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The State of the Australian Labour Market [HSC Economics Review Episode #6] - YouTube
Channel: ArtofSmartTV
[0]
what's up guys it's rowan and terry here
[2]
from art of smart tv and we're bringing
[4]
you the next episode of the hsc
[6]
economics review now in this episode
[9]
we're going to be diving in to look at
[11]
the state of the australian labor market
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in particular we're going to be looking
[14]
at
[15]
wage growth it's been a bit of an issue
[17]
lately and we're going to talk about the
[19]
new
[20]
nyuru yes that's right we have a new
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nairo
[24]
now why is this important well i think
[26]
you know the the rba
[27]
not too long ago cut the cash rate to a
[29]
historical low
[31]
right 1.25 percent and in doing so
[35]
the governor announced of the rba that
[37]
you know one of their main
[38]
issues was you know low income growth
[41]
right so clearly what's going on here is
[43]
there's some major issues occurring
[45]
for the australian labor market that we
[47]
need to unpack and that's exactly what
[49]
we're going to be doing
[50]
in this episode we're going to be
[52]
exploring wage growth in australia
[54]
we're going to be looking at why we have
[56]
slow wage growth what the implications
[58]
are of it
[59]
and in particular this is going to be
[60]
really relevant for you
[62]
in your essays when you're having to
[64]
analyze effectiveness of policy
[66]
particularly analyzing the effectiveness
[68]
of monetary policy and whether or not
[70]
it's going to have an impact
[71]
we're going to need to consider the
[73]
extent to which it's going to really
[75]
shift
[76]
this wage growth issue and therefore
[78]
have you know the
[79]
the outcomes it's intending to have on
[81]
the economy
[82]
so to kick things off i suppose an
[84]
initial question terry
[86]
why is wage growth even important for
[88]
the australian economy
[89]
well hopefully we all understand that uh
[91]
wages are important because it's what we
[93]
earn as households
[94]
right and the spending that we have uh
[97]
is directly influenced by how much we
[98]
earned
[99]
so aggregate demand as you've been
[101]
learning with
[102]
fiscal policy and monetary policy as
[104]
part of macro policy is
[105]
influenced by 60 of it is actually
[108]
influenced by
[109]
by consumption right consumption from
[111]
households and then therefore if that's
[113]
consumption by households then it
[114]
matters how much they're earning
[116]
uh next couple of things with this is
[118]
then if a d is low because of
[120]
low wage growth uh you're also going to
[122]
get some very poor inflation outcomes
[124]
now if you remember with monetary policy
[126]
the goal of inflation isn't to have
[127]
inflation too low
[129]
there's a range between two to three
[130]
percent and so if it is a little too low
[133]
that can also have issues as well so in
[135]
other words just to contextualize like
[138]
if consumption is the biggest driver
[140]
agri demand
[141]
and wages are the biggest driver of
[144]
consumption
[144]
we've sort of got to sort out wages to
[146]
be able to then get inflation kicking
[148]
economic growth kicking it's like
[150]
this really important lever or cog in
[152]
the economy
[154]
that we need to work on to get it to
[156]
work so
[157]
i suppose the next question now is okay
[159]
like what's our wage growth
[161]
like okay so actually wage growth has
[164]
actually been a little bit better
[166]
in recent times okay so over the past
[168]
three years wage growth has been
[169]
particularly poor
[170]
uh it's actually started to pick up a
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little bit it's at 2.3 percent
[174]
uh at the moment um and it was it hit a
[176]
record low of 1.9
[178]
in 2017 so it's actually not doing as
[180]
bad as it used to
[181]
however if we zoom out a little bit more
[184]
right um
[185]
wage growth in the recent times has been
[188]
very very different from what it used to
[189]
be so what was it like maybe 10 20 years
[191]
ago
[192]
yeah so look if we look at the long-term
[193]
trend and we we zoom out to sort of 1998
[196]
to sort of
[197]
2019 okay like the average weight growth
[200]
wage growth was sort of around 3.2
[202]
percent that's average right so there
[204]
were times where it was of course
[205]
considerably higher so
[207]
we can see that you know when we hit the
[209]
1.9
[210]
in 2017 that was well below the average
[212]
and even 2.3 which we're saying is an
[214]
improvement it's a stronger recent trend
[217]
that's still almost a percent below the
[219]
average wage growth we've seen
[221]
um you know over the last sort of 20
[223]
plus years so
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i guess it raises you know this concern
[227]
i suppose about well
