Australian Economic Developments
Australia’s labour market continues to expand in 2018. The ABS estimates that the national unemployment rate fell to 5.3% in July 2018, its lowest point in five and a half years (seasonally adjusted). Total employment decreased by 3,900 people in July, partially unwinding a large (+58,200) increase in working people in June. The participation rate — the number of people working or actively looking for work – also declined a touch in July. These falls in employment and participation in July were very small and come after big gains in June, so the labour market is still heading in a positive direction. Most positively, increasing job opportunities are encouraging greater workforce participation among older Australians and lower unemployment rates for young jobseekers (aged 15-24 years), as highlighted by RBA Governor Lowe in his testimony to the Australian Government’s House of Representatives Standing Committee on Economics this week.
Wage rates continue to grow more slowly than jobs growth however, with the national headline wage price index (WPI) up by 2.1% p.a. in Q2 2018 (a slight acceleration from Q1 2018) and full-time adult weekly ordinary time earnings (AWOTE) up by 2.7% over the year to May 2018. Stronger rises in female than male AWOTE in the year to May 2018 saw Australia’s ‘gender pay gap’ shrink to 85.5% in May, the smallest gender wage gap since these data began in 1994. The slow pace of growth in wages and incomes in 2018 reflects ongoing weakness in:
- Inflation (2.1% p.a. for headline CPI and 1.9% p.a. for core inflation in Q2 2018); and
- National productivity growth (labour productivity per hour worked up by 0.5% p.a. in 2016-17 and multi-factor productivity up by 0.3% p.a in the market sectors); and
- Labour market spare capacity (5.3% unemployment plus 8.4% underemployment, adding up to an underutilisation rate of 13.6% of the labour force).
Governor Lowe reiterated this week that stronger nominal wages growth “would be a welcome development” across the economy for a range of reasons including inflation targeting and nominal debt reduction. Real income growth however, requires real productivity growth; “to the extent that stronger wages growth is backed by stronger productivity growth, it would boost our real incomes”.
In separate data released by the ABS this week, there were 9,946 foreign-owned businesses in Australia in 2014-15. They accounted for just 0.5% of all businesses in 2014-15, but 9% of employment, 21% of industry value-added output and 29% of exports in that year.
Unemployment rate falls in July 2018, despite a small loss of employment
The ABS estimates that the national unemployment rate fell to 5.3% in July 2018, its lowest point in five and a half years (seasonally adjusted). This occurred despite total employment decreasing by 3,900 people because 9,600 people left the labour force (stopped working or searching for work) in the same month. In July, jobs growth of 19,300 full-time workers was more than offset by a decrease of 23,300 part-time workers (those working 35 hours or less per week). At the same time, the number of unemployed people looking for full-time work increased by 2,300 and the number of unemployed people looking for part-time work fell by 8,000.
These monthly labour market data are volatile and subject to revision. For example, results for June originally included a gain of 50,900 jobs but this was revised up to 58,200 jobs in this week’s data release (and might be revised again in future data releases). For these reasons, the ABS recommend the trend estimates as the best guide to underlying patterns in the labour market.
In trend terms, the national unemployment rate held steady at 5.4% in July, down from a recent peak of 5.6% in July 2017. Employment increased by 26,900 in July, with part-time employment increasing by 8,800 and full-time employment increasing by 18,200. Part-time employment accounted for 31.8% of the workforce in July 2018, just below the record high of 32.0% in November 2016. Reflecting this high rate of part-time work, aggregate hours worked across the economy continued to grow more slowly than ‘headcount’ employment, with all hours worked up 1.9% p.a. in July compared with 2.4% p.a. for employment (Chart 1 and Table 1).
The ABS recommends that “Trend estimates are considered the best indicators of the underlying behaviour in the labour market.” ABS 6202.0, Labour Force, Australia, Media Release. 14 Sep 2017. The data below are all trend.
Stronger employment growth is attracting more people into the labour market and pushing up the national participation rate (those that are working or looking for work). This has occurred despite the long-term ageing of our population, which more typically sees participation rates decline. This is a normal response to stronger demand for labour, as more job vacancies and more jobs draw more people into active participation. As of July, Australia’s participation rate was 65.5%, just shy of our record high of 65.6% in February this year (trend). Rising labour force participation rates are particularly evident at present among older workers and among women.
