have turned more dovish and further monetary stimulus is likely in the US, China, Australia and New Zealand. This will assist global growth but the trade war needs to be resolved before GDP growth improves and reduces spare capacity. Until growth picks up and labour underutilisation is reduced, interest rates and bond yields will remain low.
While every care has been taken in the preparation of this article, neither AMP Capital Investors (US) Limited nor any member of the AMP Group make any representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.