Aussie labour market: Why beauty is in the eye of the beholder

Sat, 18 Mar 2017  |  

This article first appeared in the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/labour-market-why-beauty-is-in-the-eye-of-the-beholder-011836039.html?soc_src=social-sh&soc_trk=tw 

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Aussie labour market: Why beauty is in the eye of the beholder

Economic facts do not always give an accurate reading on the health of the economy. Or rather, they are open to interpretation and, as in most things, the beauty is in the eye of the beholder.

Think of today’s labour force data.

The unemployment rate in seasonally adjusted terms in February was 5.9 per cent. Whether that is a ‘good’ or a ‘bad’ number is open to interpretation. Compared with January, the unemployment rate was 0.2 percentage points higher; compared with middle of 2015 ago, it was 0.4 percentage points lower; compared with the recent low point in the unemployment rate just prior to the global financial crisis, it was almost 2 percentage points higher.

See the difficulty in determining whether it’s a good or bad result?

The fact is that none of these comparisons give a complete picture on the health of the labour market or indeed, whether the unemployment rate at 5.9 per cent is good, bad or indifferent.

Suffice to say, each month the unemployment rate should be compared with the level of full employment in the economy. In other words, it should be judged in context of whether the economy has been performing strongly enough to ensure that everyone who wants a job has a job. Anything less is failure.

Using economic jargon, full employment occurs when the unemployment rate is as low as possible but consistent with a sustainable rate of wages growth that is in turn consistent with the official 2 to 3 per cent target for inflation. The recent history for Australia suggests that the full employment unemployment rate is around 4.5 to 5 per cent or a tick lower.

Today’s 5.7 per cent unemployment rate is far from good. It is around 1 to 1.5 percentage point higher than it should be which owes much to the last half decade of below trend economic growth. The economy simply hasn’t been growing fast enough to generate the economic activity needed boost employment and drive the unemployment rate lower.

The current forecasts from Treasury and the Reserve Bank of Australia are for the unemployment rate to remain around 5 to 5.5 per cent for the next couple of years – and this assumes, perhaps optimistically, further strong momentum in the global economy, a positive influence from the higher terms of trade and ongoing low interest rates.

In other words, the outlook for unemployment is reasonable without testing full employment. And if anything goes wrong, say commodity prices tick lower or the housing market falters, the unemployment rate will remain in a 5.5 to 6 per cent range. It is too high.

To achieve a lower unemployment rate and full employment, domestic policy settings need to be directed at stronger growth. Interest rates could be cut, for example. With the US Federal Reserve hiking interest rates this morning, a rate cut in Australia would probably drive the Australian dollar lower which would boost the local economy. In the budget, which is less than two months away, the government could deliver a mild fiscal stimulus aimed at moving the economy towards full employment.

In the interim, the unemployment rate is too high. That unemployment rate translates to 750,000 people unemployed. A full employment target is not only imposing a social cost, but it represents untapped resources that, if utilized, would add to growth.

Lowering unemployment is not only good for those who are currently unemployed, it is good for the economy.

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Employment - the odd one out or is the economy booming?

Thu, 19 Oct 2017

I am reluctant to bag and slag the employment data, because it is all we have when looking at the health of the labour market. But there are a few quirky bits and bobs in the news of the wonderful run of job creation over the past year.

Employment rose by a remarkably strong 3.1 per cent in the year to September, a fabulous result.

But, and it is a big but, the results are at odds with just about every other indicator in the economy. EIther they are misleading or the employment data are misleading.

One way to check it to have a look at the economy the last time annual growth in employment was above 3 per cent. This takes us to the period around 2007 and into early 2008.

In 2007, annual real GDP growth was generally around 4 to 5 per cent, as you would expect with such jobs growth. The economy was on fire!  In 2008, the CPI surged by over 4 per cent which is again as you would expect given the boom in employment. The RBA was hiking rates at an agressive pace, with the official cash rate hitting a stonking 7.25 per cent in 2008. Wow! 

What bubble? The financial sector is fighting fit

Tue, 17 Oct 2017

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/1897318-045821149.html 

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What bubble? The financial sector is fighting fit

Australia’s banking sector is in peak health and the household sector is having few if any problems managing its debt.

This is the good news from the Reserve Bank of Australia Financial Stability Report which effectively put the kybosh on the fear-mongers who continue to forecast a crisis in household debt, a crash in house prices and turmoil in the financial system and more specifically, the banks.

The key conclusion from the RBA was that “the financial system is in a strong position and its resilience to adverse shocks has increased over recent years.”

These are strong and direct words from the normally cautious RBA.

It also noted that the bank’s non-performing loans (bad debts in other words) “remain low” and bank profitability “is high”, which are the key indicators of financial stability and strength. The RBA went as far to say that “the banks also have ample access to a range of funding sources at a lower cost than a decade ago” which is fundamental to the functioning of the financial system. Nothing was presented that indicated current problems in the financial sector.

The RBA assessment can be tested from the markets, specifically bank share prices. Most evidently, bank share prices remain strong as the investment community continues to place its money where its mouth is when determining actual performance and even risks when allocating investment funds.