Australia’s labour market needs no reform

June 24, 2013

By Stephen Koukoulas

So it looks like industrial relations and labour market regulation won’t be major election issues after all.

Despite calls for action from some on the right of the Liberal Party, notably Peter Reith, the Coalition is making discretion the better part of valour.

With a healthy lead in the polls, it has played down any major changes on IR. Whatever the tactical merits of the Coalition’s thinking, there are sound economic reasons for leaving the labour market alone.

This is because there is nothing inherently wrong with the current structure of labour market conditions, a point confirmed by the facts that the unemployment rate is low, wages growth is in check, industrial disputation is low and productivity growth is solid.

It is worth looking at recent trends in a range of economic and labour market indicators to confirm this view of a flexible and dynamic labour market.

The pace of economic expansion has slowed over the past year, with annual GDP growth moderating from around 3.5 per cent in the middle of 2012 to 2.5 per cent in the March quarter 2013. In addition to this recent cooling in activity, the impact of the global financial crisis and its aftermath have meant that annual GDP growth has averaged a tepid 2.6 per cent over the last four years, around 0.5 per cent per annum below the long-run trend.

Normally this subdued growth momentum over a four-year time frame and the more recent slowing would underscore an observable weakening in the pace of job creation and a meaningful rise in the unemployment rate.

This is not happening.

Since the start of 2013, monthly employment gains have averaged 19,900. Over the past 18 months, the average monthly employment gains have been similarly expansive at 15,400. Jobs are still being created at a decent pace.

While there has been some increase in the unemployment rate since early 2012, it remains near historical lows. Quite remarkably, the unemployment rate has been within a range of 4.9 to 5.6 per cent for almost four years. The most recent data for May showed the unemployment rate at 5.5 per cent, down from 5.6 per cent in the prior two months.

One key reason why the extended four-year period of below trend economic growth has not sparked a more extreme lift in the unemployment rate is workplace flexibility.

In concert with their workers, firms are maintaining employment but are, on average, are reducing hours worked per employee. Rather than a reluctance to hire or there being labour shedding, firms are in aggregate maintaining their workforce.

In years gone by, the softer economy would have seen job cuts and a jump in the unemployment rate. Most illustrative is the period in 2000 and 2001 when, in the wake of the US tech bubble bursting and the impact of the introduction of the goods and services tax, there was a temporary lull in economic growth. This soft patch saw the unemployment rise from 6.0 per cent to 7.1 per cent in the space of a year. The labour market was less flexible then than it is now.

In another sign of the current labour market flexibility, wages growth has adjusted lower to take account of the moderation in economic growth. The annual increase in the wage price index (WPI) has eased to 3.2 per cent in the year to the March quarter 2013 from 3.9 per cent in early 2011. The annual increase in the WPI is the lowest in three years and one of the lowest readings in several decades.

In other words, the pace of wages growth has adjusted to the economy entering the current period of sub-trend growth.

It is noteworthy at this point to highlight the fact that even with this recent wage moderation, real wages continue to rise. Over the last few years of wage moderation, wages have risen more than the increase in the inflation rate meaning that workers cost of living pressures are, on average, easing. The ongoing low inflation climate is a critical element in sustaining household purchasing power and worked against wage claims designed to ‘keep up’ with inflation.

Amid all of this, it would be desirable to see the pace of economic growth return to trend in the next year and for job creation and hours worked to rise. The current easy stance of monetary policy and the lower Australian dollar suggest such a growth acceleration is just around the corner.

When this happens, the flexible labour market will likely see wages growth remain sustainably moderate with workers, in the first instance, ramping up their hours worked rather than it showing up in wage increases. The unemployment rate would also be likely to drift lower.

Many of the calls for industrial relations and labour market reform at the moment are based on ideology and not the facts. Those facts continue to show a dynamic labour market that adjusts to macroeconomic trends. It is a system that is working well, servicing both workers and employees as the business cycle swings up and down.