On headline numbers, the jobs market is booming.
In the past year, total employment growth has accelerated to an annual pace around 3 per cent, a very solid uptick that is pleasing the Reserve Bank of Australia. For perspective, the working-age population is increasing at around 1.6 per cent, so growing jobs at a faster rate than that is undeniably positive. It's also the strongest growth since 2008 and resulted in 371,000 jobs. This week, the unemployment rate was reported at 5.5 per cent, also only slightly higher than the 5.25 per cent average since the mid-2000s, despite dramatic shifts in recent years such as the end of the mining investment boom and shutdown of the car making industry.
But within any data, good and bad news can be found regardless of the trends. And in a world lusting for any signs that inflation may be stirring, it’s looking unlikely Australia will be an outlier and experience a near-term spike in prices outside of the cost of electricity.
Concerning us about the Australian market has been the make-up of the hiring surge in the past year. In short, it’s been very narrowly focused compared to broader gains in 2015-16 with more than half of the gains, or 246,000 jobs, coming from sectors that service households. Within this, it’s also been quite narrowly focused around government driven employment, particularly in education and health. As the cranes in the skylines across Sydney and Melbourne would suggest, the construction sector has also been a solid contributor, adding 104,000 jobs.
In contrast, the often higher-paying business services sector is now reducing employees, down 105,000 in the past year, amid professional & technical services retrenchments. The public administration sector is also shedding jobs, alongside leisure and hospitality. Manufacturing has been flat.
The numbers reflect the uneven expansion underway in the economy and somewhat rain on the parade of the more bullish forecasters out there given that the home building construction cycle is close to peaking and several industries are facing greater “disruption”. Think about the impact of automation in financial services or food retailing, where employees are continuing to decline.
With Amazon entering the market, there will be further pressure on retailers to reduce costs. We will need to watch this space closely.
While the decline in manufacturing employment has been a very long trend, a bright spot has been an ongoing expansion in food manufacturing employment and the “clean green” image of Australia food production does remain a very positive story that can be built upon. There has also been an expansion in furniture manufacturing, albeit related to the maturing construction cycle as people fit out offices and homes, rather than a comparative advantage Australia has in the production of couches and desks.
Employment data is very powerful to help us understand what is driving economic activity in each state and the picture is clearly mixed. Government activity and policies related to health and education are contributing the most to employment gains in NSW as the property market slows. In Victoria, the rapidly expanding population has boosted retail employment as well as health and other household services. The government has also played a significant role in Queensland and South Australia, while in WA stronger construction activity as commodity prices improved has been critical to better than expected gains at a challenging time for the state.
For my mind, if the household services sectors is the nation’s main job engine, that doesn’t bode great for wages growth, which is desired by all. Part of the reason is that these new jobs being created tend to pay lower wages than jobs being lost in business services, helping to explain why labour income – and thus household income – has not grown as fast as you would expect given the overall lift in employment in the past year.
So while robust overall growth in employment is great, there are several caveats – including the nation’s record high household debt and the global trend of technology and rising competition. This interplays with soft inflation and weak productivity growth, troubles confounding economists around the world.
Even though we don’t think the RBA will follow other developed nations in raising official interest rates, Australia remains inextricably linked to the global economy, including the challenges around jobs, inflation and productivity. To us, that points to the RBA cash rate being on hold through next year.
This article is general commentary and any view or opinions expressed in this article are the author's own and may not necessarily reflect the view or opinions of Westpac. Any commentary contained in this article is not intended as financial advice and should not be relied upon as such by you.