Could the REAL unemployment story be good news for your business?
When it comes to the labour market, you have to be careful what you wish for:
If employment is too weak, then many are so economically squeezed that their biggest challenge is merely to get by day to day.
On the other hand, if employment is too strong, interest rates and inflation rise, with a detrimental impact.
The Common Assumptions About Unemployment
People look two main headline numbers at when considering employment:
1. Unemployment rate, and
2. Wages growth.
A well-known economic theory basically says this: As unemployment rate reduces, wage go up (for geeks, it is the “Phillips Curve”). Sounds like common sense, right? Certainly that is what everyone assumes. And yet…
Paradoxically, it has not applied in recent times and both have been coming down! How can that be? Now read on.
The Secret Unemployment Rate
Here’s what governments like to trot out (when it suits them) – for example, “Unemployment falls to four-and-a half year low” (ABC News 16/11/17). This is what the unemployment graph looks like:
Yep, it ticks the boxes: “jobs and growth, jobs and growth.” Which Government wouldn’t be happy to be showing this off?
But in fact the “unemployment rate” is a very misleading number.
Given its prominence, most would be surprised how unemployment is actually measured. It is based on a survey of approx. 50,000 people by the ABS – that about 0.3% of the workforce. Then a person in that group counts as “employed” if they did at least one hour paid work in the week before the survey.
Yep. And that is how the headline grabbing, policy influencing key statistic is done. She’ll be right.
The research company Roy Morgan helpfully takes an alternative approach. I won’t go into it but they consider underemployment, casual work etc. and arrive at their view. Which looks like this:
They call the number at almost twice the official rate. Importantly, note the divergence since 2010.
How on earth can this happen?
So, if indeed unemployment is going down, wages should rise, right? Hmmm. Not so fast. Take a look at this graph of labour costs:
Not only are wages growing at a pitiful 2%, but we are working longer to squeeze that out. On an hourly basis, wages are growing at 1%. Anybody in Canberra watching (on either side)? Related to this, I really do question the official inflation rate of approx. 2%. The main item helping is grocery costs remaining static or decreasing; but when you look at what is happening to energy, and education, medical insurance costs etc. I can’t see how for many consumers costs of basic living would only be going up 2%. Can you?
The Third Leg Of The Stool: Job Quality
This is important and the above numbers do not capture it. Let’s loop it back to property: the “quality” and reliability of employment is important when applying for a mortgage.
I see it every day trying to get banks to recognise my clients’ income. Banks are still in the “if not a permanent employee, we are going to black mark your income” approach. If it isn’t coming from a permanent PAYG job, then flags go up and income gets “shaded” (banking speak for “we are going to not considering all or any of it”).
So, employment markets have got policymakers in a real dilemma and a bit of a mystery that little wage growth is being achieved considering relatively strong employment environments.
It’s a trend world over: unemployment going down, but wages are not rising. My theory never really gets a mention.
The Macro Trends At Play
I hate saying “it’s different this time”; but I suspect three related macro trends are kicking in to reduce the leveraging power and therefore wages of employees:
- Globalisation – This is not new, but continues as more businesses offshore many jobs. Look what our friends at the banks have done only in the last few years.
- Technology – You see in every industry that the impact of technology is increasing more than ever. It is far cheaper for businesses to run many parts of their processes now.
- The “gig economy” – Only ten years ago, many opportunities to earn a dollar today didn’t even exist. Think about Uber, Airbnb, online marketing management, website development, freelance graphic designers etc. This is great for businesses, consumers and many people doing these jobs, because it can suit their lifestyles. It makes getting a mortgage a nightmare though.
Technology is becoming a bigger and bigger factor – eg “National Australia Bank says 6,000 jobs to go as it books $6.6bn profit” (Source: The Australian 2/11/17).
So What’s The Conclusion?
To wrap up, for property you could take the view that this is pretty grim. The real driver of overall demand in the economy is none of the above. (If I said that up front you wouldn’t have read this.) It is total wages earned. This is simply the number of people employed x $ earnings.
Depending on what industry you are in, this holds to a greater or lesser extent. It certainly applies to businesses selling essential items, less so for discretionary type products and services.
We know from above that earning per person is flat. But partly because of unemployment rate and more by population growth – the veneer that covers up all economic mismanagement, on whatever side of politics.
That’s the cold hard fact: overall demand is primarily being driven by population growth!
In summary, a million more people are in employment than 6 years ago, almost 2% a year. This chart shows the trend:
That is not due to any wise economic management (so don’t believe what the pollies tell you… oh, I probably don’t need to tell you that, do I?!). But whatever the cause, it is certainly a boon for overall economic demand… And that should be a cause for optimism for your business, shouldn’t it?
What’s your view? To continue the discussion, email me, or call me on 0401 715032.