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What is happening in the Australian labour market?
Australian labour market data released yesterday by the ABS showed the economy shed 2.5k jobs in the month of May. The result came as a surprise to professional forecasters and commentators, with consensus expectations of around 21k additional jobs created in May. With a backdrop of weak economic growth – the national accounts data showed that the economy barely grew in the March quarter – how worried should we be about the latest employment data?
The first thing to note is extreme volatility in employment growth from month-to-month. For example, in April, around 88k jobs were created, more than double expectations. Hence, it is unsurprising that even professional forecasters are apt to miss the monthly jobs outcome.
What is more important is the trend. And here the data are unambiguous. Once the data had settled from the Covid-induced gyrations, yearly growth in employment peaked at a stonking 4% two years ago in May 2023. Since then, the growth rate has slowed steadily to its current yearly rate of 2.3%. Although trend employment growth has been slowing, the current yearly rate of 2.3% is still significantly higher than what we would expect in the long run.
Of course, in recent years employment numbers have been boosted by the exceptionally strong migration pick up following Covid. But data now show that population growth is slowing as the migrant intake slows, particularly among the number of international students entering the country, who, incidentally, have high workforce participation rates. As the migration intake reverts to the government’s target rate of 250k per annum, we expect to see employment growth slow to its longer-run trend rate of around 1¼%.
But what of potential downward cyclical pressures on the labour market due to sluggish economic growth? Presumably, the economy cannot support 2% employment growth if it is only growing at half that speed.
A feature of the economy has been the malaise in productivity. Although Australia’s poor productivity performance is longstanding and multidimensional, the post Covid labour market data do point to at least one serious issue: the role played by the expanding share of the non-market sector in driving weaker productivity. The non-market sector includes Health, Education and Public Administration, which are largely government funded.
The problem is starkly revealed over the last two years; i.e., the two years of recovery following the last of the Covid lockdowns. Over this time, of the 643k new jobs created, around 80% (or 504k) were in the non-market sector. In percentage growth terms, over the last two years, employment has increased by 4.2%, while economic activity has increased by just 2.5%, meaning that output per worker has fallen by 1¾%.
Given that the bulk of the additional workers have been in the non-market sector, the finger is firmly pointed at these sectors for our recent poor productivity performance. No doubt, this issue will feature at the Federal government’s Productivity Roundtable scheduled for August.
But before we jump to conclusions, we must address a technical issue, which is the way in which the ABS measures the output of the non-market sector. For this sector, the ABS measures the output as being equal to the input costs. However, the cost of capital is largely discounted, meaning that the value of the output is equal to the labour costs (wage, salaries and supplements) of the service provider. What this means is that according to the ABS, if a non-market service provider (say a not-for-profit aged care provider) were to employ an additional care worker on (say) an $80,000 salary, the value of the output of the care provider would be deemed to go up by $80,000 and the output per worker is flat.
In other words, the way output is measured in these sectors means that, by definition, the rate of increase in productivity is zero. Consequently, a large part of the explanation for Australia’s recent poor productivity performance is simply the large share of the employment increase attributable to the non-market sector and the statistical convention used for measuring the output of this sector. As an aside, as these sectors, in particular, Health, become a larger share of our economy, we can expect the measured rate of productivity growth to slow.
But returning to the problems of today, even allowing for the measurement effect of the non-market sector, which would weigh on productivity growth, productivity in the market sector has also underperformed. Hence, there are other factors at play in explaining our terrible post-Covid productivity performance. Hopefully, the August Roundtable will shed light on some of those factors and, more importantly, suggest remedies to Australia’s productivity malaise.