Just about everyone assumes we can never have enough jobs. So it's funny
that our unending discussion about how the economy's growth is doing
rarely delves into the detail of what's happening in the labour market.
But
that's what Dr Chris Kent, an assistant governor of the Reserve Bank,
did in a speech last week. He shows it really is a market, with the
demand for labour interacting with the supply of labour to help
determine the price of labour (wages) and the quantity demanded
(employment). Unlike textbook markets, however, this one never "clears" -
there's always some labour left unsold (unemployment).
It
shouldn't surprise you that, in studying developments in the labour
market in recent years, one big thing stands out: the effect of the
resource boom as it moves through its three stages of high export
prices, booming mine construction and rising production of minerals and
energy.
The demand for labour is "derived" demand - it flows from
the demand for goods and services. To produce those things you need
machines and workers. The more you produce, the more workers you need.
For
most of the two years since the middle of 2012, the economy (real gross
domestic product) grew at less than its 3 per cent annual trend rate,
held back by the decline in mineral export prices, the decline in mining
construction, the high level of the dollar and the weak growth in
public demand (government spending).
A big part of the problem was that
the downturn in mining-driven activity came at a time when the
non-mining economy was subdued.
This below-trend growth in the
production of goods and services meant weaker growth in the demand for
labour, as we can see from the various indicators of labour demand.
The
rate of unemployment is high relative to its recent history. The rate
at which people of working age (15 years and above) are participating in
the labour force, either by holding a job or actively seeking one, is
at about the lowest it's been over the past eight years. And since 2010
there's been a significant decline in the ratio of employed people to
the working-age population.
It's true the economy seemed to grow
more strongly in the last quarter of 2013 and the first quarter of 2014.
And we can see some small improvement in the indicators. Using the
trend estimates, employment grew by 0.7 per cent over the first five
months of this year, unemployment seems to have stabilised at 5.9 per
cent and the participation rate at 64.7 per cent.
But much of the
growth in real GDP over the past two quarters has come from greatly
increased production and export of minerals and energy, as newly built
mines start working. Trouble is, mines are so capital-intensive that all
this extra production would have created few extra jobs.
So, for
once, the growth in real GDP overstates the increase in demand for
labour. Kent suspects the growth in employment is explained partly by
slightly stronger growth in the non-mining economy and by a catch-up
from weaker-than-you'd-expect employment growth last year.
If so,
we're not out of the woods yet. And Treasury's forecast is that
unemployment will have risen a little further to 6.25 per cent by June
next year.
Now let's turn to the supply of labour. At the most
basic level, growth in the population of working-age adds to the supply
of labour, whether that growth comes from "natural increase" - more
young people joining than old people retiring - or immigration.
But
not everyone of working age chooses to participate in the labour force,
of course. And, in practice, changes in the participation rate are a
key indicator of the strength of labour supply.
Kent says growth
in labour supply has slowed substantially over the past year or so, with
the "part rate" down from 65.1 per cent.
This is a sign of the
interaction between labour demand and supply: when demand is strong,
more is supplied, but now it's vice versa. So it's usual for the part
rate to fall during periods of weak demand.
"As jobs become more
difficult to find (at the prevailing wage), some individuals become
discouraged from searching," Kent says. If they are still available to
work these people are "discouraged workers", many of whom will resume
the search for work when conditions improve.
But Kent says that,
since 2010, the rise in the number of discouraged workers accounts for
only less than a quarter of the fall in the part rate. Some of these
other people may have chosen to make themselves unavailable to work by
embarking on a period of study or accepting involuntary early
retirement.
But another, more structural, factor helping to
explain the fall in the part rate is the ageing of the population.
Ageing means a higher proportion of the population is in older age
brackets which tend to have lower rates of participation. (And if oldies
are still working, they're more likely to be part-time).
Kent
says ageing is estimated to have subtracted between 0.1 and 0.2
percentage points a year from the part rate over the past
decade-and-a-half. But now the rate is a clear 0.2 points. In recent
decades this purely demographic change has been offset by the decisions
of individual oldies to continue working, but now this second trend
seems to have stopped.
In textbooks, prices adjust automatically
to bring supply and demand into balance. In the real-world labour
market, it ain't that simple. Even so, the weaker demand for labour has
seen wage growth decline to well below its average over the past decade.
Pay rises of more than 4 per cent are now far less common and rises of 2
to 3 per cent are more common than 3 to 4 per cent. So are rises of 1
per cent or less.
