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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
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$,MX$$$$]

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