[229]
you know our wage growth isn't going the
[231]
right way and really it hasn't since the
[233]
gfc
[233]
you know we've really seen a trend
[235]
downwards um since
[237]
gfc and depending on how you look to
[239]
measure it you know
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it could even be considered even worse
[242]
because if we look at another way that
[244]
you can measure wage growth is average
[246]
weekly earnings
[247]
so you look at the growth in average
[248]
weekly earnings and and what's really
[250]
interesting here is that um
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the average there is about four percent
[254]
but we've seen growth only of about
[256]
two percent in average weekly earnings
[258]
and so some economists have gone as far
[260]
to say
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that this is the worst wage growth
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statistics
[264]
since the great depression or second
[267]
world war
[268]
you know which um is i guess the reason
[270]
for concern
[271]
for the australian economy even if you
[274]
know we're saying that it's improved a
[275]
little over the last sort of couple of
[277]
years so
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why is this a concern for australia
[280]
what's happening macro economically
[282]
that is saying yes our wage growth is a
[285]
problem
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um well so as we were able to as ron
[288]
established right there's a really clear
[290]
link between wages and consumption and
[292]
therefore aggregate demand
[293]
right and so based on the level of
[295]
expenditure in the economy
[296]
right that's going to determine our
[298]
level of economic growth okay and so
[300]
there's a very clear link here wages
[301]
growth wage growth has been really poor
[303]
and hopefully you're aware as well
[305]
economic growth has also been really
[306]
really poor so that's
[307]
a very clear relationship between the
[309]
two uh we've got economic growth
[310]
currently sitting at one point eight
[311]
percent
[312]
uh we've got forecasts in the budget
[314]
that say should be about two point two
[315]
five percent for the year
[317]
and continue to go up right but if wages
[319]
i'm going to pick up
[320]
uh then this would present a severe
[323]
challenge to actually reach that
[325]
economic growth
[326]
goal the other side of the story is of
[328]
course the philips the short run
[330]
phillips curve
[330]
okay so when you've got uh very very low
[332]
rates of
[334]
wage growth and therefore inflation that
[336]
also generally implies that you're also
[338]
going to have
[338]
a very high unemployment rate or at
[340]
least a growing unemployment rate
[342]
definitely so i i think what has then
[345]
caused that right you know i mean like
[346]
why are we in this sticky situation like
[348]
we did mention post
[349]
gfc that it's been trending downwards
[352]
clearly the macro conditions
[354]
are not pointing in the right direction
[356]
um what are some of the factors that are
[357]
contributing to this low wage growth
[359]
uh my biggest factor that i'd like to
[361]
look at is actually just the
[362]
casualization
[363]
of the workforce okay because i believe
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that since the 1980s
[366]
we used to have unemployment up in the
[368]
10 range right
[369]
above 10 it's gone down a lot since then
[372]
and i think
[373]
there is there's a lot of advantages
[375]
with that but i think just recently
[376]
we're kind of starting to see some of
[377]
the
[378]
disadvantages of that when you have
[380]
labor market reforms you make it more
[382]
flexible you make it easier to hire
[384]
people
[384]
one of the downsides of that is well
[386]
simply you leave a lot of
[388]
underutilized labor resources right
[390]
because if you're dropping that
[391]
unemployment rate
[392]
people are generally finding jobs but at
[394]
the same time they're not finding
[395]
full-time jobs
[396]
they're finding casual jobs instead uh
[398]
think about
[400]
a casual worker they're probably going
[401]
to be less able to bargain for higher
[403]
wages
[404]
compared to someone who's full-time so
[405]
that's that's my biggest reason all
[407]
about yours
[408]
and i think before i share you know one
[409]
of my biggest reasons i think
[411]
um just to note and to really explicitly
[414]
connect this for you to the hsc syllabus
[416]
and course right
[417]
what terry was just exploring was really
[419]
one of the limitations of
[422]
some of the microeconomic reforms that
[424]
we've seen particularly around the labor
[426]
market you know so we've seen a move to
[428]
a more
[428]
decentralized model of wage
[430]
determination that's had a lot of
[432]
positives
[433]
certainly but clearly one of the the
[435]
implications here is perhaps that it's
[437]
