Australian Labour Market
I was listening to the radio where an economist, Stephen Wu, employed by the CBA, was being interviewed on Radio National about an indicator he has developed to help assess the state of the Australian labour market.
He made the point that when the unemployment rate is used in isolation to judge the state of the Australian labour market, it is likely overstating its tightness.
The unemployment rate has basically tracked sideways for a year now, but it is possible that there has been a loosening in the labour market since about October 2022.
Before discussing this finding further, it is worth making the point that the unemployment rate is provided gravity that is not provided to the inflation rate.
Inflation rates around the world are analysed to death to try and find out what is really going on. There are measures that purport to show the generalised rate of price inflation and a whole host of measures that strip out various components to try and arrive at a ‘core’ measure of inflation without volatile components included.
In addition to measures of inflation and core inflation, there is even a measure of hard-core inflation that strips out measures like food and energy.
This level of detail tends not to have been applied to measures of unemployment. On the contrary, rather than try and look at the ‘real’ or core level of unemployment in the same way inflation is, a filter is applied that strips out some of the real data that can help us understand the Australian labour market.
Filtered Data
The filter that is applied here is to remove the seasonality from the statistics so that they are not so erratic on a month-to-month basis. A further layer of filtering is often applied to spot the ‘trend’ in the unemployment rate.
While filtering these statistics can be useful in many circumstances, they may have left us in the dark when it comes to the crucial task of picking a turning point in the trajectory of the Australian economy and the application of interest rate policy.
It was Milton Friedman, a Nobel Prize-winning economist that started talking about long and variable lags in relation to the transition mechanism in monetary policy. While this is true, and I certainly don’t want to pick an argument with a long-dead and very famous economist, there are things we can do to try and cut down the length of these lags.
Have We Gone Too Far
It is critical to avoid overshooting or undershooting using policy levers like interest rate settings.
It appears odd to me that while the inflation rate is parsed to within an inch of its life, the same does not appear to occur in data related to the Australian Labour Market and the unemployment picture.
What Stephen Wu, the economist from the CBA found was that the tightness in the Australian labour market is overstated because of the focus on the unemployment rate and that this measure does not adequately consider the amount of underemployment and spare capacity.
It is slightly counterintuitive because the measure of underemployment which is different to unemployment has risen from 5.8% to 6.4% even though the number of hours worked has risen. Workers are still willing and able to work more hours than are available.
Why Does Underemployment Exist
This desire to keep increasing the number of hours worked by the labour force may be driven by the rising costs of living as evidenced by the inflation rate and increasing interest rates. Seeking to work more hours may simply be a strategy to make ends meet. Whatever the cause, it translates into a labour market that is not as tight as the unemployment rate would have us believe.
This leads me to believe that we are far less likely to see further interest rate rises than I believed before I heard this interview.
It is not hard to fathom this situation when you consider that having a historically low unemployment rate is really the flip side of having a historically high cost of living inflation environment.
A more subtle inference from finding we want to work more hours is that in the Australian labour market, we are still anxious about their ability to make ends meet even though we are working more hours. We want to work even more.
Are We On The Right Track
This appears to be going wrong. I kept thinking that we are about to enter a period of disinflation that could eventually turn to deflation when I should be seeing it from an employment perspective rather than a price perspective.
Above the gate of the concentration camp at Auschwitz was the words ‘Arbeit macht frei’. Work sets you free. Have we put that same way of thinking around our necks like a millstone?
We can buy as much food as we want, especially if it is processed. It has made us obese.
We have subsidised medical care. It’s so good we are legalising Euthanasia.
The appliances and comforts we need for living are so cheap they end up in landfills rather than repair shops.
We live in a country of sunshine and ocean beaches. We are so relaxed and comfortable that we are the world’s largest users of methamphetamines per head of population.
We have land in abundance. Until you want to find somewhere to have a home in which case it is unaffordable, and no one will build on it.
All I can say is lucky that we live in a democratic country. In the end, we are self-correcting, and I wouldn’t want to live anywhere else. If we have gone down the wrong path or paths, we will eventually find our way to the right one. But it will take radical adjustment.
In the meantime, thanks to the creativity and work ethic of one of our own. An economist. We may be twigging onto the fact that we have gone far enough in raising interest rates and making life difficult in the Australian labour market.
If you want to read more about inflation, I have written an article called “Deflation or Stagflation“.
What we really need to do is figure out how to be more productive so that instead of working more hours to make ends meet, we can work more effectively.
I have written here about how working more hours is not increased productivity. The article is called “Baby Boomers Businesses“.
