MNI ANALYSIS: Involuntary Part-Time Workers Key to RBA MonPol

By Sophia Rodrigues

     SYDNEY (MNI) - Involuntary part-time workers may hold the key to the timing

of the Reserve Bank of Australia's next rate move, making it likely Governor

Philip Lowe will have to maintain his policy patience for longer.

     Lowe has said on several occasions that he's prepared to be patient and

wait for inflation to rise back to 2.5%, the middle of the RBA's 2% to 3% target

band, before taking action. Until there are clear signs that is happening, it's

unlikely Lowe will start the rate hike process.

     An analytical paper published by the International Monetary Fund this week

suggests this process may take longer because the relatively high level of

involuntary part-time employment in developed countries is holding down wages

and so inflation. Australia's labor market slack is made up of not just the

number of unemployed workers but also underemployed workers, a good proportion

of whom are involuntarily underemployed.

     The latest Labor Force Survey showed the jobless rate was 5.6% in August

compared to the 5.0% which the RBA estimates is the rate when the economy is at

full employment. The underemployment rate was 8.6% in August, down from 8.8% in

the previous survey in May but still higher than the 8.3% in November 2016. The

labor underutilization rate was 14.1% versus 14.3% in May. 

     "While accommodative policies can help lift demand and lower headline

unemployment rates, wage growth may continue to remain subdued until involuntary

part-time employment diminishes or trend productivity growth picks up," the IMF

paper published Wednesday said.

     "Inflation rates will also likely remain low unless wage growth accelerates

beyond productivity growth in a sustained manner," it added.

     Two trends in Australia stand out: the growth in part-time workers; and the

growth of employment in the services sector.

     According to the IMF paper, both these factors are playing important roles

in keeping wage growth low, along with lower inflation expectations and a

slowing in trend productivity growth.

     Since 2013, growth in part-time employment in Australia has averaged 3% per

year, while growth in full-time employment has averaged less than 1%. While most

part-time workers are not seeking full-time employment, around one-quarter want

to work more hours than they currently do, Lowe said in a recent speech, quoting

work done by RBA staff on the labor market.

     On average, they are looking to work an additional 14 hours per week,

although many are not taking active steps to secure the additional work, Lowe

said.

     Australia has also seen a significant growth of workers in the services

sector. Almost 80% now work in service industries, compared with 50% in the

1950s. According to the IMF paper, a higher services sector share of employment

is also associated with an increase in involuntary part-time employment.

     According to Lowe, the picture is mixed as far for growth in services

sector wages go.

     While growth in service-sector employment has been strongest in occupations

with above-average rates of pay, there has also been strong employment growth in

occupation with lower rates of pay. When the same analysis was done for the

business services and household sectors separately, it showed that growth of

higher-paying jobs has been much more pronounced in business services, while the

growth in household service sector jobs has been strongest in those positions

with below-average wages, Lowe said.

     These trends in Australia, coupled with current below-trend economic

growth, are all factors  keeping wage growth low and can be expected to continue

doing so for a while.

     "Involuntary part-time employment has risen more in countries where output

is estimated to fall short of its potential. Once the influence of slack is

taken into account, involuntary part-time employment has increased more where

medium-term growth expectations have fallen more, automation has progressed

faster, and the importance of services in the economy has increased," the IMF

paper said.

     RBA Assistant Governor for Economics Luci Ellis recently commented on the

issue of slack in the economy and also alluded to the conclusion in the IMF

paper.

     "One of the things we've been wrestling with over recent times is exactly

how much (slack) there is. Is the unemployment rate all you need to look at, or

how important is underemployment?," Ellis said at the Q&A session following a

speech on September 20.

     "Does it matter now that the labor market's become more flexible? Does that

mean that the lags between a tightening labor market and labor costs, and

therefore prices, will be slower and weaker?"

     These issues, along with the progression of the current global expansion,

will be key influences on RBA's monetary policy, Ellis suggested.

     RBA interest rate expectations in Australia have changed significantly in

the last few weeks, with the market pricing the risk of a second cash rate hike

in 2018. The change was largely due to strong labor force numbers, and other

factors including positive data, an upbeat tone from the RBA and some economists

bringing forward their forecast for RBA hike to next year.

     While there is no doubt that the strong growth in jobs seen so far this

year has been stellar, it hasn't resulted in much change in either the jobless

rate or the underemployment rate.

     The growth in jobs has been accompanied by rise in the labor participation

rate which is good for demand in the economy because more workers are now

employed. But the issue of slack in the economy remains and that is key for the

wage growth outlook.

     At the start of September, Australia's money market was pricing in a cash

rate hike of 5bps in February, 11bps by May and 21bps by August. This rose to

10bps for February, 19bps for May and 32bps for August last week, and has now

eased back to 7bps, 17bps and 29bps, respectively.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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