The good news is that total employment in Australia grew strongly for two months in a row in March and April and the unemployment rate fell from 5.9% in March to 5.7% in April. The bad news is that the April labour force report confirms that part-time employment continues to grow more strongly than full-time employment so far in 2017 with part-time employment growing at an average monthly pace of 15,800 against 10,800 for full-time employment.
Some may say what is bad about both employment categories growing even if growth in part-time continues to outstrip full-time? The problem is that that total paid hours worked by full-time workers is falling, down by 0.8% in April relative to December 2016, even though the number of full-time workers has increased by more than 40,000 over the same period. There is a small offset from rising paid hours worked by part-time workers, up by 0.9% over the same period, but that represents only an extra 1.6 million paid hours worked against a loss of 11.7 million hours for full-time workers.
Total paid hours worked was 11 million hours, or 0.7% less in April 2017 compared with December 2016. Moreover, wages growth continues at record slow annual pace, 1.9% y-o-y in Q1 2017, the same as in Q4 2016.
Even though the economy is growing comparatively well, wage and salary earners remain under constraint from a combination of stagnant to falling paid hours worked and stickily low annual wages growth now tracking lower than the latest Q1 annual change in the CPI at 2.1% y-o-y. There are no clear-cut explanations for why growth in hours worked and wages continue to stay so very weak as economic activity improves.
It could be a transitional phase after the mining investment boom where many very highly paid construction jobs were cut and the next best opportunities for those losing jobs were for lesser hours and pay. While that might explain in part persistently low wages growth it would not explain the casualisation of employment that has been occurring for much longer than the changes in mining investment both ups and downs over the past decade.
Part of the explanation may also come from the way that the Australian economy has been changing with the declining importance of secondary activity such as mining and the increasing importance of services many of which have more emphasis on lower paid and part-time employment.
Another possible explanation may be Australia’s relatively high immigration intake based predominantly on a needed skills selection basis. A continuing flow of skilled migrants compete for available jobs with local applicants providing employers bargaining power on hours and wages offered.
These represent only a handful of possible reasons for persistently low wages growth and weak to negative growth in paid hours worked. At this point, all that is known with any degree of certainty is that the situation has not changed even though economic circumstances such as firmer economic growth and higher total employment growth seem to point to the possibility of improvement ahead.
One very big concern is that if wages growth and paid hours worked do not improve soon households will find it increasingly difficult to service its massive debt burden touching a record high 190% of household disposable income. Much of that household debt burden relates to housing and a quite general view is that Australians will do whatever they can to avoid defaulting on their home loans, probably still true relating to the homes they live in, but possibly questionable relating to the homes they rent out for investment representing a sharply increasing proportion of home loans over recent years.
Even if Australian households respond to a continuing squeeze on income by meeting their home loan servicing requirements they are likely to need to find some savings to make ends meet somewhere in their household budget. There is some evidence that this may already be occurring in relatively weak retail spending in Q1 and pretty glum readings of consumer sentiment in March and April. It is also likely that households will become less enthusiastic buyers of homes too.
In short, unless the constraints on household income growth from low wages growth and stagnant growth in paid hours worked start to ease soon it is almost inevitable that household spending growth will be comparatively weak making it likely that economic growth will be less robust too. These are the conditions that could lead the RBA eventually to cut the cash rate further.
However, if wages growth starts to accelerate and paid hours worked start to lift, households are likely to lift their spending and it is likely that economic growth would quicken and perhaps to the point that would lead to expectations of higher inflation. In these circumstances the RBA would start hiking its cash rate.
The interest rate outlook really is on a knife edge and a key factor is what happens to wages growth and paid hours worked from here and how households react. We cannot adequately explain the past weakness in wages and hours worked so it makes any forecast of what is likely to happen a guess at best.