This one is for the boffins. If you’ve ever applied for a job and wondered how they work out the unemployment rate and why wages don’t go up when unemployment is low, read on. This story is by ABC Business reporter, Gareth Hutchens.
According to the Reserve Bank, Australia’s unemployment rate could fall to 3.75 per cent by the end of 2023. That would be the lowest unemployment rate since the summer of 1974/75.
But incredibly, the RBA still thinks the labour market might not be tight enough to see robust wages growth at that point, even if the unemployment rate hits those 48-year lows. How is that possible?
Last week RBA governor Philip Lowe released a statement explaining what path he thought the economy would take over the next two years.
He said the unemployment rate could fall below 4 per cent this year, and it could be “around 3.75 per cent” by the end of 2023.
He said wages growth had picked up a little recently but wages growth was “still expected to be gradual.”
So what’s going on? The “unemployment rate” is a strange number that’s poorly understood. I wrote a series of pieces last year explaining the mechanics of the number and we don’t have time to re-run that analysis.
But remember this: the unemployment rate only makes sense if you think about it from the perspective of an employer.
For example, let’s say you’re a business owner and you’d like to hire some extra staff quickly. You can look at the unemployment rate and know that 4.2 per cent of the “labour force” is currently looking for work and is ready to start work immediately.
If you want to fill your vacant positions quickly, that’s the pool of ready-to-go labour you’d have at your disposal.
Never mind that there are over a million other Australians who also aren’t working and who’d like to work. If they’re not available to start work immediately, they’re no use to you.
The unemployment rate only measures the unemployed people who are looking for work and who are available to start this week. It’s designed to meet the needs of employers, rather than workers.
Given the “unemployment rate” is designed to solve the immediate needs of employers, it’s providing a snapshot of the current level of competition among firms for ready-to-go unemployed workers.
So, when the unemployment rate declines, it’s supposed to indicate that the labour market is getting “tighter,” which means firms are competing more fiercely over fewer ready-to-go unemployed people to fill immediate vacancies.
That’s why wages are meant to rise when the unemployment rate declines to low levels, because competition for ready-to-go labour is supposed to be getting tougher.
Which brings us to the main point.
At what point will wages growth pick up significantly? The RBA thinks the unemployment rate could fall to 3.75 per cent by the end of next year.
When was the last time it was that low? Well, the ABS’s monthly labour force survey began in February 1978. The unemployment rate has never been as low as 3.75 per cent in that time.
In fact, you have to go back to the summer of 1974/75, to the moment when the low unemployment rates from the old “Keynesian” regime finally broke free from their moorings.
That was the period when “stagflation” hit Australia’s economy.
The unemployment rate had averaged less than 2 per cent for three decades before then, but that summer it jumped to 4.6 per cent, never to return.
Australia’s low unemployment rates of the post-war era ended in the mid-1970s. So, it leaves us with some fascinating questions.
- Firstly, we’ve been told for years that the economy couldn’t sustain unemployment rates at such low levels, so was that true?
- Secondly, what role has our closed international border played in helping the unemployment rate get so low so quickly? Will the unemployment rate remain at such low levels when international travel and labour movements eventually return, or will it have to rise?
- And thirdly, if the RBA thinks wages growth will still only be “gradual” when the unemployment rate pushes down towards 3.75 per cent, what does that say about employers’ bargaining power these days?
You’d assume that exceptionally low unemployment should see exceptionally robust wages growth.