4.6% unemployment rate hints at what’s possible, but it’s not the real thing

The latest ABS labour force figures provide the first tiny glimpse into the labour-market fallout from Australia’s recent lockdowns, writes UNSW Business School's Richard Holden

Australian Bureau of Statistics recently published the wage price index for the June quarter, showing sluggish wages growth, below forecasts. The labour force figures for July is an impressive 4.6 per cent, but tempered by the number of people who have stopped looking for work and a higher underemployment rate.

These numbers tell us how the labour market is recovering from last year’s massive pandemic hit. It’s also a sneak peek into how it might be affected by the current lockdowns.

The Greater Sydney lockdown officially began on June 26 – right at the end of the June quarter (the virus had been circulating in Sydney since mid-June). So the June quarter figures give us a baseline for the labour market before the big hit from what looks like several months of lockdowns in Sydney, NSW and maybe beyond. We also have a glimpse of the first two weeks of the “self-lockdown” in Sydney, where people pull back on economic activity due to the virus circulating.

Annual wages growth of 1.7 per cent

The wage price index – measuring wages growth – increased by 0.4 per cent in the June quarter. This was below consensus forecasts of 0.6 per cent and put the annual rate at 1.7 per cent. This is just above the 2020 low of 1.4 per cent.

Wage price index, annual growth

All that anecdotal chatter about how it has been impossible to get workers in this industry or that certainly didn’t make its way into the aggregate data.

There were sectoral differences in wage pressures. Three sectors recorded annual increases in wages above 2 per cent – construction (2.2 per cent), professional services (2.5 per cent) and other services (2.6 per cent). The smallest increases were in rental, hiring and real estate services (1.1 per cent), administrative and support services (1 per cent) and arts and recreation services (0.9 per cent).

The unemployment rate hits 4.6 per cent

The labour force figures came on the back of a stunningly good June rate of 4.9 per cent. July’s rate is stunning again. Kind of. The monthly unemployment rate dropping to 4.6 per cent represented 39,900 fewer unemployed persons and a slight increase in employed persons, by 2200 to 13,156,400.

Unemployment rate, seasonally adjusted

Less positive was that the 4.6 per cent rate also reflected a drop in labour force participation, from 66.2 per cent to 66 per cent and that the official underemployment rate jumped from 7.9 per cent to 8.3 per cent. 

The fuzzy demarcation between what makes one unemployed versus underemployed, as well as the effect of people leaving the labour market, is why I always focus in all jobs figures on the “total hours worked”. This remained effectively steady in July, at 1.778 billion hours.

Overall, therefore, these figures represent very good news. Perhaps the most important implication is that all the naysayers who suggested we could never get unemployment down to or below 4 per cent look – at least so far –   wrong.

Read more: Why the RBA wants to cut unemployment, not soaring house prices

The immigration illusion

Speaking of folks being wrong, the jobs data also bear on Reserve Bank of Australia governors Philip Lowe’s recent statements about the effect of immigration and wages. In a speech in early July Mr Lowe suggested high levels of immigration in recent years was an important reason for low wages growth.

Others, including myself, think this view is not supported by the data. Low wages growth since 2013 has a lot more to do with global shifts in technology, the phenomenon of “secular stagnation”, and the fact the Reserve Bank kept interest rates too high, for too long, until finally giving into pressure to cut them in 2019.

The latest data – if looking at the data is your thing – show that, with effectively zero immigration wages, growth remains low. It’s barely moving even in the sectors where immigration is meant to play the biggest role, such as services and construction.

Moreover, even with unemployment falling to 4.6 per cent, there’s relatively little upward pressure. This suggests getting unemployment down to or below 4 per cent not only might be achievable but necessary to get inflation back into the RBA’s target band of 2-3 per cent.

Lockdown impacts still to come

That said, this might be the last good news for a while.

The next quarter’s figures will capture the effect of lockdown for perhaps the entire three months in Greater Sydney, as well as a significant amount of time elsewhere. Fiscal support measures such as JobSaver and the Disaster Payment definitely help but they will only stem a flow of bad labour-market numbers.

In the longer term, though, we can and should expect our policymakers – fiscal and monetary – to show us an unemployment number with a 3 in front of it in 2022 or 2023.

Richard Holden is a Professor of Economics at UNSW Business School, director of the Economics of Education Knowledge Hub @UNSWBusiness, co-director of the New Economic Policy Initiative, and President-elect of the Academy of the Social Sciences in Australia. His research expertise includes contract theory, law and economics, and political economy. A version of this post first appeared on The Conversation.