More positively, the youth unemployment rate (those aged 15-24 years) fell to 11.1% in July 2018 from 12.8% in July 2017 and a recent peak of 14.1% in December 2014. This was the lowest youth unemployment rate since the GFC (Chart 2).
Across the states, employment increased in the year to July 2018 in all states and territories. Annual employment growth was strongest in New South Wales (+3.2% p.a.), Victoria (+2.5% p.a.) and Queensland (+2.5% p.a.) (table 2).
Unemployment rates fell in July 2018 in Western Australia (6.1%) and the Northern Territory (4.0%) and remained steady in New South Wales (4.9%), Victoria (5.1%), Queensland (6.1%), South Australia (5.6%), Tasmania (6.2%) and the ACT (3.6%). In seasonally adjusted term, the Victorian unemployment rate fell to a seven year low of 5.0%.
Wage growth accelerates modestly to 2.1% in Q2 2018
The ABS Wage Price Index2 (WPI) for the June quarter (Q2) of 2018 rose by 0.6% q/q and 2.1% p.a. This was a slight acceleration from (a downwardly revised) 2.0% p.a. in Q1. Wage growth in Q2 2018 rose at its fastest quarterly rate (0.6% q/q) since Q1 2014, lifting annual growth to 2.1% p.a. This was the fourth quarter in a row that annual wage growth was above 2.0% p.a.. It has lifted from its slowest point in this cycle after reaching an historical low of 1.9% p.a. in 2016.
Annual wage growth in Q2 2018 remained stronger in the public sector (+0.6% q/q and 2.4% p.a.) than the private sector (+0.5% q/q and 2.0% p.a.). Public sector wages have been stronger than wage increases in the private sector since 2014 (Chart 3). Over much of the past 20 years, wage growth has been stronger in the public sector and stronger for employees covered by Enterprise Bargaining Agreements (EBAs) than for other employees.
Private sector wages excluding bonuses accelerated mildly, to 0.5% q/q and 2.0% p.a. In contrast, private sector wages including bonuses rose by 2.5% p.a. in Q2, which suggests that some firms are now paying higher bonuses instead (for example, in order to retain flexibility and/or to reward stronger performances) (Chart 4).
Wage growth tends to reflect the strength of labour demand and activity across industries and geographies. Across industries, private sector wage growth was strongest in Q2 2018 in education (2.8% p.a.), health care (2.7% p.a.), finance & insurance (2.4% p.a.) and manufacturing (2.2% p.a.). These industries all increased their employment numbers in 2017-18. Private sector wage growth was weakest in mining (1.3% p.a., albeit off a significantly higher base wage than other industries), retail (1.5% p.a.) and rental & real estate services (+1.7% p.a.).
Ongoing weakness in inflation (with core inflation at just 1.9% p.a. in Q2) means that average wages are still growing in real terms across the public sector and across most of the larger private-sector industries (Chart 5).
Across the states, private sector wage growth was strongest in Tasmania (2.5% p.a.), followed by Victoria (2.2% p.a.), ACT (2.1% p.a.), Queensland (2.1% p.a.) and New South Wales (2.1% p.a.). Wage growth was weakest in Northern Territory (1.4% p.a.) and Western Australia (1.6% p.a.) due to the prevalence of mining jobs in those states. Mining wages are now growing more slowly than in other industries (albeit off a significantly higher base wage).
Average national wage growth is accelerating from very slow rates in 2016 and 2017, but it is likely to remain relatively weak in the short term due to ongoing slow growth in: (1) productivity; low inflation and (3) spare labour market capacity. The ABS estimates that national labour productivity per hour worked improved by just 0.5% p.a. in 2016-17 in the market sectors, with multi-factor productivity up by just 0.3% p.a. Over the longer term, this is holding wages back.
