Solving the RBA’s employment puzzle

Via Bill Evans at Westpac:

The minutes of the April monetary policy meeting of the Reserve Bank Board have provided the clearest signal yet that the Bank would be prepared to cut the cash rate.

Firstly, the final section “Considerations for Monetary Policy” states “a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and via reducing required interest payments on borrowing, freeing up cash for other expenditure”.

The Board even sets out the conditions for a rate cut, “members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances”.

Recently the latest quarterly breakdown of employment by industry printed for the year to February.

We have considered this industry breakdown to try to find some insights into the RBA’s “tension” between the GDP and Employment Reports.

For a start it is reasonable to separate out the employment data into “cyclical” and “non-cyclical” sectors.

We have looked at “non-cyclical” covering: public administration; education and training; health care; and utilities.

Cyclical sectors are considered to be the other thirteen including: construction; manufacturing; retail and wholesale trade; accommodation; transport; finance; mining; real estate; recreation; and media.

The “non-cyclical “group has increased as a proportion of total employment from 27.9% in February 2008 to 31.9% in February 2019. That 4% increase in share represents 510,000 jobs in today’s workforce. The cyclical group has fallen as a proportion of the workforce from 64.6% in February 2008 to 59.4% in February 2019.

It is important to note that “public administration” has increased by 18% over the last year but we assess that a considerable part of that increase has been due to reclassification of health and education workers from “private” to “public”.

Because we are including public; education; and health in the noncyclical category the reclassification does not distort the results.

Finally we have one remaining category – “professional services”. This group represents 8.7% of total employment covering: management consulting; computer system design; accounting services; legal services; and engineers. This category represents 8.7% of total employment having increased from 7.4% in February 2008.

Consider Table 1 to assess whether there has been any evidence of the impact of the slowdown in growth in the economy on employment. The table uses the six month annualised growth rate for jobs in the three categories (using a two quarter average to smooth the series).

The following observations are relevant:

• As noted by the RBA, overall momentum in the jobs market has held fairly steady over the last 18 months despite the slowdown in economic growth (2.6% in the six months to February 2018 to 2.2% in the last six months).

• However, momentum in the “cyclical” sectors has slowed markedly from 2.9% in the six months to February 2018 to –0.4% in the six months to February 2019.

• Momentum in the “non-cyclical” sectors has lifted considerably from 1.5% to 5.6% over the same period.

• The professional services sector has been booming.

So the “puzzle” about the labour market is not as opaque as might be expected. Non-cyclical jobs (dominated by government) have been strong and this sector is increasing as a proportion of total employment. Cyclical sectors are slowing markedly and are falling as a proportion of total employment. Given the lags and the cautious outlook for growth, employment in these sectors is likely to continue to slow.

It is not clear whether the “professional services” sector best fits in the cyclical or the non-cyclical categories. Certainly, strong government spending in the infrastructure space is likely to explain a considerable part of the success of this category; the sharp lift in government regulations is also supporting this sector. Furthermore, there is also likely to be a structural element to the success of this sector as companies embrace technology to boost productivity and substitute labour.

Conclusion

The Board of the RBA has nominated the labour market as the key for the policy outlook. We are disappointed that ongoing low inflation and the persistent need to lower growth forecasts seems to be out-weighed by the employment “story”.

Our analysis points to a marked slowdown in jobs growth already being well underway in the cyclical sectors of the economy.

We expect that eventual recognition of these facts will keep the RBA on track for our expected first rate cut in August.

Nice work as usual. To my mind the NDIS is playing a big role here. It’s budget is the second largest only to defense spending and it is not just lifting health care jobs. From my conversations with senior management, there is a massive pull for IT, consulting, accounting and legal jobs as well. Many of these are outsourced and will appear as private sector. Goldman has estimated it is generating 100k jobs per annum all by itself.

Basically the jobs market has become a ward of the state as an enormous quantity of previously unrecognised care work is absorbed into GDP, adding little in growth but lots of jobs. This has another year or two to run then it will end as well, adding much more pressure to the labour market.

In the meantime, the private sector is dying and its job losses will overwhelm in due course. That is, it is a lagging indicator.

Comments

  1. Personally, I see our transition to these new Government jobs as a sort of UBI in action.
    How long before everyone has access to a Caring job and thereby everyone that wants it has a government guaranteed income (sounds like UBI to me). Those few who actually consider their own time is worth more money than the Government pays will be the only ones that officially don’t Care….or more to the point aren’t being paid enough to care.

  2. My peripheral contact with NDIS via patients and their carers supports your conclusion.

    Once upon a time patients with profound disabilities e.g. intellectual impairment from group homes would be dropped/dumped into the ED and just be by themselves. Families never turn up, still dont in 95% of cases. Since the NDIS, it is not uncommon for a care worker to come in with them and sit there the whole 16 hours or whatever it is. To be fair, with the patients who really do it tough being in a noisy ED with bright lights, needles etc, the carer can really help a lot. In other cases it is really a waste of time and someone’s money.

    If the patient gets discharged from the ED instead of being admitted upstairs – as some do – we produce a standard discharge letter, the same one all patients get. But recently I have been getting these care workers proffering detailed medical report forms that their supervisors insist we complete in addition to our discharge summary, which is not good enough because ‘it needs to be written on their form’. I had one of them flat out to refuse to take the patient back to the group home without one.

    Now getting forms shoved in your face that ‘must be completed now’ is part and parcel of life as a Doctor. You do not survive in this job unless you have a few tricks up your sleeve when it comes to this. So I tried a bit of reverse bureaucracy / BS on him and said that as a public hospital we are not allowed to charge fees for anything and that includes reports, and because we can’t charge a fee we cant possibly write on your form. I said I am very sorry, but ‘those are the rules from Canberra that govern funding agreements for public hospitals’. That stumped him long enough, and he just left with the patient back to the group home.

    The point being that paperwork/bureaucracy layer seems to have sprung up like rapid growing weeds overnight and god knows how many back office / supervisor types are employed to run this thing. The underlying point, as I have made here many times is, how do we avoid imploding economically when more and more of our meaningful employment growth comes from publicly funded jobs?

    And since at least some of you were wondering: yes, the vibrancy index for the people filling these carer jobs is off the scale.

  3. Jumping jack flash

    Very good.

    Now they need to make the connection to the cause of the problem – too much nonproductive debt, recklessly handed out because the banks thought they’d cracked the code and found the holy grail – a system for infinite growth on the back of infinite debt.

    But the experiment just could not sustain itself because there just wasn’t the feedback into wages – indeed wages and productivity was required to be removed to repay the interest on the nonproductive debt.

    They tried to lower interest to almost nothing, but they can never remove it completely because interest is vital for banks to function. While interest is greater than zero, productivity is taxed to pay for nonproductive debt.

    “Basically the jobs market has become a ward of the state…”

    As indeed it must be in this environment of extreme private debt. There isn’t going to be much else left while this nonproductive wad of debt is repaid.
    Now, if only the government would diversify a bit, into manufacturing, and research…

    “In the meantime, the private sector is dying”

    Also a symptom of this environment.
    The consumer is tapped out on debt.
    The private sector only exists to create profit, from consumers.
    There is no profit to be made except though ongoing gouging of the cost of living and cheaper and cheaper workers – the limits of these are quickly being reached.
    Therefore, the private sector falters – crushed by too much nonproductive debt.

    “and its job losses will overwhelm in due course”

    once we reach each tipping point, the problems will begin to show up in the statistics – at least, until they redefine them to show that everything is awesome.