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Why 5% unemployment won’t fix wage growth

Lucy Dean
·3-min read

Australians’ pay packets won’t increase in size until underemployment is adequately recognised in the economy, a prominent academic has said.

Even as Australia’s unemployment rate falls to 5.8 per cent from 6.3 per cent in January, this won’t translate into bigger wages until underemployment is addressed, economics professor at the University of Melbourne Jeff Borland told Yahoo Finance.

“There’s a pretty simple logic underlying what’s happening. It’s basically underemployment goes with part-time employment and as part-time employment continues to be a growing share of employment in Australia, then we’re likely to see continuing growth in underemployment,” he said.

While the unemployment rate fell in February, the underemployment rate - which measures those who want to be working more hours - increased from 8.1 per cent ot 8.5 per cent.

And that means that while the Reserve Bank of Australia (RBA) has flagged a mission to reach “full employment”, Borland believes that without considering underemployment and underutilisation, the goals won’t match up with the desired results.

The unemployment figures of 2021 and the unemployment figures of 1950 are essentially different, in that 70 years ago, most labour force slack came from people who were entirely unemployed, and those who were employed were employed full-time.

Today, those who are registered as employed may also be underemployed, meaning the unemployment rate essentially obscures the real story.

If the target unemployment rate isn’t adjusted to consider underemployed people, the RBA will have issues.

“It could be a barrier [to wages growth] if we don’t adjust our understanding of what the rate of unemployment means.

“If we go along thinking, ‘If we can get the unemployment rate down to 5 per cent, that should mean that wage inflation will start,’ then that will be a problem because 5 per cent unemployment doesn’t mean what it used to mean.”

JobKeeper end looms, but there is light

Borland’s comments come as Australia prepares for the end of JobKeeper.

Treasury Secretary Dr Steven Kennedy said as many as 150,000 Australians could be out of work when the policy expires on 28 March.

RBA Deputy Governor Dr Guy Debelle also expects the road ahead is “bumpy and uneven”, despite the unemployment rate dropping more sharply than the central bank had predicted last year.

"Our view is still very much wage pressures are likely to be subdued for quite some time yet," Dr Debelle told Senate estimates on Wednesday.

"What we do know is before the pandemic arrived, we had an unemployment rate of around about five per cent and we weren't seeing much pressure on wages."

He said Australia may have a similar experience to other countries that have hit historically low unemployment rates before wages rose, however he hopes wages will begin to increase before unemployment falls to within 4 per cent, or even the upper end of 3 per cent.

"With any luck, we start seeing upward pressure (on wages) before we get there," Dr Debelle said.

"We need wages a fair bit higher than where there are now before we get inflation up to a reasonable number which is consistent with our objective."

However, Borland believes that while the dip will sting for affected workers, once borders reopen and the vaccine is rolled out, jobs in those heavily affected sectors will bounce back.

“Jobs will probably come back quite quickly in some of those sectors. I don’t necessarily think people have to be thinking about really changing industries,” he said.

“While they’re down at the moment because of this COVID effect, we would still expect some more bounce back in some of the sectors that are going to be negatively affected.”

Image: Yahoo Finance
Image: Yahoo Finance