also
[437]
now placed significant downward pressure
[440]
on wages you know one of the
[441]
the things we used to see in the in the
[443]
70s and 80s was wage breakouts and that
[445]
was one of the biggest fears of
[447]
the rba in the government from an
[448]
inflationary perspective
[450]
because if wages go up inflation's going
[453]
to go up very quickly we've shown that
[454]
connection right
[456]
so i think certainly casualization has
[458]
played a role and it's a result of
[460]
these labor market reforms so if you're
[463]
getting a micro reform essay
[465]
you know it's an opportunity to actually
[466]
bring some analysis around
[468]
wage growth and the issues it might now
[470]
be creating for the australian economy
[473]
i think just to build on terry's point
[475]
for for me for one of the major current
[477]
causes
[478]
because you know terry's i think example
[480]
is looking at sort of the structural
[481]
change that's resulted in the economy
[483]
over the last
[484]
20 to 30 years i think a more immediate
[487]
cause
[487]
is uh this idea which the rba has talked
[490]
a lot about you're going to hear it and
[491]
it's going to sound like jargon so we're
[493]
going to try to
[494]
explain it for you and that's the phrase
[496]
spare capacity
[497]
in the labor market okay it's thrown
[499]
around a lot and essentially all it's
[501]
referring to is a couple of things like
[503]
one
[504]
unemployment okay so if you're
[505]
unemployed you've got
[507]
time that you could be using and
[509]
resource towards
[510]
uh you know being employed and producing
[513]
something so there's
[514]
spare capacity there but it's not just
[516]
uh unemployed
[517]
it's the underemployed as terry
[519]
highlights those that are casualized
[521]
that are working 10 hours a week but
[522]
want 40 um and the combination of those
[525]
two
[526]
okay the unemployed and the
[527]
underemployed form what is known as our
[529]
labor under utilization rate and and if
[532]
we do look at that we've seen that
[534]
growing that's at 13.7 um so it's
[537]
considerably higher than the 5.2 percent
[540]
unemployment rate that we've seen so
[542]
right now simple idea if you've got more
[545]
capacity in the economy you've got
[547]
every employer who puts a job out if
[549]
they know that 10 people are going to
[550]
turn up to apply for that job
[552]
as opposed to two they're going to get
[554]
to choose
[555]
who they hire and so as a result there's
[557]
not going to be that much upward
[558]
pressure on wages
[560]
they're going to be able to offer lower
[561]
wages knowing that if the first
[563]
eight don't say yes the last two might
[566]
so
[566]
the greater capacity you have the lower
[569]
the pressure is for wage growth and so
[571]
right now the rba beliefs that we've got
[573]
due to this casualization due to the
[576]
unemployment figures
[577]
underestimating the true issue of labour
[579]
utilization
[580]
we have a situation where there's low
[582]
wage growth because we've got lots of
[583]
people that actually
[584]
are still looking for work and could be
[587]
working
[588]
more so i think right now that's also a
[591]
key
[591]
issue um and really i think we we can
[594]
say that it's really been an issue since
[595]
gfc
[596]
you know gfc really prompted uh
[598]
increasing casualization as
[600]
firms needed to shed workers um and or
[603]
shed you know the the nature from
[605]
part-time and full-time to casual so i
[607]
think
[607]
that's a really big issue and it's one
[609]
that uh you know the rba is particularly
[612]
focused on right now because it's a
[613]
short-term macro economic issue that
[615]
they can solve
[616]
the change is microeconomic is something
[618]
that the government
[619]
you know itself needs to sort out but
[621]
the rba itself
[622]
their only option is to deal with the
[624]
macroeconomic side of things
[626]
i think what's interesting is that as
[627]
part of this they have changed the nairu
[629]
now
[630]
i mean what's the new nairu what's the
[631]
thinking behind changing it
[633]
uh so the new larue is that 4.5
[635]
unemployment rate so that means that
[637]
originally they used to think it was
[639]
around 5 which meant that once
[641]
unemployment hit 5
[642]
they'd expect inflationary pressures to
[643]
pick up now obviously unemployment did
[646]
hover around five percent for much of
[647]
last year and they actually didn't see a
[649]
pickup in inflation so
[650]
uh economists they kind of looked at
[652]
that and they said hang on well that's
[653]
not that doesn't make sense so we need
[654]
to go back
[655]
recalculate our data do some more models
[657]
and what they've
[658]
arrived at is four point five percent so
[661]
and then it shows really if that you
[663]
know the knower is at that point we've
[664]
we do certainly have that spare capacity
[666]
that they've been talking about
[668]
