Unemployment and underemployment have got the labour market stuck
Australia’s’ been having issues with the labour market for a while now. To force firms to increase wages we need the unemployment rate to go down which will reduce the “slack” in the economy. The ABS data for July this year showed that although 41,000 people were mostly moved into full-time work it simply wasn’t enough to make a positive change, and the number of unemployed actually rose by 800. In addition to this, the underemployment rate went up.
According to Tom Piotrowski, market analyst for CommSec, “Underemployment is when a person has a job but wants more hours or days but those shifts just aren’t available…More than a million Aussies fall into the underemployment category…That’s about 8.5 percent of the workforce”. With underemployment wreaking havoc and Australian’s unemployment rate stuck at 5.2 percent, the RBA is set to make even more rate cuts. While this is good for some it’s terrible for anyone wanting a bigger pay cheque. With unemployment stationery and work simply not being available people are being a lot more careful with their money which means wages aren’t budging.
Money makes the world go around
There are two main reasons why wage growth is so important and why this year’s 2.5 percent wage growth compared to the usual 4 percent, simply won’t cut it.
1. The economy works as a cycle. One person’s spending is another person’s income. When we know we aren’t earning enough income, or our wages aren’t increasing we tend to be more frugal and spend less on recreational items. If everyone does this at once it stalls the economy – this is called the “paradox of thrift”.
2. Australia has record high levels of household debt. In the past having a yearly wage growth of 4 percent meant that an income of $70,000 would turn into $179,000 in 25 years due to compound growth – which is good when you need to repay a mortgage. However, with this stall in wage growth people are more focused on repaying their homes which again means, less spending in retail.
Will interest cuts solve the economy?
“The reserve bank of Australia is on a campaign to help support the nations job market. That’s the main reason it slashed interested rates in June and July, which was the first back-to-back rate cut we’ve seen in around 7 years.” Says Tom.
RBA’s reasoning behind cutting interest rates to 1 percent is to ideally give families the opportunity to pay back their loans AND have spare money to spend. This means more money goes into the economy, making things run more freely and wages can increase.
RBA is predicting two more rate cuts this year which would be unprecedented. That would take interest rates from 1 percent down to 0.5 percent. The big risk in this is that lower interest rates don’t do enough to solve the economy. This could potentially lead to the housing market blowing up again, which no one wants!
What does this mean for you?
Just because the economy is slacking and wages are temporarily stuck, doesn’t mean you need to be. If you’re wanting a pay-rise and there isn’t one in sight, it might be time to review your currently role. Learn how you can find a better paying job!