BCEC Monthly Labour Market Update – July 2023

— Employment stagnates, unemployment rate rises from 3.5 per cent to 3.7 per cent. —
— Real wages remain low, little prospect for growth in coming quarters. —
— Data only weaker for women, and may not reflect a general labour market trend. —

Key economic data finally following the script

You have to have some sympathy for outgoing Reserve Bank Governor Philip Lowe. Just as he departs, there are signs the RBA’s plan to slow the economy may finally be coming together.

Inflation moderated in the June quarter 2023 and now figures from the July labour force survey suggest the labour market is cooling, with the unemployment rate creeping up toward a more sustainable level consistent with full employment.

Total employment fell marginally in July and the unemployment rate rose from 3.5 per cent to 3.7 per cent.

It’s generally accepted that an unemployment rate below 4 per cent is incompatible with maintaining inflation in the 2-3 per cent target zone, so the July figures are in line with the intended outcome of successive increases in interest rates.

However, there are plenty of challenges ahead to achieving the ‘soft landing’ the RBA is aiming for and relief for mortgage holders in the form of an interest rate cut remains off the table for now.

Labour demand remains very strong, with average hours worked and vacancies increasing in July. Signs of cooling appeared only in the data for women, who saw a sharp drop in full-time employment and a 0.2ppt fall in the participation rate to 62.3 per cent.

We suspect changes in behaviour since the pandemic may be distorting seasonal adjustment of the estimates associated with the July school holidays, which would disproportionately affect women and may not reflect a general labour market trend.

There are also inflationary pressures in the pipeline. Nominal wage growth to the June quarter is now running above the target inflation rate, and wage indexation that came into effect on 1 July will add to that in the September quarter, as will current high fuel prices.

The July labour force data hasn’t completely extinguished the risk of one more rate rise.

More ‘weakly’ earnings growth

Estimates relating to the June quarter 2023 for both the Wage Price Index (WPI) and Average Weekly Earnings (AWE) were released in the same week as the July labour force figures. Neither shows any recovery in the real purchasing power of Australians’ pay packets.

The WPI series increased by 0.8 per cent in the quarter, exactly matching inflation, meaning the real hourly wage costs faced by employers remained steady.

In real terms, the WPI is around 5 per cent lower than just prior to the pandemic, and remains at the lowest it has been for over a decade.

The WPI adjusts for compositional changes in the workforce, such as workers’ skill levels.

Released every six months, AWE provides a more direct measure of what workers are earning.

The average ordinary-time earnings for a full-time adult worker in May 2023 was $1,838.

In nominal terms that was up by about $30 since November 2002, but represents a further slight decline in real terms. As with the WPI, real average weekly earnings are lower today than they were in 2013.

The Federal government’s commitment to get real wages moving again seems unlikely to be met in the near future.

While the rate of erosion of real wages may be slowing, real wages are lower still than when Labor came into power.

Without a significant pick-up in labour productivity, wages growing faster than the current rate of inflation won’t be compatible with getting inflation back into the 2-3 percent target range.