RBA: Lowering underemployment key to wage growth

The Reserve Bank of Australia (RBA) has released its June Bulletin, which includes an interesting report on the reasons behind the rise in Australia’s underemployment rate.

Measures of underemployment

Australia’s underemployment has risen over many decades.

The RBA defines an underemployed person as “someone who is currently employed, but who would like and is available to work additional hours”. Thus, even in someone has “one or more jobs, there is a shortfall between that person’s preferred number of hours and their actual hours worked”.

An underemployed person, therefore, represents spare capacity, since “underemployment represents additional hours of labour supply that are available from the current labour force”.

Over the past 40 years, “the share of part-time employment has roughly doubled, from around 15 per cent of total employment in the late 1970s, to around one-third at present”.  This rise in part-time employment “has been a key driver of the longer-run increase in the underemployment rate since, on average, the share of part-time workers who are underemployed has been much higher than for full-time workers”:

Underemployment

Part-time work has driven the rise in underemployment.

Indeed, “around half of the increase since the early 1980s has been due to the gradual upwards trend in the share of part-time employment”:

Underemployment ratio

Mostly structural, brought about by the rise in part-time work.

As expected, industries dominated by part-time and migrant workers have the highest underemployment rates:

Underemployment by industry

Hospitality & Tourism has highest underemployment.

The RBA notes that the underemployment rate is now a key determinant of wage growth – something MB has argued for years:

Given the willingness of underemployed workers to work additional hours, underemployment clearly represents an amount of potential labour supply that can be drawn on without an increase in measured employment. Importantly, these are additional hours that people are prepared to work at prevailing wage levels; employers may not need to increase wages in order to source additional labour supply…

The move higher in underemployment in Australia over the past decade or so appears to have had some relationship with observed wages outcomes over this period; higher rates of underemployment have generally been associated with slower rates of wages growth (Graph 11). In contrast, there has been a less clear relationship between wages growth and changes in the unemployment rate…

Underemployment and wages

Underemployment rate correlates strongly with wages.

Because of the additional spare capacity represented by an increase in underemployment, observed wages growth may be slower for a given level of the unemployment rate. The increase in the underemployment rate has therefore likely contributed to various researchers’ finding that the level of unemployment consistent with stable wages and inflation has declined over the past 15 years or so in Australia…

An elevated level of underemployment will generally imply that there is spare capacity that would need to be absorbed before the labour market is sufficiently tight to induce strong wages growth.

The good news is that Australia’s closed international border and the associated loss of migrants pushed the underemployment rate to a seven year low of 7.4% in May, whereas underutilisation fell 0.7% to 12.5%:

Labour underutilisation

Underemployment down, down, down.

Next stop, wage growth.

Unconventional Economist

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