Most of the recent gains in employment, which at face value has been impressive, are merely a reflection of population growth and no more. Another disconcerting aspect of the labour force data was confirmation that total hours worked by all employees in the economy fall sharply in January. This is a sure sign that the economy is not all that healthy.
Usually when economic conditions are buoyant, employees are asked to work more hours before finally the employer adds to staff numbers. In Australia’s highly flexible labour market, when times are tough, firms tend to ask their employees to work less fewer hours rather than sacking them. This is what is happening now.
Total hours worked in the Australian economy is lower in January 2018 than in May 2017 and this is despite employment rising by close to 250,000 over that time.
The average hours worked per employee fell to a record low as a result, meaning that there is still a huge amount of spare capacity in the labour market, evidenced by very high underemployment and ongoing troublesome high unemployment.
The labour force data have important implications for the Reserve Bank and interest rate settings. At its most simplest, there is now close to zero probability of an interest rate rise any time soon. The economy could not digest it, not just because of the soft labour market conditions, but because house prices are falling, wages growth is dead and inflation is below target.
The case for interest rate cuts, which was strong because of those factors, is gaining momentum not least because of the stalling in progress in reducing the unemployment rate.
Next week sees the release of wages data. If these show annual wages growth mired around 2 per cent, the rate cut bandwagon may get a few more people on board, including the RBA. It will require a major about face for the RBA to move to an easing bias, but in recent months it has shown pragmatism and flexibility when confronted with new information on the economy.
The labour force data confirm the economy needs a shot in the arm if we are to get close to full employment, let alone matching the 4 to 4.5 per cent unemployment rate many of our competitors are currently enjoying.