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Australia’s puzzling labour market locks down wages growth - May 2021

Whilst the latest data released by the ABS shows promising signs of the labour market recovering, with unemployment falling by 0.2% to 5.5%, wages growth looks to remains stagnant in the coming years. The end of March saw the end of the JobKeeper subsidies, resulting in the loss of 30,600 jobs in April. Labour force statistics show that 33,600 individuals exited the labour market, driving down participation rate by 0.3% to 66%. The underemployment rate has also fell down to 7 year lows at 7.8% with the Australian economy adding 33,800 full-time jobs but losing 64,400 part-time jobs in April.

From December 2020, overall wages grew by 0.6% over the last two quarters, recording the highest level of growth since 2018. Quarterly private sector growth fell slightly from 0.7% to 0.6% where a promising 2.4% annual wage growth provides a glimpse of hope that Australia’s economy has not seen in the last 6 years. However, the overall annual growth of 1.5% would be a record low as every industry is facing slower annual wages growth due to the lingering impacts of COVID-19.


Real wages have increased in the past year only because inflation was at record low levels. The current unemployment rate of 5.5% would have been consistent with wages growth of around 3% in the first decade of the century, instead it was just 1.5%. This systemic issue of wages partly stems from the decoupling of the link between unemployment and inflation from a flattening of the Philips curve. In order for inflation or wages growth to increase substantially, unemployment must fall further than it did before, evidenced by the level of full employment or NAIRU decreasing from 5% to 4.5%. For the past 17 years, an underemployment rate of 7.8% would see wages growing by at least 2.5% suggesting that both unemployment and underemployment levels will need to be at record lows to achieve previously average increases in wages.


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