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The carrots and sticks boosting labour supply
Australia’s labour market continues to soften, with data this week showing the unemployment rate rising to 4.2%, its highest level in two and a half years. In addition, sequential wage growth fell to its slowest pace in two years. In past Weekly Economic Briefs, we have described the labour market softness as a Goldilocks style easing – not too hot, not too cold, but just right. What does that really mean and how does it come about?
The Goldilocks easing in the labour market is characterised by a reduction in inflationary pressures, in this context – slowing wages growth and a rising unemployment rate, but importantly, without experiencing outright job losses. This can be achieved with an increase in labour supply that outpaces the increase in labour demand. And this is precisely what has been achieved in Australia over the last year. In the year to July, labour supply grew by 3.7%, while the number of people in employment grew by 3.2%, leading the unemployment rate to rise to 4.2% from 3.8% last July.
The supply of labour has benefited from faster population growth associated with increased net overseas migration since the re-opening after COVID. Working-age population is estimated to be growing at an annual rate of 2.9% currently, well above its long run average of around 1.5%. But that is only part of the labour supply story; there has also been an increase in the share of people participating in the workforce. The participation rate rose to a new high of 67.1% in July up from an average of 65.7% prior to COVID, an increase of 1.4% points. While the male participation rate rose by 0.4% points over this time, the female participation rate rose by a whopping 2.3% points. What is driving more women into the workforce?
There are likely carrot and stick elements explaining the increased participation of women in the workforce. With the high cost of living, many families need a second income to repay the mortgage and other bills; this is likely the stick element driving increased workforce participation by both men and women. But there are also carrot elements attracting more women to the workforce, by making it more financially viable and reducing barriers to work.
Firstly, the outsized gains in wages in the aged care sector, which is predominantly female-staffed, have encouraged more women to join the work force. Award wages for aged care workers were boosted by 15% in 2023 as part of the initial Fair Work Commission (FWC) adjustment, with subsequent upward adjustments since in some roles. With substantial wage gains soon to be rolled out to the female-dominated childcare industry, further gains in female labour force participation can be expected. Secondly, the Stage 3 tax cuts were redesigned to provide further benefits to lower-income earners rather than just high-income earners, which proportionately benefits women who are more likely to be part-time and/or lower income earners. Treasury modelling estimated there would be a 0.25%-point increase in the female labour force participation rate as a result of the redesigned Stage 3 tax cuts, which only came into effect in July.
Third, barriers to work have been reduced by cheaper childcare, with governments from both sides of politics contributing to childcare subsidies since COVID. Subsidies have been boosted by around $1.5b a year since 2023/24 to help reduce childcare/early childhood education costs, enabling more new mothers to return to work sooner after having children. Since COVID, childcare costs (after subsidies) have risen by less than 5%, while aggregate wages have risen by almost 14%. Finally, increased workplace flexibility in the post-COVID era is also likely to have encouraged more working mums back to work. Despite the gains, the female labour force participation rate, at 63.2%, remains around 8 percentage points lower than the equivalent male rate. Government reforms are likely to see women continue to contribute more to growth in labour supply than men, narrowing the gap between the male and female labour force participation.
Given the strength of labour supply, perhaps the more interesting question is how the weak Australian economy has been able to generate sufficient labour demand to prevent the unemployment rate rising faster? Interestingly, ABS estimates of trend employment growth have roughly doubled this year from around 25K to 50K per month, suggesting an acceleration in labour demand rather than a softening. This hardly seems indicative of a softening labour market. With annual employment growth running in excess of 3%, how can we be sure the labour market is softening?
One of the surest signals on the tightness of the labour market is the outcome of wage bargaining, particularly in the private sector. The Wage Price Index (WPI), released this week, showed a moderation in private sector wage growth to 0.7% in the June quarter, its slowest quarterly rate of increase since lockdowns in 2021. Private sector wage gains have been slowing gradually since Q3 last year, in line with the upward trend in unemployment.
In addition, total labour input to the production process consists of not just the number of people employed, but the hours worked by those people. And here, total hours worked grew by a far less impressive 0.9% over the last year, as hours worked per person fell. This reflected a shift away from full time employment towards part time employment, as well as people working fewer hours. This fall in hours worked has meant that more people have been needed to produce the same labour input, which has been one reason for the relatively modest increase in the unemployment rate so far.
With labour supply and demand holding up, the unemployment rate remains our best gauge of labour market softness. For now, it is indicating that pressures are easing in an orderly manner, and we are forecasting this to continue, with an increase in the unemployment rate to 4.5% by the end of this year. A more disorderly increase in the unemployment rate would pressure the RBA to bring forward its rate cut cycle.