Australia’s two economic stories: strong growth but low labour demand

James McIntyre, Australian Head of Economic Research
14 Nov 2016

At first glance the Australian economy is looking strong, with the lowest unemployment rate in 3 years and promising GDP growth. But behind the scenes there’s a more complex story unfolding with other indicators suggesting endemic weakness in Australia’s labour market.

Australia’s strong GDP growth and the lowest unemployment rate since 2013 are masking other indicators of weakness in Australia’s labour market.

Despite growth in the total number of jobs across the economy, underemployment is on the rise and the number of full time jobs is shrinking.

Were it not for GDP growth above 3 per cent and a steady unemployment rate of 5.6 per cent, this under-utilisation of Australian workers would be prompting a very different conversation about the state of the economy.

If you look past the headline figures, Australia’s labour market has been showing signs of vulnerability for some time now.

The average working week has shrunk by 20 minutes since late 2015, according to our research. This drop goes beyond the structural decline in working hours we’ve seen over the past two decades as employers adopt more flexible workplace practices.

Had employers instead chosen to cut jobs, rather than hours, the unemployment rate would be a full percentage point higher and there would be 124,000 fewer jobs across the economy today.

Combined with persistently low inflation which is constraining wages growth to record lows of 2.1 per cent, these are the sorts of figures we typically see during times of recession.

The last time Australia experienced a significant drop in the number of hours worked was in 2008 during the global downturn and in 2001, when Australia’s economy slowed as a result of poorer economic conditions globally.

Sectors showing strong growth are in parts of the economy that lean heavily toward part-time employment, including household services, an industry dominated by jobs in healthcare and social assistance, education, and tourism and food services.

The difference this time is the strength of GDP is masking weaker economic conditions.

The production phase of the Liquefied Natural Gas boom in northern Australia has delivered a surge in export volumes that has kept economic growth ticking along and will continue to contribute significantly to GDP in coming years. But the industry no longer needs the volume of workers it required when it was constructing its gas plants because the production phase is less labour intensive and therefore employs fewer people.

In order to see stronger economic conditions, labour demand needs to increase. Without that, there will be no growth in wages and inflation.

If employee hours start to increase again, it could still take two-and-a-half years and jobs growth of 25,000 per month before the labour market would be strong enough to support a cash rate of 3 per cent or above.

In the meantime, weakness in the labour market will act as dampener for interest rates in Australia, leaving room for further strong economic growth before wage pressures become an issue.

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