The labour market is, perhaps, the most pertinent economic and social indicator of a recession.
That is true both in the early stages as the economy contracts (traditionally a recession has been defined as two consecutive quarters of declining GDP) and the ensuing recovery. Despite being unique in its cause and speed of impact, the COVID-19 crisis is no different.
But unlike prior recessions such as our last one in the early 1990s, this time around we have far more timely details than just the monthly Labour Force Survey thanks to the ABS’s new Weekly Payrolls data covering more than 80 per cent of jobs.
That’s the good news.
The bad news is there’s some concerning signs about the momentum in the labour market, making this week’s economic update from the government even more important.
Firstly, the boost to incomes from the government’s biggest support initiative, the JobKeeper wage subsidy scheme, has already ended and wages appear to be falling back to fundamentals. This is particularly so for the biggest winners from JobKeeper: the youngest and oldest cohorts, plus females.
Second, people in the middle age groups continue to see an outsized hit to wages in comparison to jobs, hinting at a greater fall in hours worked and/or wages being compressed under JobKeeper.
As such, a lot is riding on the strength of the jobs market in the December quarter: if employment is not growing fast enough to offset the loss of the $1500 JobKeeper support payments in September, then ending the programme would be sorely missed by many business and households, particularly those households on lower incomes and businesses that were struggling with tight margins even before the COVID-19 shock.
Of course, a hard stop to JobKeeper is unlikely with the government suggesting targeted ongoing support to the most affected industries and workers. an extension for 1.2 million employees to the of end December, followed by a further six months for 600,000 employees.
With more than three million Australians currently receiving JobKeeper, it has helped flatter the unemployment rate of 7.4 per cent because those in the program aren’t counted unemployed even if they work no hours. In June, 230,000 employees worked zero hours so it would be safe to assume that they would have normally become unemployed without JobKeeper. If this 230,000 is deducted from total employment, the unemployment rate would have been 9.2 per cent in June. In addition, if you add back the 384,600 people that have left the workforce since March, the unemployment rate would have been lifted further to 11.7 per cent.
JobKeeper has also significantly increased wages at the lower end of income distribution.
As a flat $750 a week payment, the scheme resulted in a pay rise for many part-time workers and younger people working in services industries, while also lowering wages for some on higher incomes who have had hours reduced to zero. These trends played out in April when the Weekly Payrolls data showed the introduction of JobKeeper provided such a significant offset for low income workers that their overall wages did not fall as much as jobs did, even though the monthly Labour Force Survey showed their hours worked slumped more than employment.
Put another way, for lower income workers in certain industries (in particular arts & recreation) and the youngest cohort, JobKeeper provided such a noticeable positive boost to wages that it offset the job losses.
However, these reversed through May and June, particularly for part-time workers. Likewise, females – who typically make up a greater share of part-time/casual employment than males – appeared to receive a boost from JobKeeper to their wages early on as some received a pay rise, before the trend also reversed through May and June.
Thus, the JobKeeper boost to incomes is over and it’s back to fundamentals: job losses or gains, and hours worked.
Unfortunately, the latest payrolls data has been on the weak side even prior to Melbourne’s new lockdown. Total employment dipped 0.8 per cent in the two weeks to June 27 while wages paid fell 0.3 per cent – the weakest fortnightly result for payrolls since April 18 during the widespread lockdowns.
To be sure, the ultimate impact on the economy relating to the income shock from the withdrawal of JobKeeper is complex, and will also be impacted by what decisions are made about JobSeeker, the unemployment payment formally known as Newstart that has been temporarily increased by $550 a week. Currently, the JobKeeper payment is a little higher than JobSeeker, but where the latter ultimately settles has not been announced. But what is likely to return is the reciprocity arrangement of the Newstart programme for JobSeeker where recipients have to be actively looking for employment to receive the payment.
Like in past recessions, the labour market is signalling a long and bumpy recovery, not helped by COVID-19 outbreaks in Victoria and NSW. We currently expect the unemployment rate to peak at 8.4 per cent sometime in the December quarter – far below our previous fears of a double-digit number due to the positive impact of JobKeeper, but still a high level that is going to take years to recover from.
Remember, in the more than 10 years between the GFC and the COVID-19 crisis, we failed to retrace the rise in unemployment, highlighting the lingering pain job losses cause.
In the short term, it’s the strength of employment once JobKeeper eventually ends that’s the key to how this recession plays out.
The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.