Labour under-utilisation dragging on economy

Australia’s unemployment rate moved up to 5.2% in April 2019, as the number of people seeking employment rose to 703,900, the highest level in 9 months. As a result of the increased participation, the labour under-utilisation rate lifted to 13.7%, wiping out all of the gains of the last year. The implications of labour under-utilisation may be especially severe for the struggling Australian economy.

As other items in this edition of Statistics Count address, one of the failings of the Australian economy right now is its inability to create prices growth, mainly because of poor consumption growth and ultimately inadequate (and below target) GDP growth.

The re-elected Morrison Government has for these reasons set a target for wages growth to return to its long-term average of 3.25% per annum. Latest data, just days prior to the Federal Election, showed wages growth had ticked up marginally, but was well below the target band at 2.3% per annum. To be fair, the Government’s budget predictions are for the 3.25% to be reached only by the June Quarter of 2021, before a further uptick to the high 3.5% per annum in 2022 and 2023, as the chart below shows.


Right now, mainly because of challenges related to employment and the utilisation of labour, the Australian economy is battling to sustain even the current level of wages growth, leave alone push higher.

In April, the unemployment rate, shown below, tipped up to 5.2%, as more people, especially women, entered the labour market. The number of unemployed persons ticked up to 703,900.


To go straight to the dashboard and take a closer look at the data, click here.

Notably, the last time the unemployment rate was higher (August 2018 – 5.3%) was also the last time there were more than 700,000 people unemployed.

There is nothing automatically distressing about the unemployment rate. But, when its is combined with the underemployment rate, which measures those people with a job who are seeking more hours, to form the labour under-utilisation rate then you can see it becomes more serious. 

This is shown in the chart below, which indicates that over a reasonably short period, the under-utilisation rate fell from the high fourteen per cent mark to the low 13 per cent mark because less people were looking for work. That is, they didn’t have jobs and were not actively seeking them. As the number of people seeking work has risen, the labour under-utilisation rate has tracked back up to 13.7%. Not a disaster, but in the wrong direction. 


To go straight to the dashboard and take a closer look at the data, click here.

The labour under-utilisation rate is a factor that combines the unemployment rate (5.2%) with the under-employment rate (8.5%), so we need to consider both the unemployment and under-employment rates to see what impact would be needed to see wages grow to target levels.

As Greg Jericho wrote in The Guardian in mid-May:

“…this latest data shows just how greatly the relationship between wages growth and unemployment has shifted. The current level of unemployment would in the past have seen wages growth of around 3.75%.

Or, to put it another way, Jericho wrote:

“To get to wage growth around the long-term average of 3.5% again, either we are going to have a historically strong increase in wages despite little change in unemployment, or we will need unemployment to fall below 3.5%.”

So, there is an observable disconnect between an unemployment rate and wages growth. But what about the under-employment rate? Jericho again:

“The link however between underemployment and wages growth … suggests to reach 3.5% wages growth underemployment would need to fall from the current rate of 8.2% to around 7.0% - the equivalent of around 150,000 workers getting the hours they desire.”

The objective for Government policy has to be to achieve effective utilisation of available labour in Australia. Anything less is likely to see one or other factor (unemployment or underemployment, leave alone the impact of the potent combination of the two) sustain the suppression of wages growth in the Australian economy.

Debate about the ‘full employment’ level in Australia has been muted for some time. But with more people entering the labour market and a persistence in underemployment rates, what really constitutes full employment is becoming a serious issue. It is conceivable that Australia could have almost everyone in a job, but an under-employment rate that was quite a bit higher than the current level. 

Just as the world of work has changed, it might be timely for the definitions of what constitutes work to change also. Certainly the RBA Governor Philip Lowe is not convinced that 5% is a special number of unemployment rates. In his post-election speech he said:

“My judgement of the accumulating evidence is that the Australian economy can support an unemployment rate of below 5 per cent without raising inflation concerns. This would be consistent with the experience overseas, with many other advanced economies sustaining lower rates of unemployment than previously thought possible without leading to a noticeable uplift in inflation.”

If unemployment rates are disconnected from wages growth, to achieve the economic benefits of wages driven consumption growth, Australia will need to address its underemployment rate, its total labour under-utilisation rate and ultimately, its approach to labour productivity.