As has been observed by the RBA and others, recent Australian wage growth has been tracking lower than its historical relationship with the unemployment rate would suggest (chart 6). Since around 2014 however, underemployment has remained relatively elevated even though the unemployment rate has declined. This has seen the total ‘underutilisation rate’ (unemployment plus underemployment, expressed as a proportion of the labour force) remain high. At a national average level, changes in annual wages are now aligning more closely to the underemployment rate than to unemployment rate (charts 6 and 7). This suggests a larger effect on wages is being exerted by the incidence of underemployment than in the past, for a range of reasons. This stronger effect from underemployment has also been noted internationally by the IMF and OECD.
Average weekly earnings rise slowly in first half 2018
In addition to the WPI (which measures hourly wage inflation every quarter), the ABS also estimates nominal average weekly earnings twice per year. This measures the total taxable gross weekly earnings of all Australian workers divided by the total number of workers and takes into account changes over time in the composition of Australia’s labour force, such as variations in the mix of occupations and industries and the proportions of full-time, part-time, casual and junior employees. This enables meaningful comparisons of total earnings between groups of workers.
In dollar terms, the ABS estimates that nominal Full-time Average Weekly Ordinary Time Earnings3 for full-time workers increased to $1,585.30 in May 2018. This was an increase of 1.0% over the last six months and 2.7% over the year.
Female workforce participation has risen to record levels in 2018 and this appears to be reflected in female full-time AWOTE, which rose by 3.4% over the year to May, faster than the 2.4% rise for male full-time AWOTE. This has seen female wages as a proportion of male wages - the ‘gender wage gap’ - rise to 85.5%. This was the highest level (or smallest gender pay gap) since this series began in November 1994 (see Chart 8). For more information on the gender pay gap, please read Ai Group’s blogpost here.
Across industries, private sector employees in mining remain the highest paid workers, even though their average pay has flattened since the recent mining boom (Chart 9). Nominal AWOTE rose in all industries except construction over the year to May 2018 (Chart 9).
The AWOTE for full-time adult employees is generally considered the most stable earnings data due to the exclusion of overtime, part-time and junior employees. The WPI and AWOTE data are not comparable and are used for different purposes. Earnings data measures average weekly earnings of employees at a point in time as opposed to the WPI, which measures hourly wage inflation for a ‘basket’ of jobs.
Across the states and territories, the highest full-time AWOTE in May 2018 was in the ACT at $1810.10, where there is a high proportion of public sector workers. This is followed by Western Australia at $1,740.30 and the Northern Territory at $1,668.50, reflecting their higher proportion of highly paid mining workers.
Over the past year, jobs growth has been stronger in the larger employing sectors such as manufacturing, professional services, construction and healthcare. Jobs growth over the past year was positive in all goods production and business services industries including mining, which despite receiving the smallest hourly wage increase in the WPI, is by far the highest paying sector (see Chart 11). Retail, other services and transport were the only sectors to experience a fall in employment over the past year.
Nearly 10,000 foreign owned businesses operated in Australia in 2014-15
This week the ABS released data about the number and nature of foreign-owned businesses in Australia, as of 2014-15. In 2014-15, there were 9,946 foreign owned businesses in Australia accounting for 0.5% of all businesses operating in Australia. Despite only accounting for 0.5% of operating businesses in Australia, foreign owned business accounted for 8.7% of the Australian workforce, 21% of all industry value added and 29% of all exports in that year (see Chart 12).
The mining industry had the largest proportion of foreign owned businesses in 2014-15 (5.9% or 474 businesses) of any industry. In raw number terms however, wholesale trade had the greatest number of foreign owned businesses at 1,909 businesses (2.5% of all businesses in the industry), followed by professional services (1,604 businesses but only 0.6% of the industry), financial and insurance services (1,138 businesses or 0.6%) and manufacturing (1,010 businesses or 1.2%).
Of the 9,946 foreign owned businesses in Australia in 2014-15, United States residents owned the largest number of foreign owned businesses (2,039) in Australia, followed by the United Kingdom (842), Japan (538), New Zealand (420) and Germany (341) (chart 13).
Foreign owned business from the United states employed 272,700 people followed by the United Kingdom (141,400) and Japan (73,900).
Foreign ownership is defined as enterprises where majority voting power (greater than 50%) is held by a single direct foreign investor or by a group of associated investors acting in concert.
