On one measure, the unemployment rate, Australia’s labour market has been performing reasonably well. The unemployment rate in April remained at a near two-year low reading of 5.7% and well down on where it stood at 6.2% a year ago. On most other measures, however, the labour market is losing strength. Employment growth is softer in the early months of 2016 and part-time employment has driven what growth there is. Tellingly, wages growth continues to fade as well. The relative strength of the labour market in total seems to be fading and that is important trying to gauge how growth in household income and spending will travel this year and next.
Employment growth seems to have lost substantial momentum in the first four months of 2016 compared with the second half of 2015. In the second half of 2015 total employment rose by 180,700 comprising a lift of 107,400 in full-time jobs and 73,700 additional part-time jobs. In the first four months of 2016 total employment rose by 26,000, but with full time jobs falling by 49,900 and part-time rising by 75,900. There are two more months to go get a complete half-year of data, but at this stage there is little pointing to a big surge in employment, especially full-time employment that might make the comparison with the second-half of 2015 look better.
Soft employment growth in the first four months of 2015, plus the reduction in full-time jobs, has also promoted a quite sharp reduction in total hours worked in the Australian economy, down by 1.7% since December 2015. In contrast, total hours worked rose between June and December 2015 by 0.7%. Less paid hours worked in the early months of 2016 will constrain growth in household disposable income.
Another factor limiting growth in household disposable income is very low wages growth. Wages growth in Q1 2016 slipped to a new record low in the 18 year history of the wage price index, 0.4% q-o-q or 2.1% y-o-y down from 0.5% q-o-q, 2.2% y-o-y in Q4 2015. While the slippage in quarterly wages growth over the past two years has not been pronounced, it has been unremitting. Last year in Q1 2015, wages rose 0.5% q-o-q, 2.3% y-o-y. The year before in Q1 2014, wages rose 0.7% q-o-q, 2.7% y-o-y.
Very slow and still moderating wages growth combined with now quite sharp reduction in paid hours worked is likely to take a toll on spending by households including their willingness and ability to take on an ever increasing housing debt load – a necessity if home purchasing activity is to keep rolling along.
There are some non-labour market influences on growth in household disposable income that provide some positive offset. There are small income tax cuts coming for some on July 1st, but almost confined to income earners above $80,000 a year. Petrol prices are still comparatively low, although are probably not likely to fall the way they did through 2015. Prices in many retail categories are tracking well below 1% y-o-y making even 2.1% y-o-y wages growth go a long way. Importantly, interest rates continue to fall. The number of households prepared to bargain for lower home loan rates or shift lenders is rapidly growing helping to lift post-debt service cost disposable income.
Nevertheless, if the current trends in Australia’s labour market – soft employment growth and that driven by part-time jobs’ growth; falling hours worked; low and still declining wages growth – continue as seems likely, inevitably the increasing constraint on growth in household disposable income will lead to fading growth in spending on housing and in retail stores. This outlook still implies more RBA cash rate cuts ahead. Until the labour market takes a marked turn for the better, it is hard to see how there is any other policy option.