so that's two major issues i think there
[670]
is a third issue here that is also
[672]
contributing particularly um and that's
[674]
labor productivity
[676]
you know what's that later productivity
[678]
like how does that relate to wage growth
[680]
in australia
[681]
okay so uh labour productivity basically
[683]
just refers to
[684]
the amount of output that each unit of
[686]
labor input is able to generate so
[688]
obviously the higher your labor
[689]
productivity
[690]
generally speaking because of the way
[692]
that we have enterprise agreements
[694]
uh you're able to then go to your boss
[696]
bargain for a higher wages by saying
[697]
look at me i'm being more productive
[699]
uh i'm more worthwhile to your company
[701]
give me a pay rise
[703]
and that's important because by and this
[706]
goes to terry's earlier point about the
[708]
labor market changes in terms of
[709]
regulation
[710]
the shift in micro reform was to connect
[712]
wage determination more closely to
[714]
productivity
[715]
that's a good thing it's a good thing
[717]
because it reduces inflation for
[718]
pressures right if
[719]
you're being more productive and you ask
[721]
for a pay rise
[723]
it's not going to create cost push
[724]
inflation because even if you're getting
[726]
a pay rise the cost per good or service
[728]
that you're creating should stay fairly
[730]
similar because you've increased your
[731]
output
[732]
um clearly though what that creates
[735]
though for australia right now is a
[736]
fairly low
[737]
labor productivity um over the last
[740]
decade
[740]
and beyond and so wages track pretty
[743]
pretty closely
[744]
with labor productivity so i mean we're
[746]
sort of looking at
[747]
um you know a fall in labor productivity
[750]
year-on-year of about
[751]
half a percent a little bit over half a
[752]
percent so overproductivity's gone
[754]
backwards yeah
[755]
which is not great it sort of explains
[757]
low wage growth i think as well
[758]
any other any other uh major reasons why
[761]
we've got slow wage growth
[763]
anything else there i wanted to add
[764]
another one just on the gfc point that
[766]
rowan had earlier um
[768]
after the gfc hit i think it really did
[770]
affect businesses and their
[771]
confidence in hiring employees um and
[774]
it's also just important to remember
[775]
that in australia we typically actually
[777]
do have quite high labor costs compared
[779]
to some other countries
[780]
and so part of the reason why it's so
[782]
high is just because of things called on
[784]
costs
[785]
okay so on costs can often go up to
[786]
about 30 of the actual
[788]
wages paid to an employee so these are
[791]
just things like your annual leave
[792]
your even other leave entitlements uh
[795]
sick leave
[796]
things like that and superannuation of
[797]
course um
[799]
so it actually does give an incentive i
[802]
believe for businesses to actually
[803]
casualize their workforce right so
[805]
because if they don't have if they have
[807]
one
[807]
full-time job and they can split it up
[809]
into a bunch of part-time jobs
[810]
uh that reduces significantly the amount
[812]
of bond costs that they have to pay
[813]
because if you remember with supreme
[814]
relation you don't actually have to pay
[816]
it until you reach
[817]
400 and fifty dollars a month yeah there
[820]
we go that's right if you split it up
[822]
you can get creative definitely
[824]
so i think um what's interesting about
[826]
all this is what are the implications
[828]
so we you know we've identified why wage
[830]
growth is important
[831]
uh you know what what the current state
[833]
of wage growth is
[834]
in australia not great what are the
[836]
driving causes both
[838]
structural and long term and macro
[840]
economic and short term that are
[842]
contributing to slow wage growth
[844]
what's the impact what's it gonna what's
[846]
it gonna do for the australian economy
[847]
well obviously as we've said it's gonna
[849]
slow down the australian economy
[850]
i think there's gonna have a lot of
[852]
implications on policy which we've
[853]
already actually seen with the rba
[855]
dropping cash rate
[856]
to 1.25 a historic low in june
[860]
and i think that that's the response
[861]
here is to try and get
[863]
wages picking up again to get labor to
[865]
get the unemployment rate down again
[866]
to actually just reduce some of that
[867]
excess capacity so in other words what
[869]
we're sort of seeing is really
[871]
an idea that unless wage growth can
[873]
increase
[874]
you know a little we're not going to see
[877]
many of our other objectives being met
[878]
you know we're not going to see economic
[880]
growth
[880]
really increase we're not going to see
[882]
unemployment well
[884]
there's a strong relationship with
[885]
unemployment trial unpack but we're not
[886]
going to certainly see inflation
[887]
increase so we're going to see a pretty
[890]
soft
[891]
