The RBA is confident about job creation but wages growth remains an open question

Australian employment growth has been strong over the past 18 months, helping to support household spending, economic growth and a slight uptick in wage and inflationary pressure.
Recent labour market indicators have been mixed. Coming ahead of Australia’s next federal election — a period that has seen employment growth slow in the past — it’s created some doubts as to whether strong hiring will continue in the period ahead.
RBA Deputy Governor Guy Debelle says the recent divergence in leading labour market indicators may reflect how businesses and staff connect, rather than a potential slowdown in employment ahead.
Debelle says employment is “likely to grow a bit above its long-term average over the next six months”. However, he sounds less confident as to whether that will lead to a noticeable lift in worker wages.

For several years policymakers at the Reserve Bank of Australia (RBA) have been forecasting that stronger economic growth will help to lower unemployment, boost wage pressures and lift inflation back towards the midpoint of its 2-3% annual target.

To date, those forecasts appear to be playing out, albeit at a glacial pace.

Economic growth in the first half of the year has accelerated to above-trend levels, contributing to a one percentage point reduction in Australia’s unemployment rate to 5.3%, the lowest level in six years. Broader measures of labour market underutilisation have also improved recently with underemployment and underemployment reversing the uptrend seen earlier in the decade.

Wage growth, while still incredibly low, looks like it’s now troughed, helped in part by two hefty increases in Australia’s minimum wage rate in the past two years as well as tighter labour market conditions.

Underlying inflation pressures also look to be building, although they still remain well below the RBA’s 2-3% target, a pattern that has been seen more often than not since the start of 2016.

Although there’s a strong argument the RBA should be taking measures to speed up the improvement in the economy, right now, things are undoubtedly improving.

A lot of that comes down to strong employment growth over the past 18 months or so, helping to offset the impact of ongoing weakness in household income growth and, more recently, declining home prices in many parts of the country, allowing households to maintain their spending levels and support economic growth.

Given that home prices are expected to fall for some time yet and the likelihood that household incomes growth will remain modest given the evidence from abroad, labour market conditions will need to stay strong if the RBA is to achieve its forecasts.

However, after being consistently strong in 2017 and the early parts of this year, leading labour market indicators have diverged in recent months, casting renewed doubt as to whether strong jobs growth will continue.

While measures such as job vacancies and the NAB’s employment index as part of its monthly business survey suggest strong employment growth will continue, other indicators such as job ads, skilled vacancies and employment gauges in PMI reports released by the Australian Industry Group have softened.

Given the proximity to Australia’s next federal election, a period that has historically seen employment growth slow ahead of polling day, the recent mixed signals have understandably created some uncertainty, and concern, that recent strength in the labour market may not be sustained.

The recent divergence in the leading indicators has not gone unnoticed by Guy Debelle, Deputy Governor at the RBA, who touched upon the conflicting signals in a speech delivered in Sydney today.

“While there is always uncertainty around our forecasts, there are currently conflicting signals from the various measures of labour demand,” Debelle said.

“Job vacancies data and business survey hiring intentions have recorded strong growth this year, but there has been little growth in the job advertisements data.

“While divergences in the signal from various activity indicators are not unusual, the divergence between vacancies and job advertisements has been steadily increasing over recent years.”

So what explains the mixed signals?

In Debelle’s opinion, it may be explained by technological change, rather than one data set being right or wrong.

“This, in part, reflects changes in the way that businesses recruit and workers search for jobs,” he said.

“For example, the job advertisements data capture the main online recruitment websites, but they are not picking up newer recruitment sites or the use of social media sites, such as LinkedIn, so the usefulness of this series may be declining.

“Large corporations are also maintaining ‘expression of interest’ registers on their own websites, which reduces their need to advertise to fill a vacancy.”

So rather than connecting via traditional jobs websites or, before that, newspaper ads, there’s now a variety of other forums to source jobs or workers from.

Given the possible move away from advertising on traditional jobs platforms to other forums, along with continued strength in official jobs data released by the ABS, Debelle remains optimistic that hiring will remain firm in the short-to-medium term.

“The labour market is in pretty good shape,” he said.

“Employment growth is above average, the participation rate is at a high level, the vacancy rate is at an all-time high and the unemployment rate is falling.

“Taking all of the information from these various indicators together suggests that employment is likely to grow a bit above its long-term average over the next six months… [and] consistent with our forecast that GDP will also grow a bit above trend.”

However, while Debelle is confident that hiring will remain strong, his optimism towards this contributing to a faster reduction in labour market underutilisation and noticeable pickup in worker wages was more guarded.

“There are a number of uncertainties around the extent and timing of the decline in the unemployment rate and the pick-up in wages growth,” he said, referring to the evidence from other major developed economies in recent years where ultra-tight labour market conditions have not resulted in strong lifts in wage pressures anywhere near the scale seen in prior decades.

Australia’s unemployment rate, at 5.3%, is still above the 5% level where the RBA anticipates that wage and inflationary pressures will increase, known as the non-accelerating inflation rate of unemployment, or NAIRU for short.

Debelle said Australia’s unemployment rate may have to fall below this level before pay and price pressures begin to emerge.

“The recent international experience indicates that the unemployment rate could decline further than historical experience would suggest before we see a material increase in wages growth,” he said.

So hiring is likely to remain firm in the medium-term, but whether that translates to an acceleration in pay rates over the same period remains unlikely at this point.

You can read the full speech here.