The promised land of full capacity

With unemployment at its lowest rate in years, wage growth remains uninspiringly modest. 

Philip Lowe, Governor of the RBA, recently addressed the Committee for Economic Development of Australia in Adelaide regarding the current status of the domestic labour market and its implications on wage growth.  In an apt summary, Lowe commented that:

“In a tight labour market, we would expect to see either strong wages growth or frequent job changing as businesses seek out workers. But we are seeing neither at present.”

The indicators of a ‘tight labour market’ are currently being somewhat obfuscated by the adoption of modern workplaces, entailing an increase in part-time hours and workers.  As a result, traditional interpretations of the cornerstone measure of national unemployment are no longer as relevant as they once were. 

As the rise of part-time work gains traction, so too does the phenomenon of ‘underemployment’, labelled as a situation whereby a worker finds themselves employed and working one or more hours per week without reaching an income level substantive enough to live off.  In other words, there is a large amount of Australians who do not earn enough money, yet are excluded from the traditional unemployment measure. 

Governor Lowe acknowledged as much in his articulate overview of the Australian economy, citing the “much more flexible [work arrangements]” coming to the fore, alongside the fact that “it is not a realistic assumption in today’s modern flexible labour market… [to assume] that if you have a job you are pretty much fully employed.” 

Traditionally, such low unemployment figures (of 5.2%) would be a sure indication of strong wage growth; currently, however, nominal wage growth remains at a modest 2.4%.  Accounting for inflation, real growth rests at just over 1%.  It is not the sort of wage growth which prompts an economic expansion and the subsequent return to the target inflation rate of 2%-3%. 

Naturally, the question arises of how to stimulate an economy which is ostensibly approaching full capacity yet leaving roughly a quarter of these underemployed Australians seeking more working hours. 

To answer this, the causes of underemployment warrant discussion.  A crude summary of the situation is that an increase in participation of women, elderly, and overseas immigrants has resulted in an influx of workers who are willing to work the flexible hours that often constitute underemployment.  The result is underutilisation; the existence of spare capacity in an economy which, on paper, looks like it is approaching full capacity. 

While admittedly concerning, there is also cause for optimism; if the jobs were there, there would a small army of underemployed people able to fill the demand for labour.  This would tighten the labour market further (and put upward pressure on wages, surely).  Disrupting the possibility of such an easy fix, however, is the finding that more than 60% of firms report that the difficulty in finding suitably trained employees is an issue in the recruitment process. 

Here, we start to see the long-term implications of the rampant cost-cutting that ensued during the Global Financial Crisis more than a decade ago (when are we gonna stop talking about that?).  With a reduced emphasis on training and employee development, there are simply fewer people in Australia equipped to slot into contemporary, dynamic organisations. 

Could we solve such a pervasive issue with a smidgeon of investment into employees’ skill sets? Maybe.  Persuading firms with the sole prerogative of maximising shareholder wealth, however, is another challenge altogether.  Getting them to part with money which yields little private ROI is akin to persuading a teenager to start investing in their super; it’s probably a good idea, but it’s not going to happen unless someone forces them into it.

Given the niche nature of such a solution, it’s clear that relying exclusively upon monetary policy – which is anything but niche in its consequences – would be an unwise endeavour.  Specifically, it might be time to hand the baton over to those responsible for fiscal policy, with the intentions of incentivising the investment into employees – both part- and full-time – to ensure that Australian people currently experiencing underemployment are equipped to take on new jobs as they arise. 

Only then will we start to reach a scenario of actual full capacity and finally some organic upward pressure on wages. 

Until then, wage growth and inflation look set to remain uninspiringly modest.

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