macroeconomic set of conditions for
[893]
australia now i think the
[895]
interesting thing here is that the rba
[897]
has identified that
[898]
that they don't see wage growth really
[900]
ticking up until unemployment gets
[901]
closer to 4.5 percent
[904]
which is their no root right because
[905]
that's going to tighten the capacity and
[907]
drive some wage growth and so
[909]
it does go to show that you know i think
[910]
one we're probably going to see ongoing
[912]
more aggressive monetary policy
[914]
over the next year because you know how
[916]
do they get
[917]
unemployment down from 5.2 to 4.5
[920]
they're going to have to be continually
[921]
expansionary
[922]
um we have seen some other things though
[924]
i mean we've seen some changes by the
[925]
fair work commission
[926]
what have they done to try to support
[928]
wage growth uh so the fair work
[930]
commission uh if you're not familiar
[931]
they set actually the national minimum
[933]
wage so every year
[934]
uh they will meet with um with unions
[937]
they'll meet with employee associations
[939]
and basically they'll come together make
[940]
a decision
[941]
on how much they should or if they
[943]
should increase the minimum wage
[944]
now often times of course we've got
[946]
inflation so usually they will at least
[948]
increase the minimum wage by at least
[949]
inflation this year they actually
[952]
agreed to increase the minimum wage by
[953]
three percent so uh
[955]
the hourly wage went up to 19.49
[958]
um and this is of course going to
[961]
support that low wage growth simply
[963]
because
[963]
uh it's literally driving up the minimum
[966]
wage uh however it is important to
[967]
mention that this three percent is
[969]
obviously going to be higher than the
[971]
wage growth in other
[973]
um for other kind of wage determination
[976]
agreements
[977]
yeah definitely and so we do the math
[979]
three percent increase on awards
[980]
inflation's 1.3 so there's a 1.7 sort of
[984]
lift
[984]
note that you know the average in the
[986]
market though has been what's 2.3 anyway
[988]
so it's a little bit lower if we
[990]
you know if we we're looking at the real
[992]
wage growth here which is
[993]
the difference right but i think it it
[995]
does show that overall the real wage
[997]
growth will be more significant which is
[999]
interesting
[1000]
um i think that the final thing i
[1002]
suppose just as we're sort of wrapping
[1003]
up here is to also consider the budget's
[1005]
role
[1006]
okay so the budget is also trying to
[1008]
support this arguably with the tax cuts
[1010]
okay so they're trying to increase
[1012]
disposable incomes you know the thousand
[1014]
and eighty dollars for low to
[1015]
you know middle income tax offsets that
[1017]
are going to be provided
[1018]
although the the question is you know um
[1021]
to what extent will this actually be
[1022]
passed on
[1024]
you know so the australian council of
[1025]
social services argued that the actual
[1027]
dollar impact
[1028]
to a low to middle income earner is
[1030]
about ten dollars
[1031]
so it's questionable right we've got the
[1033]
government saying a thousand dollars
[1035]
give or take is going to be there to
[1036]
increase total income and we've got
[1038]
other analysts saying well
[1040]
the actual reality is going to be a lot
[1041]
less so the hope here is that we see
[1043]
sort of this tri-fold approach you know
[1046]
we've got monetary policy
[1047]
um you know lower cash rate we've got
[1050]
micro reform through
[1052]
you know the fair work commissions
[1054]
changes in the award minimum wage
[1056]
and then we've got fiscal policies
[1057]
approach through tax cuts to increase
[1060]
disposable income
[1061]
and the hope is going to be that three
[1063]
of those things is going to do enough
[1065]
to lift wage growth so my question for
[1068]
you
[1068]
our question for you really is do you
[1070]
think it will right i mean this is a
[1072]
an opinion that you need to have you
[1073]
need to have an opinion because you will
[1075]
be analyzing the effectiveness of all of
[1077]
these three policies
[1079]
in achieving the objectives and given
[1080]
that wage growth is this key lever
[1083]
you're going to need to have an opinion
[1084]
on will these policies be enough
[1087]
to increase wage growth in australia and
[1089]
therefore support australia achieving
[1091]
the economic growth
[1092]
inflation unemployment objectives that
[1094]
you know the rba and the government has
[1096]
set
[1096]
so let us know do you think these
[1099]
policies will be sufficient to lift wage
[1100]
growth pop it in the comments below
[1102]
we'd love to hear what your thoughts are
[1106]
additionally if you have any questions
[1107]
for terry or i leave them in the
[1109]
comments
[1109]
um and otherwise we will see you in the
[1112]
next episode
[1122]
you
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