Higher wages would be nice, Mr Lowe, but weak unions make it unlikely

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The current record low wages growth is something that not only concerns workers – the governor of the Reserve Bank, Philip Lowe, has also expressed dismay given its impact on household consumption. During a panel session at ANU yesterday, Lowe suggested that there was a real wage “crisis”. One reason he suggests for the crisis is that workers – especially those who are underemployed – may be trapped into thinking a wage rise is a trade-off for less job security.

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Coming as they did after the rather dismal GDP figures, the May unemployment figures out last week were a nice bit of economic sunshine.

In seasonally adjusted terms, Australia’s unemployment rate has fallen from 5.9% in March to 5.5% just two months later:

And while the figures are certainly good news, it always pays to be a little bit sceptical.

The main reason for the fall in unemployment was the rise of women in full-time employment in New South Wales.

In May, the ABS estimates that total employment increased by 42,000, and 92% of that increase was due to 39,000 women in NSW gaining full-time work. That’s pretty impressive given full-time working women in NSW account for just 8% of all people employed in Australia.

The 4.1% increase in women in NSW working full-time was the second biggest monthly jump ever recorded in NSW,

So as ever we should treat the seasonally adjusted figures with some scepticism, but even the trend figures are looking good – the annual growth of both employment and hours is now in sync:

But with these figures came the rather less happy news that in May there was a record 1.13m people underemployed.

Underemployment is a relatively new problem. Back when I was studying economics in the late 1980s and early 1990s it barely rated a mention. The reason was there was so little of it – over 80% of workers worked full-time and the much bigger problem was unemployment.

And while the 1990s recession saw a massive change in the level of full-time employment, even then underemployment did not become a major issue – as it stayed relatively flat throughout the 1990s:

Even when the number of underemployed overtook unemployed in 2004, underemployment still was not a massive issue. The reason was no longer because there was so little of it, but because it largely moved in sync with unemployment.

From 2004-2014, through the mining boom, the GFC and the recovery, when the unemployment rate fell or rose, the underemployment rate fell or rose – the correlation between the two was almost perfect:

It was clear if you wanted to reduce underemployment all you needed to do was reduce unemployment. Certainly easier said than done, but it was nice that the two problems could be solved at the same time.

And then at the end of 2014 things went bonkers:



Had the nice 2004-14 relationship held, with an unemployment rate of 5.7%, underemployment would be around 7.7%. And yet instead it is a record high 8.8%, with 140,000 more people underemployed than we would have expected just three years ago.

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So much for two problems, one solution.

One reason is that part-time employment has grown much faster than full-time employment. And yet not everyone who works part-time wants more hours. Only around 27% of part-time workers consider themselves underemployed – and that level has not risen since 2014:

But obviously if you have more of the labour force working part-time you will also have more of the labour force wanting more hours. In the past decade the percentage of employed people working part-time has risen from 28.3% to 31.9% - equivalent to around 430,000 more people working part-time.

Part of the reason is also Western Australia – which has seen a massive spike in underemployment:

And yet while it would be nice to put all the blame on the end of the mining boom out west, even if we excluded WA from the national figures, the underemployment rate would still be a record high of 8.6% and the relationship between unemployment and underemployment over the past three years would still be out of whack:

The big concern is that while the underemployed have work, the growing number of those wanting more hours is causing the weak growth in wages, even while the unemployment rate is falling.

In terms of the spare capacity in the labour market, reducing unemployment is a much bigger issue. The Reserve Bank recently noted that “unemployed people seek 33 hours of work per week compared with 14 additional hours per week for underemployed people”.

This is why in normal times reducing unemployment has the bigger impact on wages growth – less unemployed leads to a higher growth of wages because it sees a big increase in the total hours of work being done.

The recent improvement in the unemployment rate would normally mean wages growth would start to pick up. And yet there is little sign that it has.

It would seem that underemployment is now having a greater impact on wages than is unemployment.

The RBA suggests that this might be because underemployment might have a different impact on wages. Workers who are after more hours might take them rather than a pay rise. So firms are able to increase hours not through employing new workers – and having to pay them more to entice them to work for that company – but by giving more hours to existing workers without needing a pay rise to entice them.

Philip Lowe doesn’t want workers to accept that trade off. For if that remains the decision – more hours versus better wages – then as underemployment grows so too will the downward pressure on wages growth.

And while it is good to hear the head of the RBA argue for greater worker activism for higher wages, in a world where little over 10% of private sector workers are in a union it is hard to see where the impetus for this change is to come.

For now it appears that while underemployment grows, it is unlikely to see real wages improve.

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