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Labour market data dominated the domestic news cycle this week with both June quarter wage outcomes and July employment numbers being released. Both the wage and employment data showed signs of an easing in labour market conditions over recent months.
Wage growth eased back from an over-the-year rate of 3.7% to 3.6% moving from the March to the June quarter, with the quarterly rate of wage growth having stalled at 0.8% since the December quarter of last year. The labour market is struggling to generate sustained high wage growth despite the unemployment rate being sub-4% since the start of 2022.
Why have wages failed to break higher? The seeming lack of sensitivity of wage growth to the unemployment rate is an issue that goes back to before Covid and is a phenomenon that has been observed across many countries, including Australia, the US and the UK, in the decade between the GFC and Covid.
A number of arguments have been put forward to explain this phenomenon, including: the reduction in union membership and the resulting decline in union wage-bargaining power; the dominance of free-market thinking in economic policy making and the resultant deregulation of labour markets that are believed to have tilted the power in wage bargaining towards employers; and globalisation of international trade that leads to a suppression of wage growth in developed economies due to competition from low-cost imports from developing economies.
Of these reasons, the drop in import prices can be clearly shown to have contributed a lower rate of global inflation and downward pressure on wage growth. But in the current inflationary environment, appeal to low inflation rates in global trade is redundant. The most straightforward answer as to why wage growth is seemingly slow to rise given the low levels of unemployment lies with the collapse in productivity. With negative growth in labour productivity, such as we are currently experiencing is Australia, unit labour costs are being driven to extremely high levels of around an annual rate of 8%.
An annual rate of growth in unit labour costs of 8% is 2 percentage points higher than the current elevated rate of inflation and represents a very high rate of cost growth for businesses to absorb. It could be argued that within the context of such high rates of unit labour costs, wage growth of 3.6% is quite robust.
Turning to the monthly labour market data, we saw a fall in employment of around 15k in July, the worst monthly jobs growth since the days of Covid lockdowns back in 2021. The unemployment rate backed up to 3.7% from its June low point of 3.5%. Are we now seeing higher interest rates and inflation finally taking their toll on the labour market?
First, a word of caution. The monthly labour market figures can be volatile, and following the last negative employment read back in April, we then saw employment spike to a year high level in May, followed by another strong read in June. The ABS also highlighted a school-holiday effect that may have distorted negatively the employment data as the ABS have encountered difficulties with seasonal adjustment factors in the post-Covid world.
So, the data of one month does not a summer make. But if we consider the weight of data now unfolding, including: weak consumer spending; the sharp fall in housing investment; the slowdown in China and the fall in our international terms of trade; then it is likely that we are entering a period of weaker labour market performance that may stretch out over the coming twelve months.