Stronger employment figures conceal the weakness in the labour market

Australia added almost 180,000 jobs in October, well in excess of expectations, as the effects of Victoria’s re-opening began to be felt across the economy. Victorian jobs accounted for nearly half that increase, although other states and territories also performed strongly (with the exception of Tasmania, where the number of jobs held steady). There is further room to run on this dynamic in the short term, and we can expect strong jobs growth momentum in Victoria for November as well, as restrictions continue to ease.

Despite this increase in demand for labour, the headline unemployment rate increased slightly to 7% on the back of increased supply, in the form of a significant (0.9%) lift in the participation rate. The effective unemployment rate, accounting for those who have left the labour market and those working zero hours, stands at 7.8%, still well above the headline rate but down from a peak of 14.9% in April.

This is all good news for those seeking work, but the implications for Australia’s recovery are more mixed. To understand why, we need to look beyond the number of people in work and examine how much they’re actually working and what they’re being paid.

Underemployment

JobKeeper has been vital to the survival of many businesses and the stability of our economy over the course of the pandemic, but there’s no doubt that it’s keeping some people in work who might not otherwise have jobs. The government’s own numbers show that it still expects ~16% of the labour force to be on JobKeeper at the end of the year. A number of those are on reduced or zero hours, and their transition back to full-time work will be a significant challenge for the economy over the months ahead, particularly if JobKeeper is phased out by March 2021 as planned.

They’re part of a larger body of underemployed workers in Australia - although around 75% of the jobs lost due to COVD-19 have returned, we’ve only recovered about 63% of the hours worked that were lost to the pandemic. Underemployment has fallen to 10.4% from a peak of 13% in April, but is still well above pre-COVID levels of around 8.8%

This dynamic is also reflected in the types of employment that have been lost and created, with part-time job numbers actually 1.3% higher than they were a year ago while full-time jobs are down 2.1%

Wages growth

The effects of a rebound in employment will also be dampened by a further slowing in wages growth, down to a record-low annualised rate of 1.4% for the September quarter (when the consensus expectation was for a 0.2% lift). Even before the pandemic, Australia had been battling with stagnant wages and given the outlook for continued spare capacity in the labour market this is unlikely to improve in the near future (see chart below).

Annual minimum wage and award increases, which usually drive wages growth in the September quarter, were distinctly underwhelming this time around, and according to the RBA, around half of the firms in the central bank’s liaison program either had a wage freeze in place or were planning to implement one in the coming year

From an industry perspective, wages growth is being held down by the sectors hardest hit by the pandemic - administration & support (+0.5%), accommodation & food services (+0.5%) and rental, hiring & professional services (+0.6%) – this is in additional to Victoria, where wages growth is running at 1.2%.

We don’t expect an improvement in the short term- in fact, we expect wages growth to decline further into the middle of next year before improving over the second half of 2021 and into 2022, returning towards its per-COVID levels around 2% in late 2022. This will have detrimental effects on consumer confidence and consumer spending, which will rely more extensively on wages growth as the income effects of government support programs are progressively removed in the New Year.

So the good news is that the labour market has stabilised as restrictions continue to ease across the country. The bad news is that we some way to go to get back to “normal” and simply getting people back to work won’t be enough – we’ll need significant growth in hours worked and wages paid particularly as the government slowly winds